Question 1

Econia's real GDP is $500 billion. Full-employment real GDP is $800 billion. The MPC = 2/3. If the full multiplier effect occurs, which of the following policies would move the economy to a full-employment equilibrium?
A) Increase government purchases by $60 billion.
B) Increase government purchases by $225 billion.
C) Increase government purchases by $150 billion.
D) Increase government purchases by $100 billion.

Accepted Answer

The answer of Econia's real GDP is $500 billion. Full-employment...

Question 2

The multiplier that should be applied to a change in taxes is:
A) -(1/(1 - MPC) - 1).
B) 1/(1 - MPC).
C) -1/MPC.
D) -1(MPC - 1).

Accepted Answer

The correct multiplier for a change in taxes is given by the formula -(1/(1 - MPC) - 1). This is because a change in taxes indirectly affects consumption by changing disposable income, and the marginal propensity to consume (MPC) determines how much of an additional dollar of disposable income will be spent. The formula accounts for the indirect effect of taxes on spending through the MPC.

Question 3

If the MPC = .8, what is the tax multiplier according to the aggregate expenditures model?
A) -2
B) -3
C) -4
D) -5

Accepted Answer

The answer of If the MPC = .8, what is...

Question 4

If the MPC = 2/3, what is the tax multiplier according to the aggregate expenditures model?
A) -2
B) -3
C) -4
D) -5

Accepted Answer

The tax multiplier is calculated as -MPC/(1-MPC). With MPC = 2/3, the tax multiplier is -2/3 divided by 1/3, which equals -2.

Question 5

The MPC is .8. Real GDP is $600 billion. The natural rate of real GDP is $800 billion. Policymakers choose to follow the aggregate expenditures model to design a tax policy to move the economy to full employment. Taxes should be:
A) decreased by $40 billion.
B) decreased by $50 billion.
C) increased by $40 billion.
D) increased by $50 billion.

Accepted Answer

To close the $200 billion GDP gap, the tax multiplier, which is -MPC/(1-MPC), is used. With MPC of 0.8, the tax multiplier is -4. Reducing taxes by $50 billion will increase GDP by $200 billion (50 x 4).

Question 6

The MPC is 2/3. Real GDP is $500 billion. The natural rate of real GDP is $800 billion. Policymakers choose to follow the aggregate expenditures model to design a tax policy to move the economy to full employment. Taxes should be:
A) decreased by $150 billion.
B) decreased by $100 billion.
C) increased by $150 billion.
D) increased by $100 billion.

Accepted Answer

The MPC is 2/3, so the multiplier is 1/(1-MPC) = 1/(1-2/3) = 3. Real GDP is $500 billion, and the natural rate of real GDP is $800 billion. To move the economy to full employment, policymakers need to increase aggregate expenditures by $800 billion - $500 billion = $300 billion. The multiplier is 3, so they need to decrease taxes by $300 billion / 3 = $150 billion.

Question 7

A key difference between the classical perspective and the Keynesian aggregate expenditure model is that the classical perspective believes that ______ and the Keynesian perspective does not.
A) the short run is the time period that matters
B) countercyclical policies are needed
C) the economy self-corrects
D) prices are not flexible

Accepted Answer

The classical perspective holds that the economy is self-correcting in the long run due to flexible prices and wages, which adjust to equilibrate supply and demand, thereby rendering countercyclical policies unnecessary. In contrast, the Keynesian perspective argues that due to sticky prices and wages, the economy may not self-correct in the short run, necessitating government intervention.

Question 8

How did China's fiscal stimulus policies compare to those in the United States during the Great Recession?
A) China used a monetary policy stimulus, and the U.S. used a fiscal policy stimulus.
B) China's stimulus was the same percentage of GDP as the U.S. stimulus.
C) China's stimulus was a smaller percentage of GDP than the U.S. stimulus.
D) China's stimulus was a larger percentage of GDP than the U.S. stimulus.

Accepted Answer

China's fiscal stimulus during the Great Recession was a larger percentage of its GDP compared to the stimulus in the United States, focusing on infrastructure and social welfare projects to boost economic growth.

Question 9

Why do classical economists believe that expansionary fiscal policy has little impact?
A) Time lags offset the impact of the policy.
B) Crowding out offsets the impact of the policy.
C) Fiscal policy has a multiplied impact.
D) Budget deficits are needed to stimulate the economy.

Accepted Answer

Classical economists argue that expansionary fiscal policy leads to crowding out, where increased government spending reduces private sector investment, thus offsetting the policy's impact.

Question 10

The fallacy of the broken window suggests that the repair costs of a broken window:
A) increase total spending and stimulate the economy.
B) are offset by reductions in other spending and thus do not stimulate the economy.
C) reduce total spending because shopkeepers save more to be prepared for other emergencies.
D) increase total spending but do not stimulate the economy.

Accepted Answer

The fallacy of the broken window, as explained by French economist Frédéric Bastiat, suggests that while the repair costs of a broken window might seem to increase spending (and thus stimulate the economy), this spending merely diverts resources from other uses. Therefore, it does not actually stimulate the economy because the money spent on repairs would have been spent on other goods or services, contributing to economic activity in other areas.

Question 11

According to Keynesians, would the expense that is needed to repair a broken window stimulate an economy?
A) yes, in all cases
B) only if the economy has unemployment
C) no, never
D) not if there is any unemployment

Accepted Answer

Keynesians argue that spending, including that for repairing a broken window, can stimulate an economy, especially when there is unemployment. This is because the spending increases demand, which can lead to more production and potentially reduce unemployment.

Question 12

If a recession is unexpected, business inventories typically will:
A) keep rising.
B) keep falling.
C) fall and then rise.
D) rise and then fall.

Accepted Answer

During an unexpected recession, businesses often find themselves with excess inventory due to a sudden drop in demand, causing inventories to rise initially. As businesses adjust to the lower demand, they reduce production, leading to a subsequent fall in inventories.

Question 13

Summarize five key differences in assumptions between the classical economists and Keynes that led him to develop his theories.

Accepted Answer

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Question 14

In the aggregate expenditures model, how can there be autonomous consumer spending when income is zero? What is the source of the funds that are being spent?

Accepted Answer

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Question 15

Describe how to identify the marginal propensity to consume on a graph of the aggregate expenditures function.

Accepted Answer

The answer of Describe how to identify the marginal propensity...

Question 16

Describe the role of the 45-degree angle line in the aggregate expenditures model. What does it measure, and how does it help identify equilibrium? When does high unemployment occur?

Accepted Answer

The answer of Describe the role of the 45-degree angle...

Question 17

What is the role of unplanned investment in the aggregate expenditures model? When does it occur, and what does it trigger?

Accepted Answer

The answer of What is the role of unplanned investment...

Question 18

Macroland's real GDP level is at an equilibrium of $700 billion, and its natural rate of real GDP is $880 billion. The marginal propensity to consume is 2/3. Government leaders decide to use fiscal policy to move the economy to full employment. How much would they choose to change government purchases? Explain how that amount is determined.

Accepted Answer

The answer of Macroland's real GDP level is at an...

Question 19

Macroland has real a GDP of $650 billion, and its full-employment real GDP is $800 billion. The MPC is .75. Macroland's government decides to use a fiscal policy of changing taxes to try to reach full employment. Use the aggregate expenditures model to explain how much Macroland should change taxes and how that amount is determined.

Accepted Answer

The answer of Macroland has real a GDP of $650...

Question 20

How does the broken window fallacy illustrate the crowding out phenomenon that is associated with fiscal policy?

Accepted Answer

The answer of How does the broken window fallacy illustrate...

Quiz 29: The Aggregate Expenditure Model

Econia's real GDP is $500 billion. Full-employment real GDP is $800 billion. The MPC = 2/3. If the full multiplier effect occurs, which of the following policies would move the economy to a full-employment equilibrium?

The multiplier that should be applied to a change in taxes is:

If the MPC = .8, what is the tax multiplier according to the aggregate expenditures model?

If the MPC = 2/3, what is the tax multiplier according to the aggregate expenditures model?

The MPC is .8. Real GDP is $600 billion. The natural rate of real GDP is $800 billion. Policymakers choose to follow the aggregate expenditures model to design a tax policy to move the economy to full employment. Taxes should be:

The MPC is 2/3. Real GDP is $500 billion. The natural rate of real GDP is $800 billion. Policymakers choose to follow the aggregate expenditures model to design a tax policy to move the economy to full employment. Taxes should be:

A key difference between the classical perspective and the Keynesian aggregate expenditure model is that the classical perspective believes that ______ and the Keynesian perspective does not.

How did China's fiscal stimulus policies compare to those in the United States during the Great Recession?

Why do classical economists believe that expansionary fiscal policy has little impact?

The fallacy of the broken window suggests that the repair costs of a broken window:

According to Keynesians, would the expense that is needed to repair a broken window stimulate an economy?

If a recession is unexpected, business inventories typically will: