Question 1

FIGURE 22-5
-Refer to Figure 22-5,Diagram 2.Which of the following fiscal policy measures could the government implement to return national income to the full-employment level of GDP (potential output,Y*)?
A)reduce government spending
B)reduce transfer payments
C)increase taxes
D)increase government spending
E)decrease disposable income

Accepted Answer

Increasing government spending is an expansionary fiscal policy measure that can help boost aggregate demand, thereby increasing national income towards the full-employment level of GDP.

Question 2

We would expect real national income to be "demand determined" when
1)there is large-scale unemployment of resources in the economy;
2)firms are price setters;
3)firms have excess capacity.
A)1,2,and 3
B)1 and 2
C)2 and 3
D)1 only
E)3 only

Accepted Answer

When there is large-scale unemployment of resources in the economy, it means that the economy is not operating at its full capacity. In such a situation, demand determines national income. Similarly, when firms are price setters, they have some degree of market power, which enables them to influence the price of their products. This means that changes in demand will affect the level of output and, consequently, national income. Finally, when firms have excess capacity, they have the ability to increase their output without having to invest in new capital. This means that changes in demand will have a direct impact on the level of output and national income. Therefore, all three conditions suggest that national income is demand-determined.

Question 3

FIGURE 22-5
-Refer to Figure 22-5,Diagram 1.Which of the following fiscal policy measures could the government implement to return national income to the full-employment level of GDP (potential output,Y*)?
A)reduce government spending
B)increase transfer payments
C)reduce taxes
D)increase government spending
E)increase disposable income

Accepted Answer

The answer of  FIGURE 22-5
-Refer to Figure 22-5,Diagram 1.Which...

Question 4

FIGURE 22-5
-Refer to Figure 22-5.Diagram 1 illustrates an economy that is experiencing a(n)________ gap.The goal of stabilization policy would be to ________ national income until it is equal to ________.
A)recessionary; increase; actual national income
B)inflationary; reduce; potential GDP
C)inflationary; reduce; actual national income
D)inflationary; increase; potential GDP
E)recessionary; increase; potential GDP

Accepted Answer

The answer of  FIGURE 22-5
-Refer to Figure 22-5.Diagram 1...

Question 5

Consider a simple macro model with demand-determined output and the following specific parameter values: 
	a) Marginal propensity to consume out of disposable income = 0.6 
	b) Marginal propensity to consume out of national income = 0.48
	c) Marginal propensity to import = 0.23 
The simple multiplier without government and foreign trade in this economy is ________ and the simple multiplier with government and foreign trade in this economy is ________. 
A) 1.67; 1.33 
B) 1.67; 4 
C) 2.5; 1.33 
D) 2.5; 2.5 
E) 2.5; 4

Accepted Answer

The simple multiplier without government and foreign trade is given by:
1/(1-MPC) = 1/(1-0.48) = 1/0.52 = 1.92
The simple multiplier with government and foreign trade is given by:
1/(1-MPC+MPI) = 1/(1-0.48+0.23) = 1/0.75 = 1.33
Therefore, the answer is C, 2.5 and 1.33.

Question 6

If the price level is taken as given in a simple macro model with demand-determined output,it is implicitly being assumed that
A)net exports are positive.
B)net exports are negative.
C)the marginal propensity to consume out of disposable income is equal to the marginal propensity to spend out of national income.
D)all resources in the economy are fully employed.
E)producers can provide whatever output is demanded of them without requiring higher prices to offset any higher costs.

Accepted Answer

In a simple macro model where the price level is taken as given and output is demand-determined, it is assumed that producers can meet any level of demand without needing to raise prices to cover increased costs. This implies that there are enough resources and capacity in the economy to increase production as needed without encountering bottlenecks that would push prices up.

Question 7

Fiscal policy involves the government's use of ________ to affect economic outcomes.
A)exchange rate changes
B)interest rate changes
C)price level changes
D)private investment expenditures
E)expenditures and taxation

Accepted Answer

Fiscal policy involves the government's use of expenditures and taxation to affect economic outcomes. By increasing government spending or decreasing taxes, the government can stimulate economic activity and increase aggregate demand. Conversely, by decreasing government spending or increasing taxes, the government can slow down economic activity and decrease aggregate demand.

Question 8

Consider a macro model in which output is assumed to be demand-determined.One situation which may justify this assumption is when
A)net exports are positive.
B)net exports are negative.
C)the marginal propensity to consume out of disposable income is equal to the marginal propensity to spend out of national income.
D)all resources in the economy are fully employed.
E)the economy is operating with some unemployed resources.

Accepted Answer

If the economy is operating with some unemployed resources, it implies that there is slack in the economy and the demand for goods and services is not fully met. Under such circumstances, output is demand-determined as firms will produce only as much as they expect to sell to consumers. When all resources are fully employed (Option D), the economy is at full employment equilibrium where output is limited by the availability of resources and is not demand-determined. Net exports being positive or negative (Option A and B) affect the level of aggregate demand but do not provide conclusive evidence for output being demand-determined. The equality of marginal propensities to consume and spend (Option C) indicates that disposable income and national income are equal but does not provide evidence for demand-determined output.

Question 9

FIGURE 22-5
-Refer to Figure 22-5.Diagram 2 illustrates an economy that is experiencing a(n)________ gap.The goal of stabilization policy would be to ________ national income until it is equal to ________.
A)recessionary; increase; actual national income
B)inflationary; reduce; potential GDP
C)inflationary; reduce; actual national income
D)inflationary; increase; potential GDP
E)recessionary; increase; potential GDP

Accepted Answer

The answer of  FIGURE 22-5
-Refer to Figure 22-5.Diagram 2...

Question 10

Consider the simplest macro with demand-determined output.If the marginal propensity to consume out of disposable income (MPC)is equal to the marginal propensity to spend out of national income (z),then
A)the marginal propensity to import (m)is larger than the tax rate (t).
B)the marginal propensity to import (m)is smaller than the tax rate (t).
C)the simple multiplier is smaller in a closed economy with no government.
D)the simple multiplier is larger in a closed economy with no government.
E)there is no effect on the simple multiplier from imports or tax rates.

Accepted Answer

If the MPC is equal to the marginal propensity to spend (z), then changes in imports or tax rates do not affect the simple multiplier, as the multiplier is determined by the MPC in a demand-determined output model.

Question 11

The simple macro model that is considered in Chapters 21 and 22 of the textbook is characterized by
A) a given (constant) price level, and equilibrium national income determined by demand and supply.
B) an endogenous price level, and national income that is solely demand determined.
C) a given (constant) price level, and national income that is solely demand determined.
D) an endogenous price level, and equilibrium national income determined by demand and supply.
E) an open economy with an endogenous exchange rate.

Accepted Answer

The simple macro model assumes a constant price level and national income determined solely by demand, reflecting a Keynesian perspective where supply constraints are not considered.

Question 12

In the simple macro model that is considered in Chapters 21 and 22 of the textbook, 
A) the economy is always in equilibrium.
B) there is no government or foreign trade.
C) the price level is determined within the model.
D) there are no supply-side influences on national income.
E) the simple multiplier is always equal to 1.

Accepted Answer

The answer of In the simple macro model that is...

Quiz 22: Adding Government and Trade to the Simple Macro Model

FIGURE 22-5 -Refer to Figure 22-5,Diagram 2.Which of the following fiscal policy measures could the government implement to return national income to the full-employment level of GDP (potential output,Y*) ?

We would expect real national income to be "demand determined" when 1) there is large-scale unemployment of resources in the economy; 2) firms are price setters; 3) firms have excess capacity.

FIGURE 22-5 -Refer to Figure 22-5,Diagram 1.Which of the following fiscal policy measures could the government implement to return national income to the full-employment level of GDP (potential output,Y*) ?

FIGURE 22-5 -Refer to Figure 22-5.Diagram 1 illustrates an economy that is experiencing a(n) gap.The goal of stabilization policy would be to national income until it is equal to .

If the price level is taken as given in a simple macro model with demand-determined output,it is implicitly being assumed that

Fiscal policy involves the government's use of ________ to affect economic outcomes.

Consider a macro model in which output is assumed to be demand-determined.One situation which may justify this assumption is when

FIGURE 22-5 -Refer to Figure 22-5.Diagram 2 illustrates an economy that is experiencing a(n) gap.The goal of stabilization policy would be to national income until it is equal to .

Consider the simplest macro with demand-determined output.If the marginal propensity to consume out of disposable income (MPC) is equal to the marginal propensity to spend out of national income (z) ,then

The simple macro model that is considered in Chapters 21 and 22 of the textbook is characterized by

In the simple macro model that is considered in Chapters 21 and 22 of the textbook,