Transcript Economics for Today 2nd edition Irvin B. Tucker

Chapter 19 Practice
Quiz Tutorial
The Keynesian Model
in Action
©2000 South-Western College Publishing
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1. The net exports line can be
a. positive.
b. negative.
c. zero.
d. any of the above.
D. Because net exports equals exports minus
imports (X-M), the sign of net exports
depends on the values of X and M.
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2. There will be unplanned inventory investment
accumulation when
a. aggregate output (real GDP) equals
aggregate expenditures.
b. aggregate output (real GDP) exceeds
aggregate expenditures.
c. aggregate expenditures exceed aggregate
output (real GDP).
d. firms increase output.
B.
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The Keynesian Aggregate ExpendituresOutput Model
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AE = Y
Inventory Accumulation
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E
AE
5
4
3
2
Inventory
Depletion
1
0
Real GDP
1
2
3
4
5
6
7
8
9
4
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3. John Maynard Keynes proposed that the
multiplier effect can correct an economic
depression. Based on this theory, an increase in
equilibrium output would be created by an
initial
a. increase in investment.
b. increase in government spending.
c. decrease in government spending.
d. both (a) and (b).
e. both (a) and (c).
D. A decrease in government spending is
multiplied times the spending multiplier
and decreases equilibrium output.
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4. The spending multiplier is defined as
a. 1/(1 - marginal propensity to consume).
b. 1/(marginal propensity to consume).
c. 1/(1 - marginal propensity to save).
d. 1/(marginal propensity to consume +
marginal propensity to save).
A. The spending multiplier is also
defined as 1/MPS.
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5. If the value of the marginal propensity
to consume (MPC) is 0.50, the value of
the spending multiplier is
a. .5.
b. 1.
c. 2.
d. 5.
C. Spending multiplier = 1/(1-MPC) =
1/(1-0.5) = 1/0.50 = 1/50/100 = 2.
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6. If the marginal propensity to consume
(MPC) is 0.80, the value of the spending
multiplier is
a. 2.
b. 5.
c. 8.
d. 10.
B. Spending multiplier = 1/(1-MPC =
1/(1-0.80) = 1/20/100 = 5.
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7. If the marginal propensity to consume (MPC)
is 0.75, a $50 billion decrease in government
spending would cause equilibrium output to
a. increase by $50 billion.
b. decrease by $50 billion.
c. increase by $200 billion.
d. decrease by $200 billion.
D. Change in equilibrium output (DY) =
spending multiplier x change in
government spending. Rewritten, DY =
1/(1-0.75) x -$50 billion = $200 billion = 4 x $50 billion.
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8. If the marginal propensity to consume (MPC)
is 0.90, a $100 billion increase in planned
investment expenditure, other things being
equal, will cause an increase in equilibrium
output of
a. $90 billion.
b. $100 billion.
c. $900 billion.
d. $1,000 billion.
D. Change in equilibrium output (DY)
= spending multiplier x change in
investment expenditure. Rewritten,
DY = 1/(1-0.90) x $100 billion = 10 x
$100 billion.
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9. Keynes’ criticism of the classical theory was
that the Great Depression would not correct
itself. The multiplier effect would restore an
economy to full employment if
a. government would follow a “least
government is the best government” policy.
b. government taxes were increased.
c. government spending were increased.
d. government spending were decreased.
C. Keynes’ prescription to cure the Great
Depression was for government to play an
active role rather than depend on the
classical theory that the price system will
eventually restore full employment.
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10. The equilibrium level of real GDP is $1,000
billion, the full employment level of real GDP is
$1,250 billion, and the marginal propensity to
consume (MPC) is 0.60. The full-employment
target can be reached if government spending is by
a. $60 billion.
b. $100 billion.
c. $250 billion.
d. held constant.
B. Change in real GDP required = spending
multiplier x change in government spending
(DG). Rewritten,
DG = 1/(1 - 0.60) x ($1,250 - $1,000)
DG x 2.5 = $250
DG = $100 billion.
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11. In Exhibit 9, the spending multiplier for this
economy is equal to
a. 1 2/3.
b. 2 1/2.
c. 3.
d. 5.
B. 1/(1-MPC) = 1/(1-3/5) = 1/ 2/5 = 5/2 = 2 1/2
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Exhibit 9: The Keynesian Aggregate
Expenditures-Output Model
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8
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MPC = 3/5
AE1
6
5
E
4
3
2
1
Real GDP
0
1
2
3
4
5
6
7
8
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12. To close the recessionary gap and
achieve full-employment real GDP as
shown in Exhibit 9, the government
should increase spending by
a. $1.0 trillion.
b. $1.2 trillion.
c. $2.0 trillion.
d. $2.5 trillion.
B.
Change in government spending (DG) x spending
multiplier = change in real GDP (DY)
spending multiplier (SM) = 1/(1-MPC) =
1/(1-3/5) = 1/2/5 = 5/2
DG x 5/2 = $3 trillion
DG = 2/5 x $3 trillion
DG = 6/5 = $1.2 trillion
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Exhibit 9: The Keynesian Aggregate
Expenditures-Output Model
9
8
7
MPC = 3/5
AE1
6
5
E
4
3
2
Full Employment
1
Real GDP
0
1
2
3
4
5
6
7
8
9
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Exhibit 9: The Keynesian Aggregate
Expenditures-Output Model
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E2
7
AE2
a
MPC = 3/5
AE1
6
5
E1 Recessionary
Gap=$1.2 trillion
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3
2
Full Employment
1
Real GDP
0
1
2
3
4
5
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7
8
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13. To close the recessionary gap and
achieve full-employment real GDP as
shown in Exhibit 9, the government
should cut taxes by
a. $.60 trillion.
b. $1 trillion.
c. $2 trillion.
d. $3 trillion.
C.
Change in taxes (DT) x tax multiplier = change in real
GDP (DY)
spending multiplier (SM) = 1/(1-MPC) = 1/(1-3/5) =
1/2/5=5/2
tax multiplier = (1-SM) = (1-5/2) = -3/2
DT x -3/2 = $3 trillion
DT = -2/3 x $3 trillion
DT = $2 trillion
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END
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