Exam 7: The Spending Allocation Model

Suppose that, as a result of a financial crisis in Asia, there is a large decline in the demand for U.S. exports. (A)What effect will this have on the interest rate and the four shares of GDP? (B)Suppose that, at the same time, there is a sharp increase in the demand for U.S. dollar-denominated assets as a result of the financial crisis in Asia. Will this tend to offset or enhance the changes that you found in part (A)?

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Question 1

Correct Answer:

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(A)The net export share line and the nongovernment share line will shift to the left, and the interest rate will fall. The consumption and investment shares will increase, the government share will not change, and the net export share will fall.
(B)Enhance. The increase in the demand for dollar-denominated assets will increase the demand for dollars, which will increase the exchange rate. This will make U.S. exports more expensive and U.S. imports cheaper, which will reduce net exports. At any given exchange rate, the net export share line will be smaller.

A decrease in the GDP share of government purchases causes a crowding out of investment in the short run.

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Question 2

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False

As of 2008, the United States current account deficit is close to 60 percent of GDP.

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Question 3

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False

Changes in the government spending share of GDP have no effect on the investment share of GDP.

(True/False)

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Question 4

The spending allocation model determines how consumers allocate their income between consumption and saving.

(True/False)

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Question 5

Draw a production possibilities frontier with the government spending share on the horizontal axis and the nongovernment share of GDP on the vertical axis. All else being equal, assume there is an increase in government purchases. (A)Use the production possibilities frontier to show what happens. (B)Does your answer to part (A) correspond to what the spending allocation model would predict? (C)Compared to the production possibilities curve analysis, what additional insight does the spending allocation model introduce?

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Question 6

All else being equal, if consumption declines as a share of GDP, then

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Question 7

All three nongovernment shares of GDP are negatively related to the interest rate.

(True/False)

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Question 8

Which of the following is the best definition of the exchange rate?

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Question 9

According to the spending allocation model, which of the following statements is correct?

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Question 10

The sum of all spending shares of GDP is always equal to one.

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Question 11

Which of the following statements is true?

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Question 12

An increase in G reduces the national saving rate.

(True/False)

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Question 13

The equilibrium interest rate is determined where

(Multiple Choice)

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Question 14

What is the connection between an increase in government purchases and the trade deficit? What are the pros and cons associated with a trade deficit that occurs because of this?

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Question 15

The share of GDP available for nongovernment use

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Question 16

The national saving rate

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Question 17

Which of the following best describes what would happen if all private retirement accounts were taxed?

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Question 18

If the share of government spending decreases by 2 percentage points, the consumption share will

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Question 19

The Democrats and Republicans are having their annual argument about the size of the government. The Republicans want to cut taxes for consumers and firms and cut government spending. The Democrats want to keep taxes and spending where they are. Use the four-diagram approach to show that while both plans could result in the same level of the interest rate in the long run, there would be differences in the level of the shares of GDP.

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Question 20

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Exam 7: The Spending Allocation Model

A decrease in the GDP share of government purchases causes a crowding out of investment in the short run.

As of 2008, the United States current account deficit is close to 60 percent of GDP.

Changes in the government spending share of GDP have no effect on the investment share of GDP.

The spending allocation model determines how consumers allocate their income between consumption and saving.

All else being equal, if consumption declines as a share of GDP, then

All three nongovernment shares of GDP are negatively related to the interest rate.

Which of the following is the best definition of the exchange rate?

According to the spending allocation model, which of the following statements is correct?

The sum of all spending shares of GDP is always equal to one.

Which of the following statements is true?

An increase in G reduces the national saving rate.

The equilibrium interest rate is determined where

What is the connection between an increase in government purchases and the trade deficit? What are the pros and cons associated with a trade deficit that occurs because of this?

The share of GDP available for nongovernment use

The national saving rate

Which of the following best describes what would happen if all private retirement accounts were taxed?

If the share of government spending decreases by 2 percentage points, the consumption share will

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity

Macroeconomics: the Big Picture

Measuring the Production, Income, and Spending of Nations

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

The Economic Fluctuations Model

Using the Economic Fluctuations Model

Fiscal Policy

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Reading, Understanding, and Creating Graphs

the Miracle of Compound Growth

Present Discounted Value

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