Exam 7: The Spending Allocation Model

Which of the following best explains what will happen if the government purchases share of GDP falls?

Suppose initially that C = 800, I = 300, G = 200, and X = -100. (A)What is GDP? (B)Calculate the four shares of GDP. (C)Suppose G increases to 300 and GDP increases to 1,500. What is the new government spending share? Draw a diagram to illustrate what happens to the equilibrium interest rate. (D)Without doing any calculations, explain what happens to each of the three nongovernment shares of GDP after the government spending and GDP increase in (C). (E)Suppose instead that G increases to 300 and GDP increases to 2,000. What is the new government spending share? Draw a diagram to illustrate what happens to the equilibrium interest rate. (F)Without doing any calculations, explain what happens to each of the three nongovernment shares of GDP after the government spending and GDP increase in (E).

Net exports for the United States have been negative in the past 25 years, with an increasingly larger difference between imports and exports.

Which of the following situations best explains a rightward shift in the consumption share line?

If the nongovernment share of GDP shifts to the right, the government share of GDP will decline.

Suppose the government is deciding between either a reduction in income taxes or an increase in government purchases. (A)According to the spending allocation model, all else held constant, what effect will the reduction in income taxes have on the interest rate? (B)According to the spending allocation model, all else held constant, what effect will the increase in government purchases have on the interest rate? (C)Consider the following statement and explain whether it is correct or incorrect. Because the reduction in income taxes and the increase in government purchases have the same effect on the interest rate, the two policies have the same effect on the economy.

T or F. If the dollar appreciates against the Japanese yen (i.e., the exchange rate changes from ¥100 = $1 to ¥120 = $1), then imports from Japan to the United States will increase and American exports to Japan will decrease.

All else being equal, an increase in the rate of interest

If GDP increases, then it is possible for all spending shares to increase simultaneously.

If the sum of the consumption and investment shares of GDP is 78 percent, the government share of GDP has to be less than or equal to 22 percent.