Question 1

If the governmentʹs net tax rate increases, then for a given level of national income disposable income will
And net tax revenue will .

Accepted Answer

A)  decrease; decrease 
B)  decrease; increase 
C)  increase; increase 
D)  increase; decrease 
E)  not change; increase 
A)  decrease; decrease 
B)  decrease; increase 
C)  increase; increase 
D)  increase; decrease 
E)  not change; increase

Question 2

The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy:
· marginal propensity to consume mpc) = 0.75
· net tax rate t) = 0.20
· no foreign trade
· fixed price level
· all expenditure and income figures are in billions of dollars.
   FIGURE 22-2
-In an open economy with government and demand-determined output, a decrease in the equilibrium level of national income could be caused by

Accepted Answer

A)  a decrease in taxes at all levels of income. 
B)  a decrease in the desired level of imports at all levels of income. 
C)  a decrease in desired consumption at all levels of income. 
D)  a decrease in the desired level of saving at all levels of income. 
E)  an increase in government purchases. 
A)  a decrease in taxes at all levels of income. 
B)  a decrease in the desired level of imports at all levels of income. 
C)  a decrease in desired consumption at all levels of income. 
D)  a decrease in the desired level of saving at all levels of income. 
E)  an increase in government purchases.

Question 3

In a simple macro model, it is generally assumed that a countryʹs exports

Accepted Answer

A)  and imports are autonomous. 
B)  and imports are induced. 
C)  are autonomous whereas imports are induced. 
D)  are induced whereas imports are autonomous. 
E)  are always equal to investment. 
A)  and imports are autonomous. 
B)  and imports are induced. 
C)  are autonomous whereas imports are induced. 
D)  are induced whereas imports are autonomous. 
E)  are always equal to investment.

Question 4

Suppose Y=400 and the governmentʹs net tax rate is 10%. If we are told that the government has a budget surplus, then government purchases must be

Accepted Answer

A)  greater than 30. 
B)  less than 30. 
C)  greater than 40. 
D)  less than 40. 
E)  Not enough information to know. 
A)  greater than 30. 
B)  less than 30. 
C)  greater than 40. 
D)  less than 40. 
E)  Not enough information to know.

Question 5

Consider a consumption function in a simple macro model with government and taxes. Given a marginal propensity to consume out of disposable income of 0.8 and a net tax rate of 20% of national income, the marginal propensity to consume out of national income is

Accepted Answer

A)  0.36. 
B)  0.64. 
C)  0.80. 
D)  0.90. 
E)  1.00. 
A)  0.36. 
B)  0.64. 
C)  0.80. 
D)  0.90. 
E)  1.00.

Question 6

Suppose output is demand determined. An increase in the net tax rate the marginal propensity to spend and thus the simple multiplier.

Accepted Answer

A)  raises; raises 
B)  raises; lowers 
C)  causes no change in; raises 
D)  lowers; lowers 
E)  lowers; raises 
A)  raises; raises 
B)  raises; lowers 
C)  causes no change in; raises 
D)  lowers; lowers 
E)  lowers; raises

Question 7

The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy:
· marginal propensity to consume mpc) = 0.75
· net tax rate t) = 0.20
· no foreign trade
· fixed price level
· all expenditure and income figures are in billions of dollars.
   FIGURE 22-2
-Refer to Figure 22-2. Which of the following equations describes the aggregate expenditure function for this economy?

Accepted Answer

A)  AE = 250 + 0.6)Y 
B)  AE = 225 + 0.75)Y 
C)  AE = 250 +0.15)Y 
D)  AE = 75 + 0.75)Y + 0.2)YD 
E)  AE = 250 +0.75)Y + 0.2)YD 
A)  AE = 250 + 0.6)Y 
B)  AE = 225 + 0.75)Y 
C)  AE = 250 +0.15)Y 
D)  AE = 75 + 0.75)Y + 0.2)YD 
E)  AE = 250 +0.75)Y + 0.2)YD

Question 8

Consider a simple macro model with demand-determined output. Suppose the level of exports decreases unexpectedly by $6 billion. If the government wants to restore the initial equilibrium level of output it could, all other things equal

Accepted Answer

A)  increase its purchases by more than $6 billion. 
B)  increase its net tax revenues by $6 billion. 
C)  increase its net tax revenues by less than $6 billion. 
D)  increase its purchases by $6 billion. 
E)  decrease its purchases by $6 billion. 
A)  increase its purchases by more than $6 billion. 
B)  increase its net tax revenues by $6 billion. 
C)  increase its net tax revenues by less than $6 billion. 
D)  increase its purchases by $6 billion. 
E)  decrease its purchases by $6 billion.

Question 9

Consider a simple macro model with a constant price level and demand-determined output. The marginal propensity to spend out of national income, z, can be expressed as where t = net tax rate and m = marginal propensity to import).

Accepted Answer

A)  z = MPC1 - t - m) 
B)  z = tY - mY 
C)  z = MPC - 1 - t- m)Y 
D)  z = MPC - 1 - t - m) 
E)  z = MPC1 - t) - m 
A)  z = MPC1 - t - m) 
B)  z = tY - mY 
C)  z = MPC - 1 - t- m)Y 
D)  z = MPC - 1 - t - m) 
E)  z = MPC1 - t) - m

Question 10

Consider a simple macro model with a constant price level and demand-determined output. When national income falls short of desired aggregate expenditures, unplanned inventory will induce firms to
The rate of output production.

Accepted Answer

A)  depletion; lower 
B)  depletion; raise 
C)  buildup; lower 
D)  buildup; raise 
E)  at zero; maintain the current 
A)  depletion; lower 
B)  depletion; raise 
C)  buildup; lower 
D)  buildup; raise 
E)  at zero; maintain the current

Question 11

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*)?

Accepted Answer

A)  reduce government spending 
B)  increase transfer payments 
C)  reduce taxes 
D)  increase government spending 
E)  increase disposable income 
A)  reduce government spending 
B)  increase transfer payments 
C)  reduce taxes 
D)  increase government spending 
E)  increase disposable income

Question 12

In a simple macro model with government and demand-determined output, to raise equilibrium national income by $100 billion, G must be

Accepted Answer

A)  raised by $100 billion. 
B)  raised by $100 billion times the simple multiplier. 
C)  raised by $100 billion divided by the simple multiplier. 
D)  lowered by $100 billion times the simple multiplier. 
E)  lowered by $100 billion divided by the simple multiplier. 
A)  raised by $100 billion. 
B)  raised by $100 billion times the simple multiplier. 
C)  raised by $100 billion divided by the simple multiplier. 
D)  lowered by $100 billion times the simple multiplier. 
E)  lowered by $100 billion divided by the simple multiplier.

Question 13

The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy:
· marginal propensity to consume mpc) = 0.75
· net tax rate t) = 0.20
· no foreign trade
· fixed price level
· all expenditure and income figures are in billions of dollars.
   FIGURE 22-2
-Consider the following news headline: ʺMinister of Defence announces $2 billion purchase of military helicopters.ʺ Assuming that aggregate output is demand-determined, and that the helicopters are purchased domestically, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income?

Accepted Answer

A)  The AE function will shift down parallel to itself and equilibrium national income will fall. 
B)  The AE function will rotate upward become steeper) and equilibrium national income will rise. 
C)  The AE function will rotate downward become flatter) and national income will fall. 
D)  The AE function will shift up parallel to itself and equilibrium national income will rise. 
E)  There will be no change in the AE function or in equilibrium national income. 
A)  The AE function will shift down parallel to itself and equilibrium national income will fall. 
B)  The AE function will rotate upward become steeper) and equilibrium national income will rise. 
C)  The AE function will rotate downward become flatter) and national income will fall. 
D)  The AE function will shift up parallel to itself and equilibrium national income will rise. 
E)  There will be no change in the AE function or in equilibrium national income.

Question 14

Consider a macro model with demand-determined output. The equations are: C = 150 + 0.8Yd, Yd = Y-T, I =
400, G = 700, T = 0.2Y, X = 130, and IM = 0.14Y. Equilibrium national income in this model is

Accepted Answer

A)  1120. 
B)  1350. 
C)  2240. 
D)  2760. 
E)  5400. 
A)  1120. 
B)  1350. 
C)  2240. 
D)  2760. 
E)  5400.

Question 15

The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy:
· marginal propensity to consume mpc) = 0.80
· net tax rate t) = 0.15
· no foreign trade
· fixed price level
· all expenditure and income figures are in billions of dollars.
   FIGURE 22-3
-Refer to Figure 22-3. What is the level of autonomous consumption?

Accepted Answer

A)  $0 
B)  $325 
C)  $350 
D)  $650 
E)  $1000 
A)  $0 
B)  $325 
C)  $350 
D)  $650 
E)  $1000

Question 16

The net export NX) function crosses the horizontal axis at a level of national income where the

Accepted Answer

A)  X and IM curves intersect. 
B)  X curve reaches the horizontal axis. 
C)  IM curve reaches the horizontal axis. 
D)  X and IM curves are at their farthest distance apart. 
E)  X curve reaches its maximum. 
A)  X and IM curves intersect. 
B)  X curve reaches the horizontal axis. 
C)  IM curve reaches the horizontal axis. 
D)  X and IM curves are at their farthest distance apart. 
E)  X curve reaches its maximum.

Question 17

Suppose aggregate output is demand determined. If the marginal propensity to spend is 0.5, and the MPC is 0.7, a $1 billion reduction in government purchases will cause equilibrium national income to by
)

Accepted Answer

A)  decrease; $3.33 billion 
B)  decrease; $2.00 billion 
C)  decrease; $1.50 billion 
D)  increase; $2.00 billion 
E)  increase; $3.33 billion 
A)  decrease; $3.33 billion 
B)  decrease; $2.00 billion 
C)  decrease; $1.50 billion 
D)  increase; $2.00 billion 
E)  increase; $3.33 billion

Question 18

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

Accepted Answer

A)  1, 2, and 3 
B)  1 and 2 
C)  2 and 3 
D)  1 only 
E)  3 only 
A)  1, 2, and 3 
B)  1 and 2 
C)  2 and 3 
D)  1 only 
E)  3 only

Question 19

FIGURE 22-4
-Refer to Figure 22-4. Autonomous expenditures as the AE curve rotates from AE1 to AE0 and equilibrium national income .

Accepted Answer

A)  decrease; decreases 
B)  increase; decreases 
C)  remain constant; increases 
D)  remain constant; decreases 
E)  remain constant; remains constant 
A)  decrease; decreases 
B)  increase; decreases 
C)  remain constant; increases 
D)  remain constant; decreases 
E)  remain constant; remains constant

Question 20

When economists use the term ʺbudget surplusʺ they are referring to

Accepted Answer

A)  net tax revenues minus government purchases. 
B)  national income minus transfer payments. 
C)  national income minus consumption. 
D)  disposable income minus consumption. 
E)  net tax revenues minus transfer payments. 
A)  net tax revenues minus government purchases. 
B)  national income minus transfer payments. 
C)  national income minus consumption. 
D)  disposable income minus consumption. 
E)  net tax revenues minus transfer payments.

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

If the governmentʹs net tax rate increases, then for a given level of national income disposable income will And net tax revenue will .

In a simple macro model, it is generally assumed that a countryʹs exports

Suppose Y=400 and the governmentʹs net tax rate is 10%. If we are told that the government has a budget surplus, then government purchases must be

Consider a consumption function in a simple macro model with government and taxes. Given a marginal propensity to consume out of disposable income of 0.8 and a net tax rate of 20% of national income, the marginal propensity to consume out of national income is

Suppose output is demand determined. An increase in the net tax rate the marginal propensity to spend and thus the simple multiplier.

Consider a simple macro model with demand-determined output. Suppose the level of exports decreases unexpectedly by $6 billion. If the government wants to restore the initial equilibrium level of output it could, all other things equal

Consider a simple macro model with a constant price level and demand-determined output. The marginal propensity to spend out of national income, z, can be expressed as where t = net tax rate and m = marginal propensity to import).

Consider a simple macro model with a constant price level and demand-determined output. When national income falls short of desired aggregate expenditures, unplanned inventory will induce firms to The rate of output production.

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*)?

In a simple macro model with government and demand-determined output, to raise equilibrium national income by $100 billion, G must be

Consider a macro model with demand-determined output. The equations are: C = 150 + 0.8Yd, Yd = Y-T, I = 400, G = 700, T = 0.2Y, X = 130, and IM = 0.14Y. Equilibrium national income in this model is

The net export NX) function crosses the horizontal axis at a level of national income where the

Suppose aggregate output is demand determined. If the marginal propensity to spend is 0.5, and the MPC is 0.7, a $1 billion reduction in government purchases will cause equilibrium national income to by )

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

FIGURE 22-4 -Refer to Figure 22-4. Autonomous expenditures as the AE curve rotates from AE1 to AE0 and equilibrium national income .

When economists use the term ʺbudget surplusʺ they are referring to

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