Exam 37: Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

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Suppose in 2010,real GDP was $160 trillion.Suppose further that the marginal propensity to consume was 0.75 and the marginal propensity to import was 0.25.Using the Keynesian multiplier,how much should government purchases be changed if policymakers attempt to raise real GDP to $180 trillion by changing government purchases?

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Question 1

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The expected change in real GDP is $180 trillion - $160 trillion = $20 trillion.The multiplier is 1/(1-0.75+0.25)= 2.Government purchases should be increased by $20 trillion/2 = $10 trillion.

The Keynesian multiplier measures

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Question 2

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In 2008,the government under the Bush administration implemented a tax cut in the form of a one-time tax rebate.That tax cut had only a small impact on personal consumption expenditure and real GDP.Explain.

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Question 3

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Because the tax cut was good for only one year,meaning that the change in income was temporary.According to the forward-looking consumption model,the marginal propensity to consume for a temporary change in income would be small in comparison to a permanent change in income.As a result,consumption increased very little,leading to a relatively small impact on real GDP.

The Keynesian multiplier will be higher if

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Question 4

Which of the following is true about the marginal propensity to consume and the marginal propensity to import?

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Question 5

According to the forward-looking model,consumption

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Question 6

According to the permanent income model,the marginal propensity to consume is larger in the case of a permanent change in income than a temporary change in income.

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Question 7

All else being equal,a higher propensity to import leads to a larger Keynesian multiplier.

(True/False)

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Question 8

Suppose that MPC = 0.8 and MPI = 0.According to the Keynesian multiplier,an increase of $20 million in government purchases will

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Question 9

Which of the following measures the change of real GDP in the short run as a result of a an increase in government purchases?

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Question 10

If the expenditure line is steeper,the Keynesian multiplier will be larger.

(True/False)

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Question 11

The Keynesian multiplier is the ratio of the change in spending to a given change in real GDP.

(True/False)

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Question 12

The formula for the Keynesian multiplier with net exports is

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Question 13

An increase in the marginal propensity to consume leads to an increase in the Keynesian multiplier.

(True/False)

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Question 14

The Keynesian multiplier relies on the assumption that people are forward looking.

(True/False)

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Question 15

The size of the Keynesian multiplier depends on

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Question 16

The permanent income model implies the same relationship between changes in consumption and income as

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Question 17

The formula for the Keynesian multiplier without net exports is

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Question 18

The permanent income model implies that

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Question 19

Sketch the 45-degree line and the expenditure line on a diagram.Use this diagram to show what happens to the level of income if government purchases decline.Does income decrease by more or by less than the downward shift in government purchases? Explain.

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Question 20

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Exam 37: Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

The Keynesian multiplier measures

In 2008,the government under the Bush administration implemented a tax cut in the form of a one-time tax rebate.That tax cut had only a small impact on personal consumption expenditure and real GDP.Explain.

The Keynesian multiplier will be higher if

Which of the following is true about the marginal propensity to consume and the marginal propensity to import?

According to the forward-looking model,consumption

According to the permanent income model,the marginal propensity to consume is larger in the case of a permanent change in income than a temporary change in income.

All else being equal,a higher propensity to import leads to a larger Keynesian multiplier.

Suppose that MPC = 0.8 and MPI = 0.According to the Keynesian multiplier,an increase of $20 million in government purchases will

Which of the following measures the change of real GDP in the short run as a result of a an increase in government purchases?

If the expenditure line is steeper,the Keynesian multiplier will be larger.

The Keynesian multiplier is the ratio of the change in spending to a given change in real GDP.

The formula for the Keynesian multiplier with net exports is

An increase in the marginal propensity to consume leads to an increase in the Keynesian multiplier.

The Keynesian multiplier relies on the assumption that people are forward looking.

The size of the Keynesian multiplier depends on

The permanent income model implies the same relationship between changes in consumption and income as

The formula for the Keynesian multiplier without net exports is

The permanent income model implies that

Sketch the 45-degree line and the expenditure line on a diagram.Use this diagram to show what happens to the level of income if government purchases decline.Does income decrease by more or by less than the downward shift in government purchases? Explain.

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Observing and Explaining the Economy

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