Exam 19: The Spending Allocation Model

The decline in investment due to an increase in government purchases is called crowding out.

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

Since the late 1980s,the government purchases share has gone up,and the investment and consumption shares have gone down.

As a result of changes in the tax laws in the late 1980s,interest payments on consumer loans were no longer deductible.How should this change in the tax law affect the consumption expenditure line,assuming everything else held equal?

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

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.

If the nongovernment share of GDP shifts to the right and the government share of GDP remains constant,then

A tax cut has the same long-run effect on the economy as the long-run effect of an increase in government purchases.

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

If the dollar gets stronger because international investors have more confidence in the U.S.economy,then the share of net exports line will shift to the right.

The four-diagram approach explains how the price level adjusts in the long run so that the shares of GDP sum to 1.

Explain how the interest rate behaves like a price in the sense that it serves as both a signal and an incentive.

An increase in interest rates will cause the nongovernment share of GDP to decline.

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

In the spending allocation model,the government share of GDP is assumed to be unaffected by the real exchange rate,being instead directly determined by government officials.

Which of the following best describes the relationship between real interest rates and net exports?

The national saving rate

An increase in a sales tax could lead to an increase in investment.

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

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)?