Question 1

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

Accepted Answer

A)  The net export share of GDP will fall with it. 
B)  The consumption share of GDP will fall with it. 
C)  The investment, consumption, and/or net export share of GDP will rise. 
D)  The investment share of GDP will fall with it. 
E)  It is not clear whether any of the other shares will change since we don't know what happens to GDP.

Question 2

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).

Accepted Answer

The answer of Suppose initially that C = 800, I...

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A)  A decrease in real interest rates 
B)  A decrease in income taxes 
C)  A decrease in the consumer confidence index 
D)  An increase in real interest rates 
E)  An increase in income taxes

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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.

Accepted Answer

The answer of Suppose the government is deciding between either...

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A)  causes a downward movement to the right along the nongovernment share line. 
B)  causes an upward movement to the left along the nongovernment share line. 
C)  shifts the nongovernment share line to the right. 
D)  shifts the nongovernment share line to the left. 
E)  has no effect on the nongovernment share of GDP.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Exam 7: The Spending Allocation Model

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

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.

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.