Question 1

In which of the following situations will the combination of the marginal propensity to consume and the proportional income tax rate (t)result in the largest multiplier?

Accepted Answer

A)  Both the MPC and t are large. 
B)  Both the MPC and t are small. 
C)  The MPC is large; t is small. 
D)  The MPC is small; t is large. 
E)  The MPC equals t. C

Question 2

With a proportional income tax,

Accepted Answer

A)  each individual pays whatever he/she is able to pay 
B)  each individual pays the same amount of money to the government 
C)  each individual pays the same percent of income in the form of taxes 
D)  the spending multiplier is unaffected by the tax rate 
E)  the spending multiplier increases as the tax rate increases C

Question 3

If the government wants to increase equilibrium income by $150 billion but does not want to change the size of the deficit,it should

Accepted Answer

A)  increase G and decrease T by $150 billion 
B)  increase G and T by $150 billion 
C)  decrease G and T by $150 billion 
D)  decrease C and increase T by $150 billion 
E)  We cannot answer the question without knowing the MPC. B

Question 4

If the MPC = 0.8 and both government purchases and autonomous net taxes fall by $100 billion,by how much does the equilibrium level of real GDP demanded change (assuming neither income taxes nor net exports exist)?

Accepted Answer

A)  -$100 billion 
B)  +$100 billion 
C)  -$500 billion 
D)  +$500 billion 
E)  +$200 billion

Question 5

The balanced budget multiplier is always negative.

Accepted Answer

A) True 
 B)False

Question 6

The effect of a new proportional income tax on the spending multiplier is to

Accepted Answer

A)  increase it,because less of each dollar of income is available for spending during each round 
B)  increase it,because more of each dollar of income is available for spending during each round 
C)  decrease it,because less of each dollar of income is available for spending during each round 
D)  decrease it,because more of each dollar of income is available for spending during each round 
E)  increase it,because a proportional income tax decreases the marginal propensity to consume disposable income

Question 7

A $100 increase in autonomous government purchases has the same effect on the equilibrium level of real GDP as a $100 increase in autonomous investment spending would.

Accepted Answer

A) True 
 B)False

Question 8

When we relax the assumption that net exports do not change with income,the aggregate expenditure function

Accepted Answer

A)  becomes steeper because net exports decrease as real domestic income increases 
B)  becomes steeper because net exports increase as real domestic income increases 
C)  becomes flatter because net exports decrease as real domestic income increases 
D)  becomes flatter because net exports increase as real domestic income increases 
E)  remains unchanged because it is not affected by changes in net exports

Question 9

If the marginal propensity to consume is 0.8 and the proportional income tax rate is 0.25,by how much would the equilibrium level of real GDP demanded increase if government purchases rose by $50 billion?

Accepted Answer

A)  $50 billion 
B)  $100 billion 
C)  $500 billion 
D)  $125 billion 
E)  $275 billion

Question 10

With a proportional income tax,

Accepted Answer

A)  the tax multiplier equals (MP
C) /(1 - MP
C)  
B)  the tax multiplier equals -MPC/(1 - MP
C)  
C)  the spending multiplier equals (MP
C) /(1 - MP
C)  
D)  the spending multiplier equals 1/[1 - MPC(1 - t)] 
E)  the spending multiplier equals 1/[1 - (MP
C) t]

Question 11

The balanced budget multiplier

Accepted Answer

A)  increases as MPC increases 
B)  increases as MPC decreases 
C)  depends on the absolute level of government spending 
D)  is always greater than the government multiplier 
E)  is equal to 1

Question 12

If the government increased autonomous net taxes by $60 million and increased its own purchases by the same amount,we would expect the net effect of these actions to be

Accepted Answer

A)  an increase in aggregate demand,which is a rightward shift of the aggregate demand curve 
B)  an increase in aggregate demand,which is a leftward shift of the aggregate demand curve 
C)  a decrease in aggregate demand,which is a rightward shift of the aggregate demand curve 
D)  a decrease in aggregate demand,which is a leftward shift of the aggregate demand curve 
E)  to leave the aggregate demand curve unchanged

Question 13

In a model with a proportional income tax rate (t),real disposable income equals

Accepted Answer

A)  t * real GDP 
B)  (1 - t)* real GDP 
C)  real GDP/t 
D)  real GDP/(1 - t) 
E)  real GDP - (1 - t)

Question 14

If the MPC equals the 2/3,then the net tax multiplier equals

Accepted Answer

A)  -2 
B)  -1/2 
C)  -3 
D)  -2/3 
E)  -1/3

Question 15

An increase in autonomous government purchases will have exactly the same effect as an equal increase in

Accepted Answer

A)  autonomous net taxes 
B)  proportional income taxes 
C)  autonomous investment 
D)  autonomous saving 
E)  transfer payments

Question 16

If the MPC equals 0.75 and the proportional income tax rate is 0.2,the spending multiplier equals

Accepted Answer

A)  3 
B)  2.5 
C)  16/13 
D)  1 
E)  4

Question 17

The __________ the proportional tax rate,t,or the __________ the marginal propensity to import,m,the __________ the spending multiplier.

Accepted Answer

A)  higher,higher,larger 
B)  higher,higher,smaller 
C)  higher,lower,smaller 
D)  lower,lower,smaller 
E)  lower,higher,larger

Question 18

The balanced budget multiplier is equal to

Accepted Answer

A)  1 
B)  1 ÷ (1 - MP
C)  
C)  1 ÷ (1 - MPS) 
D)  zero 
E)  Y - Y*

Question 19

If the government raised transfer payments by $100 million while reducing its own purchases of computers by $100 million,we would expect the net effect of these actions to be

Accepted Answer

A)  an increase in aggregate demand,which is a rightward shift of the aggregate demand curve 
B)  an increase in aggregate demand,which is a leftward shift of the aggregate demand curve 
C)  a decrease in aggregate demand,which is a rightward shift of the aggregate demand curve 
D)  a decrease in aggregate demand,which is a leftward shift of the aggregate demand curve 
E)  to leave the aggregate demand curve unchanged

Question 20

Suppose that government purchases increase by $200 and at the same time autonomous net taxes are increased by $200.If there are neither income taxes nor net exports,the change in equilibrium real GDP demanded will

Accepted Answer

A)  depend on the value of the MPC 
B)  be a $200 decrease 
C)  be a $200 increase 
D)  be equal to zero,since higher taxes exactly offset higher government spending 
E)  be an increase by some amount greater than $200

Exam 26: The Algebra of Demand-Side Equilibrium

In which of the following situations will the combination of the marginal propensity to consume and the proportional income tax rate (t) result in the largest multiplier?

With a proportional income tax,

If the government wants to increase equilibrium income by $150 billion but does not want to change the size of the deficit,it should

If the MPC = 0.8 and both government purchases and autonomous net taxes fall by $100 billion,by how much does the equilibrium level of real GDP demanded change (assuming neither income taxes nor net exports exist) ?

The balanced budget multiplier is always negative.

The effect of a new proportional income tax on the spending multiplier is to

A $100 increase in autonomous government purchases has the same effect on the equilibrium level of real GDP as a $100 increase in autonomous investment spending would.

When we relax the assumption that net exports do not change with income,the aggregate expenditure function

If the marginal propensity to consume is 0.8 and the proportional income tax rate is 0.25,by how much would the equilibrium level of real GDP demanded increase if government purchases rose by $50 billion?

With a proportional income tax,

The balanced budget multiplier

If the government increased autonomous net taxes by $60 million and increased its own purchases by the same amount,we would expect the net effect of these actions to be

In a model with a proportional income tax rate (t) ,real disposable income equals

If the MPC equals the 2/3,then the net tax multiplier equals

An increase in autonomous government purchases will have exactly the same effect as an equal increase in

If the MPC equals 0.75 and the proportional income tax rate is 0.2,the spending multiplier equals

The the proportional tax rate,t,or the the marginal propensity to import,m,the __ the spending multiplier.

The balanced budget multiplier is equal to

If the government raised transfer payments by $100 million while reducing its own purchases of computers by $100 million,we would expect the net effect of these actions to be

Suppose that government purchases increase by $200 and at the same time autonomous net taxes are increased by $200.If there are neither income taxes nor net exports,the change in equilibrium real GDP demanded will