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

Question 1

Suppose that the marginal propensity to consume out of disposable income is 0.6 and the marginal propensity to import is 0.14. If the net tax rate is 0.1, then what is the marginal propensity to spend in this economy?

A)0.30
B)0.40
C)0.46
D)0.50
E)0.60

Answer 1

B

Question 2

Consider the simplest macro model with demand- determined output. The equations are: C = 150 + 0.8Yd, Yd = Y- T, I = 400, G = 700, T = .2Y, X = 130, and IM = 0.14Y. Autonomous expenditures in this model are .

A)1120
B)1350
C)1380
D)2700
E)5400

Answer 2

C

Question 3

Government's transfer payments to individuals affect desired aggregate expenditure

A)through the investment function.
B)through net exports.
C)directly.
D)through the consumption function.
E)through the government's budget deficit.

Answer 3

D

Question 4

In a simple macro model, it is generally assumed that a country's exports

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

Question 5

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

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

Question 6

Consider a simple macro model with a constant price level and demand- determined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. The trade balance at equilibrium national income is .

A)a deficit of 36.67
B)a deficit of 21.43
C)zero
D)a surplus of 21.43
E)a surplus of 36.67

Question 7

An increase in foreign income, other things being equal, is assumed to cause the net export (NX)function to

A)shift parallel downward.
B)remain stationary.
C)pivot upward.
D)shift parallel upward.
E)pivot downward.

Question 8

Consider the following news headline: "Canadian exporters hurt by foreign recession." Assuming that aggregate output is demand- determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income?

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

Question 9

Consider the government's budget balance. Suppose G = 300 and the government's net tax revenue is equal to 0.14Y. When Y = 2000, the government is running a budget .

A)deficit of - 20
B)surplus of 20
C)balance
D)surplus of 40
E)deficit of 20

Question 10

firms have excess capacity.

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

Question 11

Consider the following news headline: "Canadians develop a greater taste for foreign vacations." Assuming that aggregate output is demand- determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income?

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

Question 12

Suppose exports are $200 and imports are given by IM = 0.2Y. At what level of national income will net exports equal zero?

A)$1000
B)$1250
C)$0
D)$200
E)$250

Question 13

Consider the net export function. An increase in domestic national income, other things being equal, is assumed to cause

A)the net export function to pivot downward.
B)a move downward along the net export function.
C)the net export function to pivot upward.
D)no effect on net exports.
E)the net export function to shift upward.

Question 14

Consider a model in which output is demand- determined. If the marginal propensity to spend out of national income is 0.4, then a $0.6 billion decrease in government purchases will cause equilibrium national income to by approximately .

A)decrease; $0.24 billion
B)increase; $1.00 billion
C)decrease; $1.50 billion
D)decrease; $1.00 billion
E)increase; $1.50 billion

Question 15

When determining the AE function for an open economy with government, it is generally assumed that as real national income

A)increases, imports will decrease.
B)decreases, exports will decrease.
C)decreases, net exports will decrease.
D)increases, exports will decrease.
E)increases, net exports will decrease.

Question 16

Consider a simple macro model with a constant price level and demand- determined output. The equations of the model are: C = 120 + 0.86Y, I = 300, G = 520, T = 0, X = 180, IM = 0.12Y. The vertical intercept of the AE function is .

A)120.0
B)420.0
C)600.0
D)828.8
E)1120.0

Question 17

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

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

Question 18

A parallel downward shift in the net export (NX)function can be caused by

A)an increase in the Canadian- dollar price of foreign currency.
B)a decrease in domestic prices.
C)a decrease in foreign national income.
D)a decrease in foreign prices.
E)an increase in domestic national income.

Question 19

In an open economy with government and demand- determined output, a decrease in the equilibrium level of national income could be caused by

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

Question 20

Consider a model with demand- determined output and a constant price level. A decrease in the net tax rate causes _ in autonomous spending and a _ in the simple multiplier.

A)a rise; fall
B)a rise; rise
C)no change; fall
D)no change; rise
E)a fall; fall

Question 21

Consider the following news headline: "China signs deal to buy more Canadian wheat." Assuming that aggregate output is demand- determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income?

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

Question 22

Consider the following macro model with demand- determined output: C = 150 + 0.9Y_d, Y_d= 0.8Y, I = 400, G = 700, T = (0.2)Y, X = 130, IM = (0.08)Y. Equilibrium national income is

A)1916.67
B)4928.57
C)2156.25
D)1380.00
E)3833.33

Question 23

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

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

Question 24

Consider the government's budget balance. Suppose G = 400 and the government's net tax revenue is 20 percent of national income (Y). Government saving is negative for all values of Y

A)above 10 000.
B)above 8000.
C)above 2000.
D)below 8000.
E)below 2000.

Question 25

Transfer payments made by the government affect its net tax revenues

A)indirectly through the investment function.
B)indirectly through net exports.
C)directly.
D)indirectly through the consumption function.
E)indirectly through government purchases.

Question 26

In a simple macro model with a constant price level, a decrease in the net tax rate causes the AE curve to

A)shift parallel upward.
B)shift parallel downward.
C)remain stationary.
D)rotate downward.
E)rotate upward.

Question 27

If the government's net tax rate increases, then for a given level of national income disposable income will but net tax revenue will .

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

Question 28

A decrease in the value of the simple multiplier can be caused by

A)an increase in the marginal propensity to save.
B)a decrease in the net tax rate.
C)a decrease in the marginal propensity to import.
D)an increase in the marginal propensity to spend.
E)an increase in the marginal propensity to consume.

Question 29

A fall in domestic prices relative to foreign prices, other things being equal, causes the net export (NX)function to shift and .

A)downward; become steeper
B)downward; become flatter
C)downward; and maintain the same slope
D)upward; become flatter
E)upward; become steeper

Question 30

In an open economy with government and demand- determined output, an increase in the equilibrium level of national income could be caused by

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

Question 31

Consider the following news headline: "Minister of Defence announces $2 billion purchase of fighter aircraft." Assuming that aggregate output is demand- determined, and that the aircraft are purchased domestically, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income?

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