chapter 11- Adding the public sector

If the MPC in an economy is 0.9, a $1 billion increase in government spending will ultimately increase consumption by A. $1 billion. B. $0.9 billion. C. $10 billion. D. $9 billion.

D. $9 billion.

If the marginal propensity to consume in an economy is 0.8, net exports are zero, and government spending is $33 billion at each level of real GDP, the slope of the economy's aggregate expenditures schedule will be A. 0.8. B. 0.2. C. 5. D. 0.125.

A. 0.8.

In a mixed open economy, the equilibrium GDP is determined at that point where A. Sa + M + T = Ig + X + G. B. the 45-degree line and the saving schedule intersect. C. Sa + X + G = Ig + T. D. Sa + Ig + X = G + T.

A. Sa + M + T = Ig + X + G.

*Taxes represent A. a leakage of purchasing power, like saving. B. an injection of purchasing power, like investment. C. an injection of purchasing power, like government spending. D. a leakage of purchasing power, like government spending.

A. a leakage of purchasing power, like saving.

In which of the following situations for a mixed open economy will the level of GDP expand? A. when Ig + X + G exceeds Sa + M + T B. when Sa + T + M exceeds Ig + G + X C. when GDP exceeds Ca + Ig + G + Xn D. when Ig + M + T exceeds Ca + X + S

A. when Ig + X + G exceeds Sa + M + T

*In the aggregate expenditures model, a reduction in taxes may A. increase saving. B. decrease real GDP. C. increase unemployment. D. reduce consumption.

A. increase saving.

The level of aggregate expenditures in a mixed open economy consists of A. Ca + Ig + Xn. B. Ca + Ig + G + T + Xn. C. Ca + Ig + Xn + G. D. Ca + G.

C. Ca + Ig + Xn + G.

Ca = 25 + 0.75 (Y - T) Ig = 50 Xn = 10 G = 70 T = 30 The accompanying equations are for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes, respectively. Figures are in billions of dollars. If the economy's tax schedule was T = 0.2Y rather than T = T0 = 30, the equilibrium GDP would be A. $387.5. B. $518.5. C. $316. D. $412.

A. $387.5.

Ca = 25 + 0.75 (Y - T) Ig = 50 Xn = 10 G = 70 T = 30 The accompanying equations are for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes, respectively. Figures are in billions of dollars. The multiplier for this economy is A. 4. B. 3. C. 2. D. 2.33.

A. 4

*What do investment and government expenditures have in common? A. Both represent injections to the circular flow. B. Both represent leakages from the circular flow. C. Neither is subject to the multiplier effect. D. Both represent a decline in indebtedness.

A. Both represent injections to the circular flow.

*If government increases its tax revenues by $15 billion and the MPC is 2/3, then we can expect the equilibrium GDP to A. decrease by $30 billion. B. decrease by $45 billion. C. decrease by $35 billion. D. decrease by $55 billion.

A. decrease by $30 billion.

Suppose the economy's multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to A. decrease by $50 billion. B. decrease by $150 billion. C. remain unchanged since spending on military goods is unproductive and usually wasteful. D. decrease by $25 billion.

A. decrease by $50 billion.

The effect of imposing a lump-sum tax is to A. reduce the absolute levels of consumption and saving at each level of GDP and to reduce the size of the multiplier. B. reduce the absolute levels of consumption and saving at each level of GDP but to not change the size of the multiplier. C. reduce the absolute levels of consumption and saving at each level of GDP and to increase the size of the multiplier. D. increase the absolute levels of consumption and saving at each level of GDP and to increase the size of the multiplier.

B. reduce the absolute levels of consumption and saving at each level of GDP but to not change the size of the multiplier.

In an aggregate expenditures diagram, equal increases in government spending and in lump-sum taxes will A. shift the aggregate expenditures line downward. B. shift the aggregate expenditures line upward. C. leave the aggregate expenditures line unchanged. D. reduce the equilibrium GDP.

B. shift the aggregate expenditures line upward.

If the MPC in an economy is 0.75, a $1 billion increase in taxes will ultimately reduce consumption by A. $1 billion. B. $0.75 billion. C. $3 billion. D. $4 billion.

C. $3 billion.

Assume the MPC is 0.8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by A. $100 billion. B. $90 billion. C. $40 billion. D. $50 billion.

C. $40 billion.

In a mixed open economy, the equilibrium GDP exists where A. Ca + Ig + Xn intersects the 45-degree line. B. Ca + Ig = Sa + T + X. C. Ca + Ig + Xn + G = GDP. D. Ca + Ig + Xn = Sa + T.

C. Ca + Ig + Xn + G = GDP.

Which of the following statements is incorrect? A. Given the economy's MPS, a $15 billion reduction in government spending will reduce the equilibrium GDP by more than would a $15 billion increase in taxes. B. Other things unchanged, a tax reduction of $10 billion will increase the equilibrium GDP by $25 billion when the MPS is 0.4. C. If the MPC is 0.8 and GDP has declined by $40 billion, this was caused by a decline in aggregate expenditures of $8 billion. D. A government surplus is anti-inflationary; a government deficit is expansionary.

B. Other things unchanged, a tax reduction of $10 billion will increase the equilibrium GDP by $25 billion when the MPS is 0.4

If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause A. a rightward shift in the investment demand schedule. B. an $8 billion downshift in the consumption schedule. C. a $4 billion upshift in the consumption schedule. D. a $12 billion downshift in the consumption schedule.

B. an $8 billion downshift in the consumption schedule.

In the aggregate expenditures model, an increase in government spending may A. decrease real GDP. B. increase output and employment. C. shift the aggregate expenditures schedule downward. D. reduce the size of the inflationary gap.

B. increase output and employment.

Equal increases in government purchases and taxes will A. increase the equilibrium GDP, and the size of that increase varies directly with the size of the MPC. B. increase the equilibrium GDP, and the size of that increase is independent of the size of the MPC. C. increase the equilibrium GDP, and the size of that increase varies inversely with the size of the MPC. D. decrease the equilibrium GDP, and the size of that decrease is independent of the size of the MPC.

B. increase the equilibrium GDP, and the size of that increase is independent of the size of the MPC.

If MPC = 0.5, a simultaneous increase in both taxes and government spending of $20 will A. decrease GDP by $20. B. decrease GDP by $40. C. increase GDP by $20. D. increase GDP by $40.

C. increase GDP by $20.

Other things equal, if $100 billion of government purchases (G) is added to private spending (C + Ig + Xn), GDP will A. increase by $100 billion. B. increase by less than $100 billion. C. increase by more than $100 billion. D. fall by $100 billion.

C. increase by more than $100 billion.

Ca = 25 + 0.75 (Y - T) Ig = 50 Xn = 10 G = 70 T = 30 The accompanying equations are for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes, respectively. Figures are in billions of dollars. If government desired to raise the equilibrium GDP to $650, it could A. raise G by $45 and reduce T by $10. B. raise G by $40 and reduce T by $30. C. raise G by $30 or reduce T by $40. D. raise both G and T by $40.

C. raise G by $30 or reduce T by $40.

In a mixed closed economy, A. government purchases and saving are injections, while investment and taxes are leakages. B. taxes and government purchases are leakages, while investment and saving are injections. C. taxes and savings are leakages, while investment and government purchases are injections. D. taxes and investment are injections, while saving and government purchases are leakages.

C. taxes and savings are leakages, while investment and government purchases are injections.

If the marginal propensity to save in a closed economy is 0.25 and a lump-sum tax is imposed, the slope of the economy's aggregate expenditures schedule will be A. 0.25. B. less than the slope before the tax. C. greater than the slope before the tax. D. 0.75.

D. 0.75.

In an aggregate expenditures diagram, a lump-sum tax (T) will A. not affect the C + Ig + Xn line. B. shift the C + Ig + Xn line upward by an amount equal to T. C. shift the C + Ig + Xn line downward by an amount equal to T. D. shift the C + Ig + Xn line downward by an amount equal to T × MPC.

D. shift the C + Ig + Xn line downward by an amount equal to T × MPC.

An increase in taxes of a specific amount will have a smaller impact on the equilibrium GDP than will a decline in government spending of the same amount because A. the MPC is smaller in the private sector than it is in the public sector. B. declines in government spending always tend to stimulate private investment. C. disposable income will fall by some amount smaller than the tax increase. D. some of the tax increase will be paid out of income that would otherwise have been saved.

D. some of the tax increase will be paid out of income that would otherwise have been saved.

A lump-sum tax causes the after-tax consumption schedule A. and the before-tax consumption schedule to coincide. B. to be steeper than the before-tax consumption schedule. C. to be flatter than the before-tax consumption schedule. D. to be parallel to the before-tax consumption schedule.

D. to be parallel to the before-tax consumption schedule.

Ca = 25 + 0.75 (Y - T) Ig = 50 Xn = 10 G = 70 T = 30 The accompanying equations are for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes, respectively. Figures are in billions of dollars. The equilibrium level of GDP for this economy is A. $600. B. $530. C. $415. D. $400.

B. $530

Other things equal, the multiplier effect associated with a change in government spending is A. the same as that associated with a change in taxes. B. equal to that associated with a change in investment or consumption. C. less than that associated with a change in investment. D. greater than that associated with a change in investment.

B. equal to that associated with a change in investment or consumption.

If government increases its purchases by $15 billion and the MPC is 2/3, then we would expect the equilibrium GDP to A. increase by $30 billion. B. increase by $45 billion. C. decrease by $35 billion. D. increase by $50 billion.

B. increase by $45 billion.

If a lump-sum income tax of $25 billion is levied and the MPS is 0.20, the A. saving schedule will shift upward by $5 billion. B. consumption schedule will shift downward by $25 billion. C. consumption schedule will shift downward by $20 billion. D. consumption schedule will shift upward by $25 billion.

C. consumption schedule will shift downward by $20 billion.

The multiplier effect demonstrates that A. equal increases in government spending and taxes do not change the equilibrium GDP. B. equal increases in government spending and taxes reduce the equilibrium GDP. C. equal increases in government spending and taxes increase the equilibrium GDP. D. taxes have a stronger effect upon equilibrium GDP than do government purchases.

C. equal increases in government spending and taxes increase the equilibrium GDP.

Which of the following is a correct statement of the effects of a lump-sum tax? A. Disposable income will increase by the amount of the tax, and consumption at each level of GDP will decline by the amount of the tax multiplied by the MPC. B. Disposable income will decline by the amount of the tax, and consumption at each level of GDP will decline by the amount of the tax multiplied by the multiplier. C. Disposable income will decline by the amount of the tax, and consumption at each level of GDP will also decline by the amount of the tax. D. Disposable income will decline by the amount of the tax, and consumption at each level of GDP will decline by the amount of the tax multiplied by the MPC.

D. Disposable income will decline by the amount of the tax, and consumption at each level of GDP will decline by the amount of the tax multiplied by the MPC.

In a mixed open economy, if aggregate expenditures exceed GDP, A. Ig + X + G = Ca. B. Ca + Ig + Xn + G < domestic output. C. Ig > S. D. Ig + X + G > Sa + M + T.

D. Ig + X + G > Sa + M + T.

Which of the following would increase GDP by the greatest amount? A. a $20 billion reduction in taxes B. $20 billion increases in both government spending and taxes C. $20 billion decreases in both government spending and taxes D. a $20 billion increase in government spending

D. a $20 billion increase in government spending

In moving from a private closed to a mixed closed economy in the aggregate expenditures model, taxes A. must be added to gross investment. B. must be added to saving. C. must be added to consumption and gross investment. D. have no impact upon the equilibrium GDP.

B. must be added to saving.

Suppose that a mixed open economy is producing at its equilibrium income and that net exports are zero. If at the equilibrium income the public sector's budget shows a surplus, A. Ca + Ig + Xn + G must exceed GDP. B. planned investment must exceed saving. C. a recessionary expenditure gap must exist. D. saving must exceed planned investment.

B. planned investment must exceed saving.

If a $20 billion increase in government expenditures increases equilibrium GDP by $50 billion, then A. the multiplier is 2. B. the MPC for this economy is 0.6. C. inflation is occurring. D. the MPS for this economy is 0.6.

B. the MPC for this economy is 0.6.

If a $10 billion decrease in lump-sum taxes increases equilibrium GDP by $40 billion, then A. the multiplier is 4. B. the MPC for this economy is 0.8. C. the MPC for this economy is 0.6. D. the multiplier is 3.

B. the MPC for this economy is 0.8.

A lump-sum tax means that A. the tax only applies to one time period. B. the same amount of tax revenue is collected at each level of GDP. C. tax revenues vary directly with GDP. D. tax revenues vary inversely with GDP.

B. the same amount of tax revenue is collected at each level of GDP.

If a lump-sum tax of $40 billion is imposed and the MPC is 0.6, the saving schedule will shift A. downward by $24 billion. B. upward by $24 billion. C. downward by $16 billion. D. upward by $16 billion.

B. upward by $24 billion.

Suppose that unintended increases in inventories are occurring in a mixed closed economy. We can surmise that A. Ig + T > Sa + G. B. T + G > Sa + Ig. C. T + Sa > Ig + G. D. T + Sa < Ig + G.

C. T + Sa > Ig + G.

A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because A. government spending is more employment intensive than is either consumption or investment spending. B. government spending increases the money supply and a tax reduction does not. C. a portion of a tax cut will be saved. D. taxes vary directly with income.

C. a portion of a tax cut will be saved.

Suppose the economy is operating at its full-employment, noninflationary GDP and the MPC is 0.75. The federal government now finds that it must increase spending on military goods by $21 billion in response to deterioration in the international political situation. To sustain full-employment, noninflationary GDP, government must A. reduce taxes by $28 billion. B. reduce transfer payments by $21 billion. C. increase taxes by $21 billion. D. increase taxes by $28 billion.

D. increase taxes by $28 billion.

Assume in a closed economy that the equilibrium level of income is $380 and the MPS is 0.25. Now suppose government collects taxes of $50 and spends the entire amount. As a result, A. the equilibrium level of real income and the price level will both remain unchanged. B. the equilibrium level of income will remain unchanged. C. the equilibrium level of income will rise to $420. D. the equilibrium level of income will rise to $430.

D. the equilibrium level of income will rise to $430.

An increase in taxes will have a greater effect on the equilibrium GDP A. if the tax revenues are redistributed through transfer payments. B. the larger the MPS. C. the smaller the MPC. D. the larger the MPC.

D. the larger the MPC.