ECON 2002.01 EOC 8

Suppose an economy's spending multiplier is 4. 1. What is the Marginal Propensity to Consume? a. 0.75 b. 0.25 c. 0.30 2. What is the Marginal Propensity to Save? a. 0.75 b. 0.25 c. 0.30

1. - a. 0.75 2. - b. 0.25

How do injections into and withdrawals from an economy affect its income and output? Injections are increments of spending, such as government spending, that lead to __________ output. Withdrawals are activities, such as saving, that remove spending from an economy. They lead to__________ output. Answer Box: - higher - lower

a. higher b. lower

A proposal that has significant support among policymakers regardless of political party is the need to modernize the nation's infrastructure, e.g., reinforcing thousands of bridges deemed structurally deficient and modernizing airports. Which of the following explains why an increase in government spending might not be as effective when the economy is experiencing an expansion as when it is experiencing a recession? a. Increasing government spending during an expansion would likely lead to a positive GDP gap. b. Increasing government spending during an expansion would likely lead to a negative GDP gap. c. Increasing government spending is undesirable during both expansions and recessions. d. Increasing government spending during an expansion would likely lead to lower prices.

a. Increasing government spending during an expansion would likely lead to a positive GDP gap.

In modern politics, the word "Keynesian" is often synonymous with "big government" spending. However, this is a misconception. Select the statement below that accurately characterizes the role of government tax and spending activity within the Keynesian model. The Keynesian model a. assumes the only effective injection is government spending. b. envisages both spending and tax cuts as means of stimulating the economy. c. smooths economic fluctuations by utilizing only tax increases. d. implies that the economy can recover only with government intervention.

b. envisages both spending and tax cuts as means of stimulating the economy.

The U.S. tax cuts that went into effect in 2018 reduced the corporate tax rate and individual income tax rates. Tax analysts have determined that while most American taxpayers benefit from the policy, a large portion of the tax cuts is aimed at higher‑income households. Based on the multiplier, how might the effects of this tax policy differ, if at all, if more of the tax cuts are aimed at lower‑income households? a. The multiplier would be lesser because those with lower incomes have greater MPS. b. The multiplier would be lesser because those with lower incomes have a higher MPC. c. The multiplier would be greater because those with lower incomes have a higher MPC. d. The multiplier would be greater because those with lower incomes have a higher MPS.

c. The multiplier would be greater because those with lower incomes have a higher MPC.

How does the economy today differ from that of the Great Depression, the economy Keynes used as the basis for the macroeconomic model discussed in this chapter? During the Great Depression, a. managing the money supply was not as important. b. there were many more programs to help the poor. c. economic analysis was less developed and understood. d. unemployment was lower and limited to rural areas.

c. economic analysis was less developed and understood.

What factor does not cause consumption to change at any given level of income? a. Changes in wealth b. Changes in household debt c. Changes in taxes d. Technological change

d. Technological change

The simple aggregate expenditures model argues that one form of spending is just as good as any other; increases in all types of spending lead to equal increases in income. Is there any reason to suspect that private investment might be better for the economy than government spending? The impact of injections into the economy can differ because a. government spending is designed to be more effective than private investment in equalizing personal incomes. It is thus more potent than private investment in increasing national income. b. an increase in productivity and growth in national income is only possible when both the government and the private sector increase their spending together to create an appropriate synergy. c. private investment improves the purchasing power of individuals. It thus increases consumption, but it does not enhance productivity and national income, like government spending. d. private investment typically leads to future increases in productive capacity. It is thus often considered comparatively better for increasing national income than government spending.

d. private investment typically leads to future increases in productive capacity. It is thus often considered comparatively better for increasing national income than government spending.

Explain why a $100 reduction in taxes does not have the same impact on output and employment as a $100 increase in government spending. These two stimulus impacts are not the same because a. changes in taxes have no impact on the consumption decisions of consumers. b. when taxes are reduced, consumers typically save a part of their increased income. c. a tax decrease and a government spending increase have opposite stimulus effects. d. government spending has a stimulus multiplier effect, but consumer spending does not.

when taxes are reduced, consumers typically save a part of their increased income.

Describe the important difference between the average propensity to consume (APC) and the marginal propensity to consume (MPC). a. The MPC is defined as _________________________ b. The APC is defined as _________________________ Answer Box: - total consumption divided by total income - the change in consumption divided by the change in income

a. the change in consumption divided by the change in income b. total consumption divided by total income

Other than reductions in interest rates that increase the level of investment by businesses, what factors would result in higher investment? Higher investment will occur when a. the unemployment rate increases. b. business expectations improve. c. total national output declines. d. the costs of resources increase.

b. business expectations improve.

1. How would a country correct an inflationary gap, using changes in government spending? a. By reducing government spending by an amount equal to the inflationary gap divided by the multiplier b. By reducing government spending by an amount equal to the inflationary gap times the multiplier c. By increasing government spending by an amount equal to the inflationary gap divided by the multiplier 2. How would a country correct a recessionary gap, using changes in government spending? a. By increasing government spending by an amount equal to the recessionary gap divided by the multiplier b. By increasing government spending by an amount equal to the recessionary gap times the multiplier c. By reducing government spending by an amount equal to the recessionary gap divided by the multiplier

1. - a. By reducing government spending by an amount equal to the inflationary gap divided by the multiplier 2. - a. By increasing government spending by an amount equal to the recessionary gap divided by the multiplier

Suppose people increase their Marginal Propensity to Save, MPS, in preparation for a recession. 1. According to the Paradox of Thrift, aggregate equilibrium output will a. decrease b. increase c. stay the same 2. aggregate equilibrium income will a. increase b. decrease c. stay the same 3. long‑run savings will a. decrease b. increase c. stay the same

1. - a. decrease 2. - b. decrease 3. - a. decrease

Suppose the economy is currently $800 million below its full employment income and that the Marginal Propensity to Consume equals 0.80. 1. What is the economy's multiplier? a. 1.25 b. 0.2 c. 5 2. Will a $150 million increase in investment spending bring the economy to its macroeconomic equilibrium, all else equal? a. Yes, because it will generate the exact $800 million needed to achieve full employment. b. No, because it will generate less than the $800 million needed to achieve full employment. c. No, because it will generate more than the $800 million needed to achieve full employment.

1. - c. 5 2. - b. No, because it will generate less than the $800 million needed to achieve full employment.

Using the data below, answer the questions that follow. Income (Y) = $2,500; Consumption (C): $2,500; Savings (S) = $0 Income (Y) = $2,600; Consumption (C): $2,560; Savings (S) = $40 Income (Y) = $2,700; Consumption (C): $2,620; Savings (S) = $80 Based on this information, what is the Marginal Propensity to Consume (MPC)? What is the multiplier? MPC = ________________ The multiplier = __________________

MPC = 0.6 The multiplier = 2.50