Baidu Macroeconomics Week 3 - The Keynesian Model and Fiscal Policy

All of the above 1. If businesses are bearishly pessimistic on the economy, they will cut back on investment 2. If businesses are bullishly optimistic on the economy, they will increase investment 3. If businesses believe the economy will go bad, it could become a self-fulfilling prophecy

"Animals spirits" in the Keynesian model is important because:

Net exports

A closed economy excludes:

1 & 2 only 1. Assumes prices are fixed 2. Assumes away inflation

A key weakness of the Keynesian model is that it:

1 & 2 only 1. Represents total spending 2. Equals consumption plus investment plus government spending plus net exports

Aggregate expenditures

All of the above 1. Is the total amount of goods and services produced in the economy 2. Creates an equal amount of income 3. Is a 45 degree line

Aggregate production

$60 billion

Assume a recessionary gap of $180 billion and an MPS of .25. How much should taxes be cut to close the gap?

Less of an expansionary effect

Compared to increases in government expenditures, tax cuts have:

The net effect of a fiscal policy stimulus may be less than intended

Crowding out means that:

Uses changes in government expenditures and taxes to stimulate the economy

Fiscal policy:

Autonomous consumption plus induced consumption

In the Keynesian consumption function, total consumption equals:

Are independent of income

In the investment function in the Keynesian model, expenditures:

Interest rates fall

Investment increases when:

It depends on whether you are a conservative or a liberal

Is it better to cut taxes or increase government expenditures to close a recessionary gap?

Showed that Keynesian solutions didn't always work

Stagflation

.60

Suppose people spend 60 cents of every dollar of their disposable income and save 40 cents. What is the MPC?

$400 billion

Suppose the U.S. permanently decreases defense spending by $100 billion after troops pull out of Afghanistan. How much will GDP be reduced assuming an MPC of 0.75?

Raise taxes by $100 billion or cut G by $50 billion

Suppose you want to close an inflationary gap of $100 billion and the MPC is .5. What fiscal policy options are available?

Income is re-spent many times after the initial increase.

The Keynesian multiplier is greater than one because:

Less than one

The aggregate expenditures curve is flatter than the 45 degree line in the Keynesian model because the MPC is:

Disposable income

The amount of money left after paying taxes to the government is referred to as:

MPC

The extra amount people consume when they receive an extra dollar of disposable income is referred to as the:

Prices vary little with output

The fixed price assumption is valid in the Intermediate range of the economy because:

People try to save more during a recession but wind up saving less because their incomes fall

The paradox of thrift occurs when:

Cool down an overheated economy

The purpose of contractionary fiscal policy is to:

The expenditure multiplier * MPC

The tax cut multiplier equals:

They automatically rise during recessions and fall during expansions.

Transfer payments like unemployment compensation and welfare payments act as automatic stabilizers because:

The MPC

Vertically summing the consumption, investment, and government expenditure curves yields the AE function. It's slope is:

MPS = 1 - MPC

What is the formula for the marginal propensity to save?

1 & 2 only 1. MPC 2. 1 - MPS

What is the slope of the consumption function?

1 & 2 only 1. A tax cut 2. An increase in government expenditures

What type of expansionary fiscal policies can be used to close a recessionary gap?

Drive up interest rates and drive down investment

When the government increases its expenditures to close a recessionary gap and finances those expenditures through increased borrowing, this can:

Consumption

Which is the largest component of Aggregate Expenditures?

1 & 2 only 1. Decreased or increased government expenditures 2. Decreased or increased taxes

Which of these are the primary tools of fiscal policy?

Consumption function

Which of these components of the aggregate expenditure function is not represented by a horizontal line?

Savings

Which of these is a leakage in the Circular Flow Diagram?

Exports

Which of these is an injection?

Exports

Which part of the net export function adds to aggregate expenditures?

Alvin Hansen and Paul Samuelson

Who was responsible for developing the textbook Keynesian model?

Autonomous consumption

Why does the AE curve intersect the vertical axis above zero?