(1) A reduction in the lump sum tax (2) A rise in the marginal propensity to import (3) A decrease in the marginal propensity to consume

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "(1) A reduction in the lump sum tax (2) A rise in the marginal propensity to import (3) A decrease in the marginal propensity to consume"

Transcription

1 S.7 Economics On 3 & 4-Sector Simple Keynesian Models S.7 Economics/3 & 4-sector Keynesian Models/p.1 95 #4 Which of the following would reduce the multiplier effect of investment on national income? (1) A reduction in the lump sum tax (2) A rise in the marginal propensity to import (3) A decrease in the marginal propensity to consume A (1) and (2) only B (1) and (3) only C (2) and (3) only D (1), (2) and (3) 96 #1 Consider the following model: C = Yd I = Y T = 0.1Y G = 10 C = consumption Yd = disposable income Y = income I = investment T = tax The government expenditure multiplier is A 1.66 B 2.17 C 3.85 D #4 What will be the result of a fall in the marginal propensity to consume? (1) A smaller government expenditure multiplier (2) A concretionary effect on the economy (3) A fall in the government tax revenue under a proportional tax system A (1) and (2) only B (1) and (3) only C (2) and (3) only D (1), (2) and (3) 97 #4 Suppose a government reduces its expenditure on goods and services and at the same time increases its transfer payments to the public by the same amount, then A The government expenditure multiplier would become smaller. B Aggregate expenditure would remain unchanged. C National income would decrease. D National income would increase with a government expenditure multiplier of 1.

2 S.7 Economics/3 & 4-sector Keynesian Models/p.2 97 #5 Consumption A B D E Consumption 45 o 0 F G H In the above diagram, the marginal propensity to save is equal to Income A BD/GH B DE/GH C BD/OH D BE/OH 97 #19 Study the following information of an economy: C = Yd Where C = consumption expenditure I = Yd Yd = disposable income T = 100 I = investment expenditure G = 100 The income of the economy will increase by 100 if the government expenditure increases by A 25 B 40 C 60 D #2 Suppose the marginal propensity to consume is under a lump sum tax system, how much tax decrease would have the same effect on the equilibrium income as a $45 million increase in government spending? A $25 million B $60 million C $120 million D $180 million 98 #4 Refer to the following diagram of an open economy without the government

3 sector. $ S.7 Economics/3 & 4-sector Keynesian Models/p.3 S + M C + I I + X 0 45 o A B Income Which of the following statements about the economy are true? (1) The equilibrium income is OA (2) The equilibrium income is OB (3) The economy has a trade surplus (4) The economy has a trade deficit A (1) and (3) only B (1) and (4) only C (2) and (3) only D (2) and (4) only 98 #25 If the government adopts a proportional income tax, the aggregate expenditure curve will become and the investment multiplier will become. A flatter... smaller B steeper... smaller C flatter...larger D steeper...larger 99 #1 The diagram below shows the aggregate expenditure in a closed economy without taxes. At the equilibrium income level, the average propensity to save is given by the ratio

4 S.7 Economics/3 & 4-sector Keynesian Models/p.4 Expenditure S C + I + G 0 A PQ / OR B QR / OU C ST / OU D SU / OU P Q R T 45 o I + G U Income 99 #5 In the elementary Keynesian model, fluctuations in investment will induce.. fluctuations in income under the proportional tax system.. under the lump sum tax system. A more... than B less... than C the same amount of... as D no... or 99 #22 In an economy, suppose the government budget is in balance while the trade account is in deficit. We can conclude that A The sum of government spending and exports is greater than the sum of taxation and imports. B The sum of investment spending and exports is greater than the sum of savings and imports. C The sum of government spending and investment spending is greater than the sum of taxation and savings. D None of the above. 00 #4 Which of the following would offset the effect of an increase in the marginal propensity to consume on the value of the government expenditure multiplier? (1) An increase in the marginal propensity to import (2) An increase in the marginal propensity to invest (3) An increase in the proportional income tax rate A (1) and (2) only

5 B (1) and (3) only C (2) and (3) only D (1), (2) and (3) S.7 Economics/3 & 4-sector Keynesian Models/p.5 00 #6 Consider the following model: C = Yd Where C = consumption expenditure I = 200 Y = national income G = 500 Yd = disposable income T = Y I = investment expenditure T = tax At equilibrium, the government budget surplus is and the government expenditure multiplier is A negative B negative C zero D positive #20 Which of the following can raise the employment level of an economy? (1) Export promotion (2) Increase in foreign investment in the economy (3) Reduction in the income tax rate A (1) and (2) only B (1) and (3) only C (2) and (3) only D (1), (2) and (3) 01 #1 Consider the following diagram of a closed economy:

6 E S.7 Economics/3 & 4-sector Keynesian Models/p.6 E = Y E = C + I + G Which of the following is true at the equilibrium income level? A Investment is greater than saving. B Investment is equal to saving. C Investment is smaller than saving. D The answer is indeterminate. T - G Y E = expenditure Y = income C = consumption I = investment G = government expenditure T = tax 01 #2 Which of the following will reduce the size of the government expenditure multiplier? (1) An increase in the proportional income tax rate (2) A decrease in the marginal propensity to invest (3) A decrease in the marginal propensity to save A (1) and (2) only B (1) and (3) only C (2) and (3) only D (1), (2) and (3) 01 #29 Consider the elementary Keynesian model with a lump sum tax but without foreign trade. Suppose the equilibrium income is $5000 and the full employment income is $600. if full employment can be achieved by a $50 increase in government spending, then what decrease in lump sum tax is needed in order to achieve full employment? A $25 B $50 C $75 D $ #3 Refer to the following diagram of an open economy without the government section.

7 S.7 Economics/3 & 4-sector Keynesian Models/p.7 C = consumption I = investment 45 o line X = exports M = imports C + I 0 Y 1 Income X - M Which of the following statements is/are true? (1) At Y 1, saving is larger than investment. (2) The equilibrium level of income is smaller than Y 1. (3) There is a trade surplus at equilibrium income. A (1) only B (1) and (2) only C (2) and (3) only D (1), (2) and (3) 02 #4 Consider the following model. C = Yd where C = consumption expenditure I = Y Yd = disposable income G = 300 I = investment expenditure T = 30 Yf =5080 T = tax Y = national income Yf= full employment national income In order to attain the level of full employment national income, what is the required change in the lump-sum tax? A -8 B -10 C 8 D #2 Refer to the following closed economy C = Yd Where C = consumption expenditure I = 100 Yd = disposable income

8 G = 200 T = 0.4 Y S.7 Economics/3 & 4-sector Keynesian Models/p.8 I = investment expenditure T = tax Y = national income The expenditure multiplier is A 1.67 B 1.92 C 2.08 D 5 03 #4 Which of the following cases will exert and expansionary effect on the economy when there is an equal increase in government expenditure and tax? (1) There is proportional tax and no marginal propensity to invest. (2) There is proportional tax and positive marginal propensity to invest. (3) there is no proportional tax, but positive marginal propensity to invest. (4) There is no proportional tax and no marginal propensity to invest. A (1) and (2) only B (1) and (4) only C (2) and (3) only D (1), (2), (3) and (4) 03 #10 Define private saving as SP = Y T C, public saving as SG = T G and national saving as the sum of private and public saving. Y, T, C and G are national income, tax, consumption expenditure and government expenditure, respectively. It follows that, in an open economy, A Private saving is equal to domestic investment. B National saving is equal to domestic investment. C Private saving is equal to the sum of domestic investment and net exports. D National saving is equal to the sum of domestic investment and net exports. 03 #26 Which of the following can explain the co-existence of unemployment, budget deficit and trade deficit? A A fall in consumption expenditure B A fall in investment expenditure C A fall in exports D A fall in government expenditure 04 #5 In a closed economy, the balanced budget multiplier is smaller than one when A There is no induced consumption in the economy. B The marginal propensity to invest is greater than zero. C The marginal propensity to consume falls by 10%.

9 D None of the above. S.7 Economics/3 & 4-sector Keynesian Models/p.9 04 #6 Refer to the following diagram of a closed economy. Expenditure 45 o Line C - I C = consumption expenditure I = investment expenditure T = tax S = saving T - G 0 National income Y 1 Which of the following statements about the economy is correct? A At Y 1, the level of foreign exchange reserves must remain constant. B At Y 1, the budget surplus is zero. C At Y 1, the value of injection (I+G) is equal to the value of withdrawal (S+T). D At Y 1, there will be an increase in inventory. 04 #8 Refer to the following diagram of a closed economy. E E = Y E = C + I + G T - G Y = national income E = aggregate expenditure C = consumption expenditure I = investment expenditure T = tax Y e = initial equilibrium income Y f = full employment income 0 Y e Y f Y Full employment and budget balance can be attained simultaneously when A There is an increase in autonomous investment. B There is an increase in autonomous government expenditure. C There is a reduction in both lump sum tax and government expenditure by the same amount.

10 S.7 Economics/3 & 4-sector Keynesian Models/p.10 D There is a reduction in lump sum tax. 04 #10 Refer to the following diagram of an open economy. E 45 o E M X T - G Y = national income E = aggregate expenditure M = imports X = exports T = tax Y f = full employment income 0 Y f Y Y f is the initial equilibrium income in the economy. Which of the following changes could generate unemployment, trade deficits, and fiscal deficits simultaneously? A A fall in private consumption B A fall in exports C A rise in private consumption D A rise in exports 05 #1 In an open economy, national saving need not equal real investment. When national saving exceeds real investment, it means that A There are net exports to the rest of the world. B There is foreign investment in the form of real investment in the rest of the world. C There is foreign investment in the form of financial investment in the rest of the world. D All of the above. 05 #4 In a closed economy with the government sector, consumption rises by $60 when disposable income rises by $100. Which of the following about the economy must be true. (1) The marginal propensity to save is 0.4. (2) The average propensity to consume is 0.6 (3) When investment increase by $20, the maximum possible increase in national income is $50. A (1) only B (1) and (2) only

11 C (1) and (3) only D (2) and (3) only S.7 Economics/3 & 4-sector Keynesian Models/p #5 Which of the following will reduce the expansionary effect of an increase in government expenditure in the elementary Keynesian model? A An increase in lump sum tax. B A decrease in the marginal propensity to save. C A decrease in the marginal propensity to import. D All of the above. 05 #6 Use the following information about an economy to answer Question 6 to 8. C = Y d where C = consumption expenditure I = 110 Y d = disposable income G = 200 I = investment expenditure T = τy G = Government expenditure NX = Y d T = taxes Y d = Y T τ = proportional income tax Y = national income NX = net exports Suppose the governments objective is to balance its budget, the equilibrium level of income will be A B C D #7 With the same government objective, the equilibrium tax rate is A 0.08 B 0.11 C 0.14 D 0.16

12 S.7 Economics/3 & 4-sector Keynesian Models/p.12 06#1 Refer to the following diagram of an open economy with no government sector. At the equilibrium income level, planned saving is planned investment and the economy has a trade. A greater that deficit B smaller than deficit C equal to surplus D greater than surplus 06#3 The above diagram shows an elementary Keynesian model for a closed economy. In this economy, all taxes are in lump sum fashion and investment is autonomous. The aggregate expenditure function shifts upward from E1 to E2 as a result of a change in lump sum tax. The change in lump sum tax is. A 50 B 62.5 C -50 D -62.5

13 S.7 Economics/3 & 4-sector Keynesian Models/p.13 06#4 In a closed economy, national saving is $1 000 and price saving is $750. This means that the government has a and the equilibrium level of investment is. A budget deficit of $250 $250 B budget deficit of $100 $1000 C budget surplus of $250 $1000 D budget surplus of $200 $ #B1 Consider the elementary Keynesian model. (a) Explain how an increase in the lump sum tax affects income. (4) (b) Suppose the tax multiplier of the lump sum tax is -4. By how much will income change if the government expenditure increases by 100? (4) 95 #C7 In an elementary Keynesian model, there is a proportional income tax and government expenditure just equals its tax revenue. (a) Explain the impact of an increase in investment on income, the government budget balance and the external trade balance. (6) (b) Suppose now the government is required to balance its budget. Explain whether the impact of an increase in investment on income will be larger or smaller than that in (a). (4) 96 #B1 Consider an elementary Keynesian model without a government sector. Explain whether planned saving can exceed, equal, or fall short of planned investment at equilibrium in an open economy. How about in a closed economy with government sector? How about in a open economy? 96 #B4 Consider a country with unemployment. With the aid of a diagram, explain how an equal increase in government expenditure and lump sum tax affects the income of the country. Show that the balanced budget multiplier is one. 97 #B1 Consider an elementary Keynesian model with proportional income tax and unemployment. Suppose the government budget is in deficit. Show how a $1 increase in government expenditure affects (a) National income. (4) (b) Government budget deficit. (4) 97 #B4 The following table gives the composition of Country A s GNP: Consumption Investment Government expenditure GNP 145 X

14 S.7 Economics/3 & 4-sector Keynesian Models/p.14 (a) (i) Find the value of X. Is the value a realized investment or a planned investment? (ii) Explain whether the value you calculated in (a) (i) can be planned investment as well as realized investment. (4) (b) Suppose the planned investment is 30. Explain how Country A s GNP will change. (4) 97 #C7 Consider the following economic model: C = Y I = 10 G = 10 X = 70 M = Y C = consumption expenditure Y = income I = investment expenditure X = exports M = imports (a) Find the equilibrium level of income and the corresponding trade balance. Illustrate your answers with a diagram. (6) (b) Supposing exports increase by one unit, explain the impact of this on income and trade balance. (4) 99 #C7 Consider an unfunded social security system in a closed economy with unemployment. The system involves a redistribution of income from young people to old people, i.e., the young is taxed and the tax proceeds are distributed to the old as transfer payments. There are 400 young people and 100 old people in the population. All the old people have retired and their pre-transfer income is zero. The consumption functions and disposable incomes of these two groups of people are given as follows: C1 = yd1 Where C1 = consumption of each young person C2 = yd2 C2 = consumption of each old person yd1 = y1 t yd1 = disposable income of each young person yd1 = tr yd2 = disposable income of each old person y1 = pre-tax income of each young person t = taxes paid by each young person tr = transfer payments received by each old person (a) Give one reason why the marginal propensity to consume of the old may be higher than that of the young. (3) (b) Suppose the social security tax is the only tax in the economy and there is no government spending. Suppose further that these taxes and transfers are lump sums. (i) Use the balanced budget condition to find tr given t = 100. (2)

15 S.7 Economics/3 & 4-sector Keynesian Models/p.15 (ii) Based on your answer to (b) (i), find the aggregate consumption, C, (i.e., sum of consumption over both the young and old people) as a function of y1. Then, divide this (pseudo) aggregate consumption function by the total population to obtain per capita consumption, c. Find c as a function of y1. (3) (iii) Suppose there is no such social security system in the economy. Find c as a function of y1. (2) (c) Use the elementary closed economy Keynesian model with no investment to explain the effect of the above social security system on the aggregate consumption, aggregate output, and aggregate saving of the economy. (4) 00 #B1 Consider an elementary closed Keynesian model. The only tax in the model is a lump sum tax. (a) Suppose both government expenditure and tax increase by the same amount. Explain the impact of such changes on the equilibrium level of income. (4) (b) Suppose government expenditure increase by an amount smaller than the increase in tax. Explain the impact of such changes on the equilibrium level of income. Under what condition will be impact be zero? (4) 00 #B5 Consider an elementary Keynesian model with a trade deficit. (a) Indicate on a diagram the equilibrium level of income and the trade deficit. (3) (b) With the aid of the diagram in (a), explain how an increase in investment affects equilibrium income and trade deficit. (5) 01 #C6 Consider the following economy. C = Yd I = 100 G = 200 T = 0.2 Y C = consumption Yd = disposable income I = investment T = tax Y = income (a) Find the government expenditure multiplier, the equilibrium income and the government budget balance. (6) (b) Suppose investment decreases (i) Explain the impact on equilibrium income and the government budget balance. (4) (ii) Suppose the government adjusts the tax rate to balance its budget. Explain whether the equilibrium income under this situation will be higher

16 S.7 Economics/3 & 4-sector Keynesian Models/p.16 or lower than that in (i). (3) 02 #B4 The national income accounting equation states that Y = C + I + G + NX, where Y, C, I, G, and NX stand for national income, consumption, investment, government expenditure, and net exports (i.e., difference between exports and imports) respectively. (a) Define private saving as S P = Y T C and public saving (or fiscal budget surplus) as S G = T G, where T stands for the government s tax revenue. Show that there is a one-to-one correspondence between fiscal deficits and trade deficits when S P = I. (2) (b) Define national saving as the sum of private and public savings so that S = S P + S G. Show that S I = NX. It follows that, in the open economy, national saving is not necessarily equal to domestic investment. Explain why if a country is running a current account deficit, its national saving MUST be insufficient to finance domestic investment. Explain also why the excess of its investment over and above its saving would show up as its capital account surplus. (5) (c) Does it follow that national saving is always equal to investment in a closed economy? If not, when will they be equal to each other? (3) 02 #C6 Answer the following questions with the aid of the elementary Keynesian model. Suppose the Hong Kong economy was initially in full employment with a fiscal budget balance and a trade balance. The economy is currently suffering from problems of unemployment and the twin deficits (i.e., the coexistence of trade deficits and fiscal budget deficits). (a) Three explanations, all of which involve a reduction in autonomous spending, have been proposed: (i) a fall in private consumption, (ii) a fall in private investment, (iii) a fall in exports. Evaluate the ability of each of these factors to explain the coexistence of unemployment and the twin deficits. (6) (b) As a fourth possibility, is a fall in government expenditure a valid explanation for these three problems? To balance its budget, the government has to find ways to increase its revenue and/or cut its expenditure. Will such fiscal actions help resolve the unemployment and trade deficits problems simultaneously? If not, how will unemployment and trade deficits be affected by such actions? (4) 03 #C7 The Hong Kong government is very much concerned with the problem of budget deficits. One measure the government has adopted is to cut its spending by reducing the salaries of the civil servants. In principle, the government could also raise the salary tax to achieve similar results. Another measure the government is contemplating is to increase its revenue by introducing a sales tax. The following questions try to compare the revenue-raising effects and other economic effects between an income tax and a consumption tax using a simple Keynesian model. Suppose the consumption function takes the form C = Y d, where Y d = Y T, Y is national income and T is tax. In the case of income tax, T = 0.25 Y; whereas in the case of a consumption tax, T = 0.25C, where proportional

17 S.7 Economics/3 & 4-sector Keynesian Models/p.17 tax rates on income and consumption are both 25%. For simplicity, suppose the economy is closed with no investment, but there is a positive level of government expenditure G = 120. in equilibrium, Y = C + G. (a) In the case of an income tax, find the equilibrium level of income. How much revenue can the government raise? (3) (b) In the case of a consumption tax, find the equilibrium level of consumption. How much revenue can the government raise? [Hint: You should first show that the consumption function satisfies C = 25 + (2/3)Y.] (5) (c) Based on your answers to (a) and (b), compare revenue-raising as well as other effects on the economy of the two kinds of taxes. (4) (d) If you have answered (c) correctly, you will have found that (at the same tax rate) the consumption tax cannot generate as much tax revenue as the income tax. Can you describe some advantage of taxing consumption in practice? (2) 04 #C5 Consider the following elementary Keynesian model: C = Yd Yd = Y T I = 110 G = 100 NX = Yd T = Y Where C, Yd, Y, T, I, G, NX and stand for consumption expenditure, disposable (or after-tax) income, gross(pre-tax) income, taxes, investment expenditure, government expenditure, net exports, and the (proportional) income tax rate respectively. (a) Suppose the government s objective is to balance its budget(i.e., make T=G) (i) What is the equilibrium income tax rate( *) it has to choose to achieve the objective? At that particular tax rate, what is the equilibrium level of income(y*)? (ii) Will the equilibrium trade balance (NX*) be in surplus or deficit? (5) (b) Suppose instead that the government s objective is to balance trade(i.e., make NX=0) (i) What is the equilibrium income tax rate( *) it has to choose to achieve this other objective? At that particular tax rate, what is the equilibrium level of income? (Y*)? (ii) Will the equilibrium fiscal budget (i.e.,t* -G) be in surplus or deficit? (5) (c) Based on your answer to (a) and (b) above, is there a tradeoff between the trade

18 S.7 Economics/3 & 4-sector Keynesian Models/p.18 balance and the fiscal balance? In the context of this example, when do you think trade deficits and budget deficits(i.e., twin deficits ) may coexist? (4) 05 #B2 (a) State the paradox of thrift. (2) (b) In the context of a closed-economy elementary Keynesian model without the government sector, explain how an increase in desired( private) saving will affect the equilibrium level of the following: national saving, investment, and national income. Does the paradox of thrift hold in this case? (4) (c) In the context of a closed-economy elementary Keynesian model with the government, explain how an increase in public saving will affect the equilibrium level of the following: national saving, investment, and national income. Does the paradox of thrift hold in this case? (4) 05 #B3 Consider the following elementary Keynesian model for a closed economy without investment: C= C +(mpc) Y d, with C >0 and 0< mpc<1, Y d =Y-T, T= T >0, under pure lump-sum tax(i.e.,τ=0), G= G >0, τy, with 0<r<1, under pure income tax(i.e.,t =0), Where C, mpc, Y d, Y,T, T, and G stand for consumption, expenditure, marginal propensity to consume, disposable ( or after-tax) income, gross(pre-tax) income, taxes, the lump-sum tax, the(proportional) income tax rate, and government expenditure respectively. C and G are constant. (a) Find the equilibrium level of income (i) In terms of (mpc, C,T, G ) under the pure lump-sum tax policy. (ii) In terms of (mpc, C,τ, G ) under the pure income tax policy. (2) (b) Under balanced budget, T = G under the pure lump-sum tax policy. Use this condition to find (i) The equilibrium level of income in terms of (mpc, C, G ) and (ii) The balanced-budget multiplier. (3) (c) Under balanced budget, τy=g under the pure income tax policy. Therefore, the tax rate is given by τ= G /Y. Use this condition to find (i) The equilibrium level of income in terms of (mpc, C, G ) and

19 S.7 Economics/3 & 4-sector Keynesian Models/p.19 (ii) The balanced-budget multiplier. (3) (d) Compare the answers to part (b) and (c) above. Does your comparison depend on the assumption of zero investment? (2) 06 #B6 (a) An example of expenditure-reducing policies is to increase income taxes. (i) (ii) Explain without using any graphs and economic models why raising the income tax rate can help improve the trade balance. (2 marks) Using the elementary Keynesian model, explain the effects of such a policy on equilibrium income, consumption, national saving, and the trade balance. (4 marks) (b) An example of expenditure-switching policies is to provide export subsidies. (i) (ii) Explain without using any graphs and economic models why providing export subsidies may help improve the trade balance. (2 marks) Using the elementary Keynesian model, explain the effects of such a policy on equilibrium income, consumption, national saving, and the trade balance. (4 marks) (c) Based on your results, which type of expenditure policy (reducing or switching) would you recommend to the government? Why? (3 marks) 06 #1 State whether each of the following statements is true, false or uncertain. Briefly explain your answer. (5 marks each) (c) Goods are in excess supply whenever national saving exceeds domestic investment.

= C + I + G + NX ECON 302. Lecture 4: Aggregate Expenditures/Keynesian Model: Equilibrium in the Goods Market/Loanable Funds Market

= C + I + G + NX ECON 302. Lecture 4: Aggregate Expenditures/Keynesian Model: Equilibrium in the Goods Market/Loanable Funds Market Intermediate Macroeconomics Lecture 4: Introduction to the Goods Market Review of the Aggregate Expenditures model and the Keynesian Cross ECON 302 Professor Yamin Ahmad Components of Aggregate Demand

More information

Study Questions 8 (Keynesian Model) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Study Questions 8 (Keynesian Model) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Study Questions 8 (Keynesian Model) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In the Keynesian model of aggregate expenditure, real GDP is

More information

The level of price and inflation Real GDP: the values of goods and services measured using a constant set of prices

The level of price and inflation Real GDP: the values of goods and services measured using a constant set of prices Chapter 2: Key Macroeconomics Variables ECON2 (Spring 20) 2 & 4.3.20 (Tutorial ) National income accounting Gross domestic product (GDP): The market value of all final goods and services produced within

More information

These are some practice questions for CHAPTER 23. Each question should have a single answer. But be careful. There may be errors in the answer key!

These are some practice questions for CHAPTER 23. Each question should have a single answer. But be careful. There may be errors in the answer key! These are some practice questions for CHAPTER 23. Each question should have a single answer. But be careful. There may be errors in the answer key! 67. Public saving is equal to a. net tax revenues minus

More information

The Multiplier Effect of Fiscal Policy

The Multiplier Effect of Fiscal Policy We analyze the multiplier effect of fiscal policy changes in government expenditure and taxation. The key result is that an increase in the government budget deficit causes a proportional increase in consumption.

More information

Answers to Text Questions and Problems. Chapter 22. Answers to Review Questions

Answers to Text Questions and Problems. Chapter 22. Answers to Review Questions Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services

More information

Answers to Text Questions and Problems in Chapter 8

Answers to Text Questions and Problems in Chapter 8 Answers to Text Questions and Problems in Chapter 8 Answers to Review Questions 1. The key assumption is that, in the short run, firms meet demand at pre-set prices. The fact that firms produce to meet

More information

13 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Chapter. Key Concepts

13 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Chapter. Key Concepts Chapter 3 EXPENDITURE MULTIPLIERS: THE KEYNESIAN MODEL* Key Concepts Fixed Prices and Expenditure Plans In the very short run, firms do not change their prices and they sell the amount that is demanded.

More information

Business Conditions Analysis Prof. Yamin Ahmad ECON 736

Business Conditions Analysis Prof. Yamin Ahmad ECON 736 Business Conditions Analysis Prof. Yamin Ahmad ECON 736 Sample Final Exam Name Id # Instructions: There are two parts to this midterm. Part A consists of multiple choice questions. Please mark the answers

More information

2.If actual investment is greater than planned investment, inventories increase more than planned. TRUE.

2.If actual investment is greater than planned investment, inventories increase more than planned. TRUE. Macro final exam study guide True/False questions - Solutions Case, Fair, Oster Chapter 8 Aggregate Expenditure and Equilibrium Output 1.Firms react to unplanned inventory investment by reducing output.

More information

FISCAL POLICY* Chapter. Key Concepts

FISCAL POLICY* Chapter. Key Concepts Chapter 11 FISCAL POLICY* Key Concepts The Federal Budget The federal budget is an annual statement of the government s expenditures and tax revenues. Using the federal budget to achieve macroeconomic

More information

Chapter 12. Aggregate Expenditure and Output in the Short Run

Chapter 12. Aggregate Expenditure and Output in the Short Run Chapter 12. Aggregate Expenditure and Output in the Short Run Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics Aggregate Expenditure (AE)

More information

The Short-Run Macro Model. The Short-Run Macro Model. The Short-Run Macro Model

The Short-Run Macro Model. The Short-Run Macro Model. The Short-Run Macro Model The Short-Run Macro Model In the short run, spending depends on income, and income depends on spending. The Short-Run Macro Model Short-Run Macro Model A macroeconomic model that explains how changes in

More information

Using an appropriately labeled money market graph, show the effects of an open market purchase of government securities by the FED on :

Using an appropriately labeled money market graph, show the effects of an open market purchase of government securities by the FED on : Using an appropriately labeled money market graph, show the effects of an open market purchase of government securities by the FED on : The money supply Interest rates Nominal Interest rates i1 i2 Sm1

More information

1. Firms react to unplanned inventory investment by increasing output.

1. Firms react to unplanned inventory investment by increasing output. Macro Exam 2 Self Test -- T/F questions Dr. McGahagan Fill in your answer (T/F) in the blank in front of the question. If false, provide a brief explanation of why it is false, and state what is true.

More information

dr Bartłomiej Rokicki Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw

dr Bartłomiej Rokicki Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw The small open economy The small open economy is an economy that is small enough compared to the

More information

. In this case the leakage effect of tax increases is mitigated because some of the reduction in disposable income would have otherwise been saved.

. In this case the leakage effect of tax increases is mitigated because some of the reduction in disposable income would have otherwise been saved. Chapter 4 Review Questions. Explain how an increase in government spending and an equal increase in lump sum taxes can generate an increase in equilibrium output. Under what conditions will a balanced

More information

Introduction to Macroeconomics TOPIC 2: The Goods Market

Introduction to Macroeconomics TOPIC 2: The Goods Market TOPIC 2: The Goods Market Annaïg Morin CBS - Department of Economics August 2013 Goods market Road map: 1. Demand for goods 1.1. Components 1.1.1. Consumption 1.1.2. Investment 1.1.3. Government spending

More information

Pre-Test Chapter 11 ed17

Pre-Test Chapter 11 ed17 Pre-Test Chapter 11 ed17 Multiple Choice Questions 1. Built-in stability means that: A. an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby

More information

Government Budget and Fiscal Policy CHAPTER

Government Budget and Fiscal Policy CHAPTER Government Budget and Fiscal Policy 11 CHAPTER The National Budget The national budget is the annual statement of the government s expenditures and tax revenues. Fiscal policy is the use of the federal

More information

14.02 Principles of Macroeconomics Problem Set 1 Fall 2005 ***Solution***

14.02 Principles of Macroeconomics Problem Set 1 Fall 2005 ***Solution*** Part I. True/False/Uncertain Justify your answer with a short argument. 14.02 Principles of Macroeconomics Problem Set 1 Fall 2005 ***Solution*** Posted: Monday, September 12, 2005 Due: Wednesday, September

More information

Expenditure Changing and Expenditure Switching policies. In an open economy setting, policymakers need to achieve two goals of

Expenditure Changing and Expenditure Switching policies. In an open economy setting, policymakers need to achieve two goals of World Economy Expenditure Changing 1 Expenditure Changing and Expenditure Switching policies In an open economy setting, policymakers need to achieve two goals of macroeconomic stability, viz. internal

More information

14.02 Principles of Macroeconomics Problem Set 1 *Solution* Fall 2004

14.02 Principles of Macroeconomics Problem Set 1 *Solution* Fall 2004 4.02 Principles of Macroeconomics Problem Set *Solution* Fall 2004 Part I. True/False/Uncertain Justify your answer with a short argument.. From 960 to 2000, the US, EU, and Japan all have experienced

More information

M.A.PART - I ECONOMIC PAPER - I MACRO ECONOMICS

M.A.PART - I ECONOMIC PAPER - I MACRO ECONOMICS 1 M.A.PART - I ECONOMIC PAPER - I MACRO ECONOMICS 1. Basic Macroeconomics Income and spending The consumption function Savings and investment The Keynesian Multiplier The budget Balanced budget : theorem

More information

Macroeconomics V: Aggregate Demand

Macroeconomics V: Aggregate Demand Macroeconomics V: Aggregate Demand Gavin Cameron Lady Margaret Hall Hilary Term 2004 introduction A very poor man may be said in some sense to have a demand for a coach and six; he might like to have it;

More information

Introduction to Economics, ECON 100:11 & 13 Multiplier Model

Introduction to Economics, ECON 100:11 & 13 Multiplier Model Introduction to Economics, ECON 1:11 & 13 We will now rationalize the shape of the aggregate demand curve, based on the identity we have used previously, AE=C+I+G+(X-IM). We will in the process develop

More information

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi CH 27 Expenditure Multipliers 1) Disposable income is A) aggregate income minus transfer

More information

S.Y.B.COM. (SEM-III) ECONOMICS

S.Y.B.COM. (SEM-III) ECONOMICS Fill in the Blanks. Module 1 S.Y.B.COM. (SEM-III) ECONOMICS 1. The continuous flow of money and goods and services between firms and households is called the Circular Flow. 2. Saving constitute a leakage

More information

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3 Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3 1. When firms experience unplanned inventory accumulation, they typically: A) build new plants. B) lay off workers and reduce

More information

Week 4 Tutorial Question Solutions (Ch2 & 3)

Week 4 Tutorial Question Solutions (Ch2 & 3) Chapter 2: Q1: Macroeconomics P.52 Numerical Problems #3 part (a) Q2: Macroeconomics P.52 Numerical Problems #5 Chapter 3: Q3: Macroeconomics P.101 Numerical Problems #5 Q4: Macroeconomics P102 Analytical

More information

1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand for money.

1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand for money. Macroeconomics ECON 2204 Prof. Murphy Problem Set 4 Answers Chapter 10 #1, 2, and 3 (on pages 308-309) 1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand

More information

Chapter 9 Aggregate Demand and Economic Fluctuations Macroeconomics In Context (Goodwin, et al.)

Chapter 9 Aggregate Demand and Economic Fluctuations Macroeconomics In Context (Goodwin, et al.) Chapter 9 Aggregate Demand and Economic Fluctuations Macroeconomics In Context (Goodwin, et al.) Chapter Overview This chapter first introduces the analysis of business cycles, and introduces you to the

More information

The Keynesian Cross. A Fixed Price Level. The Simplest Keynesian-Cross Model: Autonomous Consumption Only

The Keynesian Cross. A Fixed Price Level. The Simplest Keynesian-Cross Model: Autonomous Consumption Only The Keynesian Cross Some instructors like to develop a more detailed macroeconomic model than is presented in the textbook. This supplemental material provides a concise description of the Keynesian-cross

More information

3 Macroeconomics LESSON 1

3 Macroeconomics LESSON 1 3 Macroeconomics LESSON 1 nesian Model Introduction and Description This lesson establishes fundamental macro concepts. The nesian model is the simplest macro model and is the starting point from the national

More information

BADM 527, Fall 2013. Midterm Exam 2. Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME

BADM 527, Fall 2013. Midterm Exam 2. Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME BADM 527, Fall 2013 Name: Midterm Exam 2 November 7, 2013 Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME 1. According to classical theory, national income (Real

More information

0 100 200 300 Real income (Y)

0 100 200 300 Real income (Y) Lecture 11-1 6.1 The open economy, the multiplier, and the IS curve Assume that the economy is either closed (no foreign trade) or open. Assume that the exchange rates are either fixed or flexible. Assume

More information

2. With an MPS of.4, the MPC will be: A) 1.0 minus.4. B).4 minus 1.0. C) the reciprocal of the MPS. D).4. Answer: A

2. With an MPS of.4, the MPC will be: A) 1.0 minus.4. B).4 minus 1.0. C) the reciprocal of the MPS. D).4. Answer: A 1. If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to: A) save is three-fifths. B) consume is one-half.

More information

Lesson 7 - The Aggregate Expenditure Model

Lesson 7 - The Aggregate Expenditure Model Lesson 7 - The Aggregate Expenditure Model Acknowledgement: Ed Sexton and Kerry Webb were the primary authors of the material contained in this lesson. Section : The Aggregate Expenditures Model Aggregate

More information

Chapter 10 Fiscal Policy Macroeconomics In Context (Goodwin, et al.)

Chapter 10 Fiscal Policy Macroeconomics In Context (Goodwin, et al.) Chapter 10 Fiscal Policy Macroeconomics In Context (Goodwin, et al.) Chapter Overview This chapter introduces you to a formal analysis of fiscal policy, and puts it in context with real-world data and

More information

University of Lethbridge Department of Economics ECON 1012 Introduction to Microeconomics Instructor: Michael G. Lanyi. Chapter 29 Fiscal Policy

University of Lethbridge Department of Economics ECON 1012 Introduction to Microeconomics Instructor: Michael G. Lanyi. Chapter 29 Fiscal Policy University of Lethbridge Department of Economics ECON 1012 Introduction to Microeconomics Instructor: Michael G. Lanyi Chapter 29 Fiscal Policy 1) If revenues exceed outlays, the government's budget balance

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Econ 111 Summer 2007 Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The classical dichotomy allows us to explore economic growth

More information

file:///d:/my%20webs/econ101-8_fa11_13/probsetanswers/ps6_1.htm

file:///d:/my%20webs/econ101-8_fa11_13/probsetanswers/ps6_1.htm Page 1 of 6 Economics 10: Problem Set 6 The mythical kingdom of Philhill is ruled by a philosopher-king who donates his time as mediator of all domestic disputes. Since there are no external enemies, there

More information

Homework #6 - Answers. Uses of Macro Policy Due April 20

Homework #6 - Answers. Uses of Macro Policy Due April 20 Page 1 of 8 Uses of Macro Policy ue April 20 Answer all questions on these sheets, adding extra sheets where necessary. 1. Suppose that the government were to increase its purchases of goods and services

More information

Preparation course Msc Business & Econonomics

Preparation course Msc Business & Econonomics Preparation course Msc Business & Econonomics The simple Keynesian model Tom-Reiel Heggedal BI August 2014 TRH (BI) Keynes model August 2014 1 / 19 Assumptions Keynes model Outline for this lecture: Go

More information

ECO209 MACROECONOMIC THEORY. Chapter 11

ECO209 MACROECONOMIC THEORY. Chapter 11 Prof. Gustavo Indart Department of Economics University of Toronto ECO209 MACROECONOMIC THEORY Chapter 11 MONEY, INTEREST, AND INCOME Discussion Questions: 1. The model in Chapter 9 assumed that both the

More information

This paper is not to be removed from the Examination Halls

This paper is not to be removed from the Examination Halls This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON EC2065 ZA BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas

More information

CHAPTER 9 Building the Aggregate Expenditures Model

CHAPTER 9 Building the Aggregate Expenditures Model CHAPTER 9 Building the Aggregate Expenditures Model Topic Question numbers 1. Consumption function/apc/mpc 1-42 2. Saving function/aps/mps 43-56 3. Shifts in consumption and saving functions 57-72 4 Graphs/tables:

More information

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How

More information

Homework for Chapter 10

Homework for Chapter 10 DEREE COLLEGE DEPARTMENT OF ECONOMICS EC 1101 PRINCIPLES OF ECONOMICS II FALL SEMESTER 2002 M-W-F 13:00-13:50 Dr. Andreas Kontoleon Office hours: Contact: a.kontoleon@ucl.ac.uk Wednesdays 15:00-17:00 Homework

More information

_FALSE 1. Firms react to unplanned inventory investment by increasing output.

_FALSE 1. Firms react to unplanned inventory investment by increasing output. Macro Exam 2 Self Test -- ANSWERS Dr. McGahagan WARNING -- Be sure to take the self-test before peeking at the answers. Chapter 8 -- Aggregate Expenditure and Equilibrium Output _FALSE 1. Firms react to

More information

Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5

Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5 Econ 202 Final Exam 1. If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate unemployment is higher. b. left, so that at any inflation rate unemployment

More information

Chapter 18 of Blink and Dorton s IB Course Companion for Economics Section 3.4 of Matt McGee s Economics in Terms of the Good, the Bad and the

Chapter 18 of Blink and Dorton s IB Course Companion for Economics Section 3.4 of Matt McGee s Economics in Terms of the Good, the Bad and the Chapter 18 of Blink and Dorton s IB Course Companion for Economics Section 3.4 of Matt McGee s Economics in Terms of the Good, the Bad and the Economist Section 3 of Constantine Ziogas IB Study Guide :

More information

The Circular Flow of Income and Expenditure

The Circular Flow of Income and Expenditure The Circular Flow of Income and Expenditure Imports HOUSEHOLDS Savings Taxation Govt Exp OTHER ECONOMIES GOVERNMENT FINANCIAL INSTITUTIONS Factor Incomes Taxation Govt Exp Consumer Exp Exports FIRMS Capital

More information

1) Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases:

1) Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases: 1) Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases: a) If investment does not depend on the interest rate, the IS curve

More information

3 Macroeconomics LESSON 8

3 Macroeconomics LESSON 8 3 Macroeconomics LESSON 8 Fiscal Policy Introduction and Description Fiscal policy is one of the two demand management policies available to policy makers. Government expenditures and the level and type

More information

In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks.

In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks. Chapter 11: Applying IS-LM Model In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks. We also learn how the IS-LM model

More information

Econ 102 Aggregate Supply and Demand

Econ 102 Aggregate Supply and Demand Econ 102 ggregate Supply and Demand 1. s on previous homework assignments, turn in a news article together with your summary and explanation of why it is relevant to this week s topic, ggregate Supply

More information

Keynesian Economics I. The Keynesian System (I): The Role of Aggregate Demand

Keynesian Economics I. The Keynesian System (I): The Role of Aggregate Demand Keynesian Economics I The Keynesian System (I): The Role of Aggregate Demand Labor Market Excess supply and excess demand are not equally strong forces in the labor market. The supply of workers is such

More information

2 0 0 0 E D I T I O N CLEP O F F I C I A L S T U D Y G U I D E. The College Board. College Level Examination Program

2 0 0 0 E D I T I O N CLEP O F F I C I A L S T U D Y G U I D E. The College Board. College Level Examination Program 2 0 0 0 E D I T I O N CLEP O F F I C I A L S T U D Y G U I D E College Level Examination Program The College Board Principles of Macroeconomics Description of the Examination The Subject Examination in

More information

THE OPEN AGGREGATE DEMAND AGGREGATE SUPPLY MODEL.

THE OPEN AGGREGATE DEMAND AGGREGATE SUPPLY MODEL. THE OPEN AGGREGATE DEMAND AGGREGATE SUPPLY MODEL. Introduction. This model represents the workings of the economy as the interaction between two curves: - The AD curve, showing the relationship between

More information

ANSWERS TO END-OF-CHAPTER QUESTIONS

ANSWERS TO END-OF-CHAPTER QUESTIONS ANSWERS TO END-OF-CHAPTER QUESTIONS 9-1 Explain what relationships are shown by (a) the consumption schedule, (b) the saving schedule, (c) the investment-demand curve, and (d) the investment schedule.

More information

Use the following to answer question 9: Exhibit: Keynesian Cross

Use the following to answer question 9: Exhibit: Keynesian Cross 1. Leading economic indicators are: A) the most popular economic statistics. B) data that are used to construct the consumer price index and the unemployment rate. C) variables that tend to fluctuate in

More information

Introductory Macroeconomics. Richard Povey

Introductory Macroeconomics. Richard Povey Introductory Macroeconomics Richard Povey June 3, 2007 2 Contents I The Long Run and the Classical Model 9 1 Introduction 11 1.1 What is macroeconomics?.................... 11 1.2 Key concepts and conventions..................

More information

The Keynesian Total Expenditures Model

The Keynesian Total Expenditures Model The Keynesian Total Expenditures Model LEARNING OBJECTIVES 1. Draw the consumption function and explain its appearance. 2. Discuss the factors that will shift the consumption function to a new position.

More information

The Keynesian Model of Short-Run Fluctuations

The Keynesian Model of Short-Run Fluctuations rinciples of Macroeconomics Dr. Gabriel X. Martinez Ave Maria University Spending and Output in the Short Run What causes fluctuations? What caused the 200 recession? Lower consumer spending Lower investment

More information

Agenda. Saving and Investment in the Open Economy. Balance of Payments Accounts. Balance of Payments Accounting. Balance of Payments Accounting.

Agenda. Saving and Investment in the Open Economy. Balance of Payments Accounts. Balance of Payments Accounting. Balance of Payments Accounting. Agenda. Saving and Investment in the Open Economy Goods Market Equilibrium in an Open Economy. Saving and Investment in a Small Open Economy. Saving and Investment in a Large Open Economy. 7-1 7-2 Balance

More information

BUSINESS ECONOMICS CEC2 532-751 & 761

BUSINESS ECONOMICS CEC2 532-751 & 761 BUSINESS ECONOMICS CEC2 532-751 & 761 PRACTICE MACROECONOMICS MULTIPLE CHOICE QUESTIONS Warning: These questions have been posted to give you an opportunity to practice with the multiple choice format

More information

changes in spending changes in income/output AE = Aggregate Expenditures = C + I + G + Xn = AD

changes in spending changes in income/output AE = Aggregate Expenditures = C + I + G + Xn = AD small larger changes in spending changes in income/output AE = Aggregate Expenditures = C + I + G + Xn = AD The Multiplier Effect A small change in spending gives rise to a larger change in income/output

More information

The Aggregate Demand- Aggregate Supply (AD-AS) Model

The Aggregate Demand- Aggregate Supply (AD-AS) Model The AD-AS Model The Aggregate Demand- Aggregate Supply (AD-AS) Model Chapter 9 The AD-AS Model addresses two deficiencies of the AE Model: No explicit modeling of aggregate supply. Fixed price level. 2

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

More information

SRAS. is less than Y P

SRAS. is less than Y P KrugmanMacro_SM_Ch12.qxp 11/15/05 3:18 PM Page 141 Fiscal Policy 1. The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic consultant

More information

Economics 152 Solution to Sample Midterm 2

Economics 152 Solution to Sample Midterm 2 Economics 152 Solution to Sample Midterm 2 N. Das PART 1 (84 POINTS): Answer the following 28 multiple choice questions on the scan sheet. Each question is worth 3 points. 1. If Congress passes legislation

More information

AGGREGATE DEMAND AND AGGREGATE SUPPLY The Influence of Monetary and Fiscal Policy on Aggregate Demand

AGGREGATE DEMAND AND AGGREGATE SUPPLY The Influence of Monetary and Fiscal Policy on Aggregate Demand AGGREGATE DEMAND AND AGGREGATE SUPPLY The Influence of Monetary and Fiscal Policy on Aggregate Demand Suppose that the economy is undergoing a recession because of a fall in aggregate demand. a. Using

More information

8. Simultaneous Equilibrium in the Commodity and Money Markets

8. Simultaneous Equilibrium in the Commodity and Money Markets Lecture 8-1 8. Simultaneous Equilibrium in the Commodity and Money Markets We now combine the IS (commodity-market equilibrium) and LM (money-market equilibrium) schedules to establish a general equilibrium

More information

Keynesian Cross or Multiplier Model The Real Side and Fiscal Policy

Keynesian Cross or Multiplier Model The Real Side and Fiscal Policy Keynesian Cross or Multiplier Model The Real Side and Fiscal Policy 1 Assumptions Ignore Aggregate Supply Assume prices or inflation fixed for business cycle analysis, the Business Cycle Assumption (1

More information

chapter: Solution Fiscal Policy

chapter: Solution Fiscal Policy Fiscal Policy chapter: 28 13 ECONOMICS MACROECONOMICS 1. The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic consultant to

More information

SAMPLE PAPER II ECONOMICS Class - XII BLUE PRINT

SAMPLE PAPER II ECONOMICS Class - XII BLUE PRINT SAMPLE PAPER II ECONOMICS Class - XII Maximum Marks 100 Time : 3 hrs. BLUE PRINT Sl. No. Form of Very Short Short Answer Long Answer Total Questions (1 Mark) (3, 4 Marks) (6 Marks) Content Unit 1 Unit

More information

Problem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics

Problem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics roblem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics 1) Explain the differences between demand-pull inflation and cost-push inflation. Demand-pull inflation results

More information

Problem Set 5. a) In what sense is money neutral? Why is monetary policy useful if money is neutral?

Problem Set 5. a) In what sense is money neutral? Why is monetary policy useful if money is neutral? 1 Problem Set 5 Question 2 a) In what sense is money neutral? Why is monetary policy useful if money is neutral? In Problem Set 4, Question 2-Part (e), we already analysed the effect of an expansionary

More information

Introduction to Macroeconomics 1012 Final Exam Spring 2013 Instructor: Elsie Sawatzky

Introduction to Macroeconomics 1012 Final Exam Spring 2013 Instructor: Elsie Sawatzky Introduction to Macroeconomics 1012 Final Exam Spring 2013 Instructor: Elsie Sawatzky Name Time: 2 hours Marks: 80 Multiple choice questions 1 mark each and a choice of 2 out of 3 short answer question

More information

Consumption, Saving, and Investment, Part 1

Consumption, Saving, and Investment, Part 1 Agenda Consumption, Saving, and, Part 1 Determinants of National Saving 5-1 5-2 Consumption and saving decisions : Desired consumption is the consumption amount desired by households Desired national saving

More information

Chapter 30 Fiscal Policy, Deficits, and Debt QUESTIONS

Chapter 30 Fiscal Policy, Deficits, and Debt QUESTIONS Chapter 30 Fiscal Policy, Deficits, and Debt QUESTIONS 1. What is the role of the Council of Economic Advisers (CEA) as it relates to fiscal policy? Use an Internet search to find the names and university

More information

Practiced Questions. Chapter 20

Practiced Questions. Chapter 20 Practiced Questions Chapter 20 1. The model of aggregate demand and aggregate supply a. is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution

More information

Sample Question Paper (Set-2) Economics (030) Class XII (2015-16) Section A: Microeconomics

Sample Question Paper (Set-2) Economics (030) Class XII (2015-16) Section A: Microeconomics Sample Question Paper (Set-2) Economics (00) Class XII (205-6) Time : Hours Maximum Marks : 00 Instructions:. All questions in both sections are compulsory. However, there is internal choice in some questions.

More information

Sample Question Paper (Set-2) Economics (030) Class XII (2015-16) Section A: Microeconomics

Sample Question Paper (Set-2) Economics (030) Class XII (2015-16) Section A: Microeconomics Sample Question Paper (Set-2) Economics (030) Class XII (2015-16) Time : 3 Hours Maximum Marks : 100 Instructions: 1. All questions in both sections are compulsory. However, there is internal choice in

More information

SHORT-RUN FLUCTUATIONS. David Romer. University of California, Berkeley. First version: August 1999 This revision: January 2012

SHORT-RUN FLUCTUATIONS. David Romer. University of California, Berkeley. First version: August 1999 This revision: January 2012 SHORT-RUN FLUCTUATIONS David Romer University of California, Berkeley First version: August 1999 This revision: January 2012 Copyright 2012 by David Romer CONTENTS Preface vi I The IS-MP Model 1 I-1 Monetary

More information

Study Questions for Chapter 9 (Answer Sheet)

Study Questions for Chapter 9 (Answer Sheet) DEREE COLLEGE DEPARTMENT OF ECONOMICS EC 1101 PRINCIPLES OF ECONOMICS II FALL SEMESTER 2002 M-W-F 13:00-13:50 Dr. Andreas Kontoleon Office hours: Contact: a.kontoleon@ucl.ac.uk Wednesdays 15:00-17:00 Study

More information

FISCAL POLICY* Chapter. Key Concepts

FISCAL POLICY* Chapter. Key Concepts Chapter 15 FISCAL POLICY* Key Concepts The Federal Budget The federal budget is an annual statement of the government s expenditures and tax revenues. Using the federal budget to achieve macroeconomic

More information

ECON 201: Introduction to Macroeconomics Final Exam December 13, 2012 NAME:

ECON 201: Introduction to Macroeconomics Final Exam December 13, 2012 NAME: ECON 201: Introduction to Macroeconomics Final Exam December 13, 2012 NAME: Circle your TA s name: Amy Thiago Samir Circle your section time: 9 a.m. 3 p.m. INSTRUCTIONS: 1) The exam lasts 2 hours. 2) The

More information

INTRODUCTION TO ADVANCED MACROECONOMICS Preliminary Exam with answers September 2014

INTRODUCTION TO ADVANCED MACROECONOMICS Preliminary Exam with answers September 2014 Duration: 120 min INTRODUCTION TO ADVANCED MACROECONOMICS Preliminary Exam with answers September 2014 Format of the mock examination Section A. Multiple Choice Questions (20 % of the total marks) Section

More information

SENIOR SECONDARY INTERVENTION PROGRAMME 2013

SENIOR SECONDARY INTERVENTION PROGRAMME 2013 2013 GRADE 12 ECONOMICS LEARNER NOTES The SSIP is supported by TABLE OF CONTENTS LEARNER NOTES SESSION TOPIC PAGE 1 Topic 1. Circular flow 3 22 Topic 2. The multiplier 2 Topic 1. Business cycle composition

More information

7. Which of the following is not an important stock exchange in the United States? a. New York Stock Exchange

7. Which of the following is not an important stock exchange in the United States? a. New York Stock Exchange Econ 20B- Additional Problem Set 4 I. MULTIPLE CHOICES. Choose the one alternative that best completes the statement to answer the question. 1. Institutions in the economy that help to match one person's

More information

CHAPTER 14 BALANCE-OF-PAYMENTS ADJUSTMENTS UNDER FIXED EXCHANGE RATES

CHAPTER 14 BALANCE-OF-PAYMENTS ADJUSTMENTS UNDER FIXED EXCHANGE RATES CHAPTER 14 BALANCE-OF-PAYMENTS ADJUSTMENTS UNDER FIXED EXCHANGE RATES MULTIPLE-CHOICE QUESTIONS 1. Which of the following does not represent an automatic adjustment in balance-of-payments disequilibrium?

More information

2. Simple but doesn t deal with stagflation simultaneous presence of inflation and unemployment.

2. Simple but doesn t deal with stagflation simultaneous presence of inflation and unemployment. Keynesian Model 1. The Keynesian policy prescription: if there is unemployment, run a deficit on the government account (negative govt savings). If there is inflation, run a surplus. 2. Simple but doesn

More information

INTRODUCTION AGGREGATE DEMAND MACRO EQUILIBRIUM MACRO EQUILIBRIUM THE DESIRED ADJUSTMENT THE DESIRED ADJUSTMENT

INTRODUCTION AGGREGATE DEMAND MACRO EQUILIBRIUM MACRO EQUILIBRIUM THE DESIRED ADJUSTMENT THE DESIRED ADJUSTMENT Chapter 9 AGGREGATE DEMAND INTRODUCTION The Great Depression was a springboard for the Keynesian approach to economic policy. Keynes asked: What are the components of aggregate demand? What determines

More information

MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL*

MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* Chapter 11 MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* The Demand for Topic: Influences on Holding 1) The quantity of money that people choose to hold depends on which of the following? I. The price

More information

Chapter 4 Consumption, Saving, and Investment

Chapter 4 Consumption, Saving, and Investment Chapter 4 Consumption, Saving, and Investment Multiple Choice Questions 1. Desired national saving equals (a) Y C d G. (b) C d + I d + G. (c) I d + G. (d) Y I d G. 2. With no inflation and a nominal interest

More information

Professor Christina Romer. LECTURE 17 MACROECONOMIC VARIABLES AND ISSUES March 17, 2016

Professor Christina Romer. LECTURE 17 MACROECONOMIC VARIABLES AND ISSUES March 17, 2016 Economics 2 Spring 2016 Professor Christina Romer Professor David Romer LECTURE 17 MACROECONOMIC VARIABLES AND ISSUES March 17, 2016 I. MACROECONOMICS VERSUS MICROECONOMICS II. REAL GDP A. Definition B.

More information