# 02 Elementary Keynesian Model

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1 02 Elementary Keynesian Model HKAL ECONOMICS PAST PAPER MACRO SECTION A 1. 90(2) In a hypothetical closed economy, C = Y I = 20 Y = 10N where C = consumption expenditure, Y = national income I = investment expenditure N = employed labour force If the total labour force is 50, how much will the government have to spend so that national income will reach its full employment level? A. 30 B. 150 C. 350 D (6) Which of the following is the least inflationary measure to reduce a budget deficit? A. open market sales of government bonds. B. raising sales tax. C. raising income tax. D. borrowing from foreign financial institutions. 1/52

2 3. 90(17) The L-shaped Keynesian aggregate supply curve suggests that (1) there is downward rigidity in wages. (2) inflation emerges only when the economy reaches full employment. (3) unemployment, if it ever exists, must be voluntary. A. 1 & 2 only B. 2 & 3 only C. 2 & 3 only D. 1, 2 & (23) A in the interest rate will raise the desired stock of capital in an economy; the schedule of marginal efficiency of capital will as a result. A. fall; not change B. rise; not change C. fall; rise D. rise; rise 2/52

3 5. 90(25) The diagram below shows the aggregate expenditure in a closed economy At the equilibrium income level, the average propensity to consume is shown by the ratio A. UQ/0Q B. TP/0P C. SQ/0Q D. US/0Q 6. 91(1) In a closed economy without government, consumption rises by \$40 million when national income rises by \$100 million. This shows that (1) the marginal propensity to consume is 0.4 (2) savings will rise as national income rises. (3) the average propensity to save is 0.6 (4) investment increases as national income increases. A. 1 & 2 only B. 1 & 3 only C. 2 & 4 only D. 3 & 4 only 3/52

4 7. 91(2) The marginal propensity to save of an economy that has no taxes is 0.2, and half of the consumption goods are imported. What is the value of the multiplier in this economy? A. 1 B C. 2.5 D (21) When the consumption line changes from C l to C 2, it means (1) the autonomous consumption level increases. (2) the value of the multiplier increases. (3) the average propensity to consume increases. (4) the marginal propensity to save increases. A. 1 & 2 only B. 1 & 4 only C. 2 & 3 only D. 3 & 4 only 4/52

5 9. 92(3) Discretionary fiscal policy which increases the budgetary surplus has the same effect upon the equilibrium income as does A. an increase in saving. B. an increase in investment. C. an increase in private consumption. D. a decrease in imports (6) Financing government spending by increasing taxation is the preferred method when A. the interest rate is low. B. corporate profits are low. C. the economy is experiencing inflation. D. the economy is experiencing a recession (10) The marginal propensity to consume out of disposable income of an economy is 0.8 and there is a proportional tax of 15% on income. What is the value of the tax multiplier in this economy? A B C D. 5 5/52

6 12. 92(11) Given C = \$ Yd I = \$50 G = \$20 where C = consumption expenditure, Yd = disposable income I = investment expenditure G = government expenditure If the government collects a lump-sum tax of \$15 and gives an unemployment benefit of \$10, what will be the equilibrium level of income? A. \$400 B. \$440 C. \$480 D. \$520 6/52

7 13. 92(13) In the above diagram, PQ is the amount of and RS is the amount of. A. dissaving; inventories piled up in the current year B. dissaving; saving C. past inventories sold; saving D. past inventories sold; inventories piled up in the current year (19) If an economy is characterised by a higher marginal propensity to import, then its expenditure multiplier would be, and an expansionary fiscal policy would be, other things being equal. A. smaller; more effective B. smaller; less effective C. larger; more effective D. larger; less effective 7/52

8 15. 93(4) According to the graph above, which of the following is correct? A. Consumption decreases as disposable income increases. B. The marginal propensity to save increases as disposable income increases. C. Equilibrium national income is Y 0. D. The average propensity to consume increases at first but eventually decreases. 8/52

9 16. 93(6) Refer to the following equations about a hypothetical economy. C = \$ Yd I = \$150 30r G = \$30 T = \$0.2Y M = \$ Y T : taxation C : consumption, Yd : disposable income I : investment G : government expenditure, Y = national income M : expenditure on imports The income multiplier for this economy is A B C. 2. D (7) Which of the following are examples of built-in stabilisers? (1) the recurrent expenditure on education (2) the unemployment allowance (3) the allowance for the aged (4) the progressive tax system A. 1 & 2 only B. 1 & 3 only C. 2 & 4 only D. 3 & 4 only 9/52

10 18. 93(9) From the above graph, the value of the multiplier is equal to A. PQ/ST. B. PQ/TQ C. ST/RT D. ST/PQ (11) In an open economy with government intervention, which of the following will ensure full employment? A. saving = investment B. saving = government expenditure C. saving + taxation + imports = investment + government expenditure + exports D. None of the above. 10/52

11 20. 93(12) Suppose the value of imports of an open economy increases by ten cents for even-one dollar increase in income. If its marginal propensity to consume is 0.8 and the tax rate is 10% of income, an increase in national income of \$100 will result in increase in consumption spending on domestic goods. A. \$62 B. \$64 C. \$72 D. \$ (13) Refer to the following diagram of an open economy with no government sector. Which is the equilibrium level of national income? A. 0A B. 0B C. 0C D. 0D 11/52

12 22. 93(14) Refer to the following diagram of a closed economy with no government sector. Which of the following are true? (1) Saving must be negative when income is less than Y1. (2) The average propensity to save is one at Y1. (3) The vertical distance between C and AE at Y2 represents saving at Y2. (4) There is an unintended reduction in inventory at Y3. A. 1 and 2 only B. 1 and 3 only. C. 2 and 4 only D. 3 and 4 only. 12/52

13 Refer to the following equations which describe a hypothetical economy for 94(1) and 94(2). C = Y where C = consumption expenditure I = Y Y = income G = 50 I = investment G = government expenditure (1) If the government expenditure increases by 1, the income of the economy will increase by A. 1. B. 5. C. 8. D (2) Suppose the production function of the economy is : Y = 10N, where N is labour employment. If the labour supply is 400, which of the following statements is correct? A. There is an excess demand for labour. B. There is an excess supply of labour. C. The equilibrium income is equal to the full employment income. D. The equilibrium income cannot be determined with the given information 13/52

14 25. 94(4) A shift of the saving curve from S 1 to S 2 implies that (1) the marginal propensity to consume has decreased. (2) the autonomous consumption expenditure has increased. (3) at each disposable income level, the average propensity to consume has increased. A. 1 & 2 only B. 1 & 3 only C. 2 & 3 only D. 1, 2 & 3 14/52

15 26. 94(6) Which of the following statements about an elementary Keynesian model without government and external trade is correct? A. At Y 2, the economy is at full employment. B. At Y l, the stock of the economy will increase. C. At Y 3, there will be an unintended increase in stock. D. At Y l, realised saving is greater than realised investment (7) After the imposition of a proportional income tax, the after-tax consumption curve would the before-tax consumption curve. A. be sleeper than B. be flatter than C. be parallel to D. coincide with (8) A decrease in the marginal propensity to import will have the same effect on the size of the income multiplier as A. a decrease in the marginal propensity to consume. B. a decrease in the marginal propensity to save. C. a decrease in the marginal propensity to invest. D. an increase in the marginal propensity to save. 15/52

16 29. 94(9) The existence of a deflationary gap indicates that (1) the equilibrium income is below the full employment income. (2) a surplus budget should be used to eliminate the gap. (3) the economy has insufficient aggregate demand to achieve (4) the real income is smaller than the nominal income. A. 1 & 3 only B. 1 & 4 only C. 2 & 3 only D. 2 & 4 only 16/52

17 30. 95(3) Consumption C 0 Disposable Income The above diagram shows the consumption function of an economy. Which of the following statements are correct? (1) The marginal propensity to consume is equal to the average propensity to consume. (2) The average propensity to consume is equal to the average propensity to save. (3) The marginal propensity to consume is greater than the marginal propensity to save. (4) The average propensity to consume and marginal propensity to save are constant. A. 1 & 2 only B. 1 & 4 only C. 2 and 3 only D. 3 & 4 only 17/52

18 31. 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 & 2 only B. 1 & 3 only C. 2 & 3 only D. l, 2 & (5) Which of the following statements is true? A. If the national income is \$120 billion and the consumption is \$96 billion, the marginal propensity to consume is 0.8. B. The slope of the investment function is equal to the slope of the saving function when the national income is at its equilibrium level. C. The average propensity to consume is determined by the slope of the consumption function. D. The marginal propensity to consume is determined by the slope of the consumption function (6) Suppose the national income (Y) is The consumption function and the investment function are C = Y and I = 80 respectively. Then the realised investment is and the unplanned inventory investment is. A. 100; 20 B. 80; 2 C. 80; 0 D. 100; 0 18/52

19 34. 96(1) Consider the following model : C = Yd I = Y T = 0.1Y G = 10 C = consumption, Yd = disposable income I = investment, Y = income T = tax G = government expenditure The government expenditure multiplier is A B C D (4) What will be the result of a fall in the marginal propensity to consume? (1) a smaller government expenditure multiplier (2) a contractionary effect on the economy (3) a fall in the government tax revenue under a proportional tax system A. 1 & 2 only B. 1 & 3 only C. 2 & 3 only D. 1, 2 & 3 19/52

20 Answer questions 96(2) and 96(3) with reference to the diagram below. C = consumption, I = investment and Y = income (2) Which of the following statements are true? (1) Average propensity to consume falls as income increases. (2) Marginal propensity to save increases as income increases. (3) Marginal propensity to save plus marginal propensity to consume equals 1. A. 1 & 2 only B. 1 & 3 only C. 2 & 3 only D. 1, 2 & (3) Which of the following statements are true? (1) If the income is larger than Y l, the supply of output exceeds the demand and the planned saving exceeds the planned investment. (2) If the income is smaller than Y l, the demand for output exceeds the supply and the realised investment equals the realised saving. (3) At Y l, the planned investment equals the planned saving and income exceeds consumption. A. 1 & 2 only B. 1 & 3 only C. 2 & 3 only D. 1, 2 & 3 20/52

21 38. 96(7) Given C = Y, where C is consumption and Y is income, which of the following statements are correct? (1) Marginal propensity to consume is smaller than average propensity to consume. (2) Marginal propensity to consume is constant. (3) Average propensity to save is less than A. 1 & 2 only B. 1 & 3 only C. 2 & 3 only D. 1, 2 & (3) Money income ( \$million) Monthly consumption expenditure (\$million) When the monthly income increases from \$40 million to \$55 million, (1) the average propensity to consume decreases. (2) the marginal propensity to save is constant (3) the marginal propensity to consume is smaller than the marginal propensity save. A. 1 & 2 only B. 1 & 3 only C. 2 & 3 only D. 1, 2 & 3 21/52

22 40. 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 (5) In the above diagram, the marginal propensity to save is equal to A. BD / GH B. DE/ GH C. BD /OH D. BE/ OH (10) Which of the following is a fiscal policy that reduces unemployment? A. a direct control on the rise in the wages of worker. B. a decrease in the required reserve ratio of banks. C. an increase in the spending on tertiary education. D. an increase in the tax rate. 22/52

23 43. 97(19) Study the following information of an economy : C = Yd where C = consumption expenditure, Yd = disposable income I = Yd I = investment expenditure T = 100 T = tax G = 100 G = government expenditure The income of the economy will increase by 100 if the government expenditure increases by A. 25. B. 40. C. 60. D (24) In an economy with taxes, C = \$ Yd, where C is consumption and Yd is disposable income. The consumption function predicts that the consumption expenditure is A. \$180 when the national income is \$200. B. \$110 when the national income is \$100. C. \$90 when the national income is \$100. D. \$20 when the disposable income is \$0. 23/52

24 45. 98(1) Consider the following model : C = Y I = a Y = 4 L C = consumption I = investment Y = national income L = labour employment Suppose there are 50 units of labour. At full employment, a equals to A. 70 B. 100 C. 120 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 (3) A deflationary gap exists if at the full employment level. (1) income is greater than expenditure (2) realized investment is smaller than planned investment (3) planned saving is greater than planned investment A. (1) and (2) only B. (1) and (3) only C. (2) and (3) only D. (1), (2) and (3) 24/52

25 48. 98(4) Refer to the following diagram of an open economy without the government sector. 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 (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 25/52

26 50. 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 A. PQ / OR. B. QR / OU. C. ST / OU. D. SU / OU (4) The existence of an inflationary gap indicates that A. there is a gap between the actual inflation rate and the expected inflation rate. B. there is a gap between real income and nominal income, and the gap is caused by inflation. C. there is excess demand for aggregate output at the full employment level of income, which therefore falls short of the equilibrium level of income. D. All of the above. 26/52

27 52. 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 (9) In an elementary closed economy Keynesian model without a government, investment is fixed at some level. Suppose the equilibrium level of income increases as a result of an increase in the marginal propensity to consume, then the equilibrium level of saving will A. increase. B. decrease. C. remain constant. D. be indeterminate (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. 27/52

28 55. 00(1) Consumption C 2 C 1 0 Disposable Income Suppose the consumption curve shifts from C 1 to C 2. We can conclude that A. the equilibrium national income will increase. B. the marginal propensity to save has decreased. C. the average propensity to save has increased. D. the average propensity to consume has increased (3) The following table shows how the consumption expenditure is related to the income of a closed economy without a government. Consumption expenditure Income Suppose the planned investment is 60 and the planned consumption is always realized. Which of the following statements is correct? A. The average propensity to consume increases as the income increases. B. The equilibrium income is 300. C. The amount of unrealized investment is 40 when the income is 200. D. The amount of unplanned investment is 80 when the income is /52

29 57. 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 B. (1) and (3) only C. (2) and (3) only D. (1), (2) and (3) (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 G = government expenditure T = tax At equilibrium, the government budget surplus is and the government expenditure multiplier is. A. negative B. negative C. zero D. positive /52

30 59. 00(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) (1) Consider the following diagram of a closed economy: E E=Y 0 E=C+I+G T-G Y E = expenditure Y = income C = consumption I = investment G = government expenditure 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. 30/52

31 61. 01(2) Which of the following will reduce the size of the government expenditure multiplier? (1) an increase in the proportional 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) 31/52

32 Answer questions 01(4) and 01(5) with reference to the diagram below (4) At the equilibrium income level, the average propensity to consume is and the marginal propensity to consume is and. A B C D (5) What will be the new equilibrium income if investment increases by 100? A B C D /52

33 64. 01(10) Consider the following diagram: S, I S I S = saving I = investment Y = income 0 Y 1 Y Which of the following are true at Y 1? (1) unplanned investment is greater than zero. (2) realized saving is larger than realized investment. (3) inventory increases. A. 1 and 2 only B. 1 and 3 only. C. 2 and 3 only D. 1, 2 and (14) Suppose country A and country B trade with each other and the imports of each country are a function of its own national income. If there is an increase in investment expenditure in country A, then A. the national income of both country A and country B will increase. B. The national income of country A increases but the national income of country B remains unchanged. C. The national income of country A increases but the national income of country B may either increase or decrease. D. The national income of each country may either increase or decrease. 33/52

34 66. 02(4) Consider the following model C = Yd I = Y G = 50 T = 30 Yf = 5080 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 (8) The table below shows the consumption function of an economy. Disposable income (\$) Consumption expenditure (\$M) Which of the following statement is correct? A. The level of saving decreases as disposable income increases B. The marginal propensity to save increases as disposable income increases C. The average propensity to save decreases as disposable income increases D. The marginal propensity to consume is greater than the average propensity to consume when disposable income is below \$300 34/52

35 68. 03(2) Refer to the following closed economy: C = Yd I = 100 G = 400 T = 0.4Y The expenditure multiplier is A B C D (3) Refer to the following diagram. Assume there is no government or foreign trade. \$ Consumption expenditure 100 Investment expenditure 45 National income We can conclude from the above diagram that A. the average propensity to consume is greater than the marginal propensity to consume B. saving is zero if national income is equal to 100 C. the equilibrium income is 200 D. there is an unintended increase in inventories when national income is /52

36 70. 03(4) Which of the following cases will exert an 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 a proportional tax and positive marginal propensity to invest (3) There is no proportional tax but positive marginal propensity to invest (4) Three 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) (5) Refer to the following data of a closed economy without the government sector Investment expenditure Consumption expenditure National income An increase in investment expenditure of 50 will raise both equilibrium income and consumption expenditure by and respectively. A B C D /52

37 72. 03(10) Define private saving as S P =Y-T-C, public saving as S G =T-G and national saving as the sum of private and public savings. 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 (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 37/52

38 74. 04(3) Refer to the following diagram of the consumption function in an economy. Which of the following statements about the consumption function is correct? A. When disposable income is below Y 1, marginal propensity to consume is smaller then average propensity to consume. B. When disposable income is above Y 1, marginal propensity to consume is equal to average propensity to consume. C. The average propensity to save is always equal to the marginal propensity to save. D. The marginal propensity to save increases as disposable income rises from a level below Y 1 to a level above Y (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. Marginal propensity to consume falls by 10%. D. None of the above. 38/52

39 76. 04(6) Refer to the following diagram of a closed economy. 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. 39/52

40 77. 04(8) Refer to the following diagram of a closed economy. 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. D. there is a reduction in lump sum tax. 40/52

41 78. 04(10) Refer to the following diagram of an economy. Yf 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 export C. a rise in private investment D. a rise in taxes (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 export 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. 41/52

42 80. 05(4) In a closed economy with the government sector, consumption rise 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 increases by \$20, the maximum possible increase in national income is \$50. A. (1) only B. (1) and (2) only C. (1) and (3) only D. (2) and (3) only (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 42/52

43 Use the following information about an economy to answer Questions 05(6) to 05(8). C = Yd I = 110 G = 200 T = τy NX = Yd Yd = Y T where C = consumption expenditure Yd = disposable income I = investment expenditure G = government expenditure T = taxes τ = proportional income tax rate Y = national income NX = net export (6) Suppose the government s 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 B C D (8) With the same government objective, the equilibrium trade balance is a of. A. deficit B. deficit C. surplus D. surplus /52

44 85. 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 than deficit B. smaller than. deficit C. equal to surplus D. greater than surplus (2) Unintended inventory investment A. is not included in gross domestic product (GDP) B. is gross investment minus capital consumption allowances C. can be either positive or negative D. is zero when actual aggregate expenditure equals total output 44/52

45 87. 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 shits upward from E 1 to E 2 as a result of a change in lump sum tax. The change in lump sum tax is. A. 50 B C. -50 D (4) In a closed economy, national saving is \$1 000 and private 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 \$250 45/52

46 89. 06(6) In a closed economy where investment is autonomous, the marginal propensity to consume is 0.8 and the proportional income tax rate is 10%. The national income will increase by \$50 billion if A. there is an equal increase in government expenditure and lump sum tax by \$50 billion B. lump sum tax is reduced by \$12.5 billion C. autonomous saving is reduced by \$14 billion D. there is an increase in investment expenditure of \$20 billion (1) The above diagram shows a closed-economy elementary Keynesian model in which there is no government sector and investment is autonomous. Suppose the aggregate expenditure function changes from E 1 to E 2 due to a change in the marginal propensity to consume. Which of the following is FALSE? A. The equilibrium level of income doubles. B. The marginal propensity to consume doubles. C. The equilibrium level of saving decreases. D. The amount of autonomous saving remains unchanged. 46/52

47 91. 07(2) The following diagram shows an open-economy elementary Keynesian model. If the trade balance of the economy is zero at the equilibrium level of national income, then the government has a fiscal and the equilibrium level of private saving is that of investment. A. deficit higher than B. deficit lower than C. surplus equal to D. surplus higher than 47/52

48 Study the following information about a closed economy and answer 07(3) and 07(4) C = 0.8Yd I = 200 G = G T = 0.5Y Yf = 1200 where C = consumption expenditure Yd = disposable income I = investment expenditure G = government expenditure T = taxes Y = national income Yf = full employment income (3) If the government s objective is to achieve full employment by choosing its expenditure, the government will have a fiscal of when it achieves the objective. A. surplus 80 B. deficit 80 C. surplus 100 D. deficit (4) If the government s objective is to achieve fiscal balance by choosing its expenditure, the equilibrium income level will be when it achieves the objective. A B C D (6) Which of the following can offset the effect of an increase in income tax rate on the expenditure multiplier? A. a reduction in lump sum tax B. an increase in autonomous investment C. a reduction in the marginal propensity to import. D. An increase in the marginal propensity to save 48/52

49 95. 08(4) Which of the following are examples of an expansionary policy? (1) reduction of corporate profits tax (2) exemption of general rates (3) provision of interest-free loans to small enterprises A. (1) and (2) only B. (1) and (3) only C. (2) and (3) only D. (1), (2) and (3) 49/52

50 Refer to the following diagram of a closed economy with no government and answer questions 08(5) and 08(6). E E=Y E K M Y = national income E = aggregate expenditure I = investment expenditure J L N I 0 Y 1 Y 2 Y (5) The marginal propensity to consume is measured by. A. KL/JL B. KY 1 /0Y 1 C. MY 2 /0Y 2 D. MN/Y 1 Y (6) The equilibrium level of saving is measured by. A. KL B. LY 1 C. MN D. MY 2 50/52

51 98. 08(7) In a closed economy where investment is autonomous, all taxes are in a lump sum fashion, the marginal propensity to consume is 0.8, national saving is and private saving is If autonomous investment increases by 200, the government will have a and the aggregate private consumption will. A. budget surplus of 800 increase by 800 B. budget surplus of increase by C. budget deficit of 800 increase by 160 D. budget deficit of increase by /52

52 99. 08(8) The following diagram shows an open economy. E 45 line E Y = national income E = aggregate expenditure T = taxes G = government expenditure X = exports T G 0 Y 1 X M Y Which of the following statements about the economy in the above diagram is FALSE? A. At equilibrium income Y 1, the economy s national saving equals private saving. B. At equilibrium income Y 1, the economy s private saving equals private investment. C. The economy will suffer twin deficits (trade deficit and budget deficit) when there is a fall in exports. D. The economy will suffer twin deficits (trade deficit and budget deficit) when there is a fall in autonomous investment. 52/52

### (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

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