Q: Suppose the government increases both spending and taxes by $$\100$ each. If the marginal propensity to consume is 0.75$, what is the effect on equilibrium output?

Output increases by $$\100$$ \times \frac{$$c_1$$}{1-$$c_1$$} = \$$300$$

Question 1

Which of the following best describes the difference between nominal GDP and real GDP?

Accepted Answer

Nominal GDP is measured using current prices, while real GDP is adjusted for inflation using constant prices.

Question 2

According to the Keynesian cross model, what happens to equilibrium output if autonomous spending increases by $$100$$ and the marginal propensity to consume $$c_1 = 0.8$?

Accepted Answer

Equilibrium output increases by $$\frac{100}{1-0.8} = 500$$

Question 3

Which of the following is NOT a component of GDP when measured by the expenditure approach?

Accepted Answer

Imports

Question 4

The Phillips Curve describes the relationship between:

Accepted Answer

Inflation and unemployment

Question 5

If the central bank increases the money supply, what is the most likely short-run effect on the interest rate, according to the liquidity preference framework?

Accepted Answer

The interest rate will decrease

Question 6

Suppose the nominal interest rate is $$i = 4\%$$ and expected inflation is $$\pi^e = 2\%. $$What is the approximate real interest rate?

Accepted Answer

$$2\%$$

Question 7

Which of the following best explains the 'paradox of thrift'?

Accepted Answer

If everyone saves more, aggregate demand falls, reducing income and possibly total saving.

Question 8

In the IS-LM model, what is the effect of an increase in government spending on the IS curve?

Accepted Answer

It shifts the IS curve to the right.

Question 9

Which of the following equations represents the equilibrium in the goods market in the simple Keynesian model?

Accepted Answer

$$Y = C + I + G$$

Question 10

If the central bank sets the nominal interest rate at zero and expected inflation is negative, what happens to the real interest rate?

Accepted Answer

The real interest rate is positive.

Question 11

Which of the following is a plausible reason why the IS curve might shift to the left?

Accepted Answer

A decrease in consumer confidence

Question 12

What is the main function of financial intermediaries such as banks in the macroeconomy?

Accepted Answer

They create money by making loans and taking deposits.

Question 13

If the marginal propensity to consume $$c_1$$ increases, what happens to the multiplier in the Keynesian model?

Accepted Answer

The multiplier increases.

Question 14

Which of the following best describes the 'liquidity trap'?

Accepted Answer

A situation where the central bank cannot lower interest rates further to stimulate the economy.

Question 15

Suppose the government increases both spending and taxes by $$\100$ each. If the marginal propensity to consume is 0.75$, what is the effect on equilibrium output?

Accepted Answer

Output increases by $$\100$$ 	imes \frac{$$c_1$$}{1-$$c_1$$} = \$$300$$

Question 16

Which of the following is true about the relationship between unemployment and inflation in the U.S. since the Great Moderation?

Accepted Answer

The Phillips Curve has become flatter.

Question 17

If the risk premium $$x$$ increases due to higher perceived default risk, what is the likely effect on the IS curve?

Accepted Answer

The IS curve shifts to the left.

Question 18

Which of the following best describes the balanced-budget multiplier?

Accepted Answer

It is always one.

Question 19

In the IS-LM model, what is the effect of a monetary expansion (increase in money supply) on the LM curve?

Accepted Answer

It shifts the LM curve to the right (downward).

Question 20

Which of the following is a reason why the central bank may not be able to fully offset a financial shock?

Accepted Answer

The zero lower bound on nominal interest rates.

Macroeconomic Theory: Exam 1 Review (Chapters 1–6)

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