Q: If the marginal propensity to consume ($$c) is$$ $$0.8$$, the net tax rate ($$t) is$$ $$0.25$$, and the marginal propensity to import ($$m) is$$ $$0.35$$, what is the marginal propensity to spend out of national income ($$z$$)?

$$z = (1-0.25) \times 0.8 - 0.35 = 0.25$$

Question 1

Suppose the government increases its purchases (G) by $$10 billion. If the simple multiplier (sm$) in the economy is 1.5, by how much will equilibrium national income (Y$) increase, assuming all other factors remain constant?

Accepted Answer

$$Y$$ will increase by $$15$$ billion

Question 2

Which of the following best describes the effect of an increase in the net tax rate ($$t) on $$the value of the simple multiplier ($$sm) in $$the open economy macro model?

Accepted Answer

It decreases the value of $$sm$$ because higher taxes reduce disposable income and consumption.

Question 3

Given the consumption function $$C = 30 + 0.8Y_D$$ and the net tax rate $$t = 0.1$$, what is the marginal propensity to spend out of national income ($$z$$)?

Accepted Answer

$$z = 0.72$$

Question 4

If the government’s net tax revenue ($$T) is$$ $$200$$ billion and its purchases ($$G) $$are $$180$$ billion, what is the budget balance ($$BB$$)?

Accepted Answer

$$BB = 20$$ billion surplus

Question 5

Which of the following will cause the net export function ($$NX) to $$shift upward?

Accepted Answer

An increase in foreign income

Question 6

If the marginal propensity to consume ($$c) is$$ $$0.8$$, the net tax rate ($$t) is$$ $$0.25$$, and the marginal propensity to import ($$m) is$$ $$0.35$$, what is the marginal propensity to spend out of national income ($$z$$)?

Accepted Answer

$$z = (1-0.25) 	imes 0.8 - 0.35 = 0.25$$

Question 7

Which of the following fiscal policy actions will tend to increase equilibrium national income in the simple macro model?

Accepted Answer

Increasing government purchases ($$G)$$

Question 8

If exports ($$X) $$are autonomous and increase by $$2$$ billion, and the simple multiplier ($$sm) is$$ $$1.3$$, by how much does equilibrium national income ($$Y) $$increase?

Accepted Answer

$$Y$$ increases by $$2.6$$ billion

Question 9

Which of the following best explains why the introduction of government and foreign trade reduces the value of the simple multiplier ($$sm) $$compared to a closed economy with no government?

Accepted Answer

Because taxes and imports reduce the marginal propensity to spend out of national income ($$z).$$

Question 10

Suppose the aggregate expenditure function is $$AE = C + I + G + X - M. If $$the marginal propensity to spend out of national income ($$z) $$increases, what happens to the slope of the $$AE$$ function?

Accepted Answer

The slope becomes steeper.

Question 11

If the net tax rate ($$t) $$increases, what is the direct effect on disposable income ($$Y_D) $$for a given national income ($$Y$$)?

Accepted Answer

Disposable income decreases.

Question 12

Which of the following is true about government purchases ($$G) in $$the simple macro model described in Chapter 7?

Accepted Answer

Government purchases are autonomous with respect to national income.

Question 13

If the marginal propensity to import ($$m) $$increases, what is the effect on equilibrium national income ($$Y$$), all else equal?

Accepted Answer

Equilibrium national income decreases.

Question 14

Which formula correctly expresses disposable income ($$Y_D) in $$terms of national income ($$Y) $$and the net tax rate ($$t$$)?

Accepted Answer

$$Y_D = Y - tY$$

Question 15

If actual national income ($$Y) $$exceeds desired aggregate expenditure ($$AE$$), what will firms do in response?

Accepted Answer

Firms will reduce production.

Question 16

Which of the following is NOT a direct way that government affects the aggregate expenditure ($$AE) $$function?

Accepted Answer

Through changes in the marginal propensity to import ($$m)$$

Question 17

If the net export function ($$NX) $$shifts downward due to a rise in Canadian prices relative to foreign prices, what is the likely effect on equilibrium national income ($$Y$$)?

Accepted Answer

Equilibrium national income decreases.

Question 18

Which of the following best describes the role of the simple multiplier ($$sm) in $$the macro model?

Accepted Answer

It measures the change in equilibrium national income resulting from a change in autonomous expenditure.

Question 19

Which of the following would make the value of the simple multiplier ($$sm) $$larger, all else equal?

Accepted Answer

A decrease in the marginal propensity to import ($$m)$$

Adding Government and Trade to the Simple Macro Model (Chapter 7 Study Notes)

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