Q: Given the following: $$MPC = 0.6$$, $$t = 0.25$$, $$m = 0.1$$, what is the marginal propensity to spend on domestic output ($$z$$)?

$$z = 0.6 \times (1 - 0.25) - 0.1 = 0.35$$

Q: If autonomous consumption decreases by $$200$$ and the marginal propensity to spend on domestic output is $$z = 0.6$$, what is the change in equilibrium income ($$\Delta Y$$)?

$$\Delta Y = -200 \times 2.5 = -500$$

Q: If the marginal propensity to consume (MPC) is 0.8, the net tax rate is $$t = 0.25$$, and the marginal propensity to import is $$m = 0.1$$, what is the value of the multiplier?

$$Multiplier = \dfrac{1}{1 - [0.8 \times (1 - 0.25) - 0.1]} = 2$$

Question 1

Suppose the government increases its purchases by $$100, with a marginal propensity to consume (MPC) of 0.7, a net tax rate t = 0.2$, and a marginal propensity to import m = 0.1$. What is the resulting change in equilibrium national income ($$\Delta Y$)?

Accepted Answer

$$\Delta Y = 156.25$$

Question 2

In the macroeconomic model, which of the following is TRUE regarding government purchases ($$G) $$and net taxes ($$T$$)?

Accepted Answer

$$G is $$autonomous with respect to national income, while $$T$$ depends on income.

Question 3

If the net tax rate is $$t = 0.18$$ and government purchases are $$G = 450$$, what level of national income ($$Y) $$will result in a balanced budget?

Accepted Answer

$$Y = 450 / 0.18$$

Question 4

Which of the following best describes how taxes enter the aggregate expenditure (AE) model?

Accepted Answer

Taxes reduce disposable income, which in turn reduces consumption in AE.

Question 5

Given the net exports function $$NX = X - mY$$, with $$X = 80$$ and $$m = 0.2$$, at what level of income ($$Y) $$will net exports be zero?

Accepted Answer

$$Y = 400$$

Question 6

If the marginal propensity to import ($$m) $$increases, what is the effect on the multiplier in the open economy AE model?

Accepted Answer

The multiplier decreases because more income leaks out as imports.

Question 7

Suppose the marginal propensity to spend on domestic output is $$z = 0.5. $$What is the value of the simple multiplier?

Accepted Answer

$$\dfrac{1}{1-0.5} = 2$$

Question 8

Which of the following statements about exports ($$X) in $$the macro model is correct?

Accepted Answer

Exports are autonomous with respect to domestic income but depend on foreign income and relative prices.

Question 9

If Canadian prices rise relative to other countries, what is the likely effect on net exports ($$NX$$)?

Accepted Answer

$$NX$$ will decrease because exports fall and imports rise.

Question 10

Given the following: $$MPC = 0.6$$, $$t = 0.25$$, $$m = 0.1$$, what is the marginal propensity to spend on domestic output ($$z$$)?

Accepted Answer

$$z = 0.6 	imes (1 - 0.25) - 0.1 = 0.35$$

Question 11

If the AE function is $$AE = 500 + 0.7Y$$, what is the equilibrium level of income ($$Y$$)?

Accepted Answer

$$Y = 500 / 0.3 = 1666.67$$

Question 12

A country has $$G = 600$$, $$t = 0.2$$, and a balanced budget. If government purchases increase to $$G = 660$$ and the net tax rate remains unchanged, what is the new equilibrium income ($$Y) $$for a balanced budget?

Accepted Answer

$$Y = 660 / 0.2 = 3,300$$

Question 13

Which of the following best explains why the multiplier is smaller when taxes and imports are included in the AE model?

Accepted Answer

Because taxes and imports act as leakages, reducing the amount of spending that recirculates in the economy.

Question 14

If autonomous consumption decreases by $$200$$ and the marginal propensity to spend on domestic output is $$z = 0.6$$, what is the change in equilibrium income ($$\Delta Y$$)?

Accepted Answer

$$\Delta Y = -200 	imes 2.5 = -500$$

Question 15

In the fixed-price AE model, what determines the equilibrium level of national income?

Accepted Answer

Aggregate expenditure (AE)

Question 16

Suppose $$X = 100$$, $$m = 0.25. $$What is the slope and intercept of the net exports function $$NX = X - mY$$?

Accepted Answer

Intercept: 100; Slope: -0.25

Question 17

If the marginal propensity to spend on domestic output is $$z = 0.4$$ and government purchases decrease by $$\Delta G = -50$$, what is the change in equilibrium income ($$\Delta Y$$)?

Accepted Answer

$$\Delta Y = -50 / (1 - 0.4) = -83.33$$

Question 18

Which of the following is the correct formula for disposable income ($$Y_d) in $$the macro model?

Accepted Answer

$$Y_d = Y - T$$

Question 19

If the marginal propensity to consume (MPC) is 0.8, the net tax rate is $$t = 0.25$$, and the marginal propensity to import is $$m = 0.1$$, what is the value of the multiplier?

Accepted Answer

$$Multiplier = \dfrac{1}{1 - [0.8 	imes (1 - 0.25) - 0.1]} = 2$$

Question 20

Which of the following best describes the effect of an increase in foreign income on a country's exports ($$X) $$and net exports ($$NX$$)?

Accepted Answer

Exports and net exports both increase.

Chapter 7: Adding Government and Trade to the Simple Macro Model — Study Notes

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