Q: If the government increases its spending by $$\Delta G$$ and the simple multiplier is $$SM$$, what is the formula for the total change in real GDP ($$\Delta Y$$)?

$$\Delta Y = SM \times \Delta G$$

Q: Which of the following equations correctly represents the simple multiplier ($$SM) in $$the presence of taxes and imports?

$$SM = \frac{1}{1 - z}$$, \text{ where } z = b(1-t) - m$

Q: If the marginal propensity to consume ($$MPC) is 0.8$$, the net tax rate ($$t) is 0.3$$, and the marginal propensity to import ($$m) is 0.2$$, what is the value of $$z$$?

$$z = 0.8 \times (1 - 0.3) - 0.2 = 0.36$$

Question 1

In the short run, which of the following is assumed to be constant according to the macroeconomic model described in the study materials?

Accepted Answer

Factor prices and technology

Question 2

Suppose the economy is experiencing a recessionary gap. According to the adjustment process, what is the expected sequence of events?

Accepted Answer

Excess supply of labor leads to falling wages, which shifts the AS curve rightward

Question 3

Which of the following best describes the long-run aggregate supply (LRAS) curve?

Accepted Answer

A vertical line at $$Y^*$$

Question 4

If the government increases its spending by $$\Delta G$$ and the simple multiplier is $$SM$$, what is the formula for the total change in real GDP ($$\Delta Y$$)?

Accepted Answer

$$\Delta Y = SM 	imes \Delta G$$

Question 5

Which of the following is NOT a limitation of discretionary fiscal policy?

Accepted Answer

Immediate adjustment of factor prices

Question 6

An economy is initially at potential output ($$Y^*). A $$positive aggregate demand shock occurs. In the long run, what happens to real GDP and the price level?

Accepted Answer

Real GDP returns to $$Y^*$$ and the price level is higher

Question 7

Which of the following equations correctly represents the simple multiplier ($$SM) in $$the presence of taxes and imports?

Accepted Answer

$$SM = \frac{1}{1 - z}$$, 	ext{ where } z = b(1-t) - m$

Question 8

If the marginal propensity to consume ($$MPC) is 0.8$$, the net tax rate ($$t) is 0.3$$, and the marginal propensity to import ($$m) is 0.2$$, what is the value of $$z$$?

Accepted Answer

$$z = 0.8 	imes (1 - 0.3) - 0.2 = 0.36$$

Question 9

Which of the following best explains why the adjustment process is asymmetric between recessionary and inflationary gaps?

Accepted Answer

Wages are sticky downward, so they adjust more slowly in a recessionary gap

Question 10

Suppose the government wants to close a recessionary gap of $$60$$ using a multiplier of $$1.2. $$What change in government spending ($$\Delta G) is $$required?

Accepted Answer

$$\Delta G = \frac{60}{1.2} = 50$$

Question 11

Which of the following scenarios will produce the largest fluctuations in real GDP from autonomous expenditure shocks?

Accepted Answer

MPC = 0.8, t = 0.1, m = 0.2

Question 12

Which of the following is an example of an automatic fiscal stabilizer?

Accepted Answer

A progressive income tax system

Question 13

In the long run, which of the following determines the level of real GDP?

Accepted Answer

Potential output ($$Y^*)$$

Question 14

If the economy is at point $$E_0$$ with $$Y_0$$ \u003c Y^*$$, which of the following will occur during the adjustment process?

Accepted Answer

Aggregate supply shifts right as wages fall

Question 15

Which of the following best describes the effect of a permanent increase in government spending in the long run?

Accepted Answer

Real GDP returns to $$Y^*$$, but the composition of GDP changes

Question 16

Which of the following is true about the effect of a positive aggregate supply shock in the short run?

Accepted Answer

Real GDP increases and the price level decreases

Question 17

Which of the following is a reason why fiscal policy may not affect potential GDP in the long run?

Accepted Answer

Most fiscal policy changes do not increase productivity or factor supplies

Question 18

Which of the following best describes the role of expectations in the effectiveness of discretionary fiscal policy?

Accepted Answer

If policy is expected to be temporary, its effect on aggregate demand may be reduced

Macroeconomic Adjustment: Short Run, Long Run, and Fiscal Stabilization ch 9

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