Question 1

Suppose the government increases its autonomous spending (G) while all other components of aggregate expenditure remain unchanged. What is the immediate effect on the aggregate expenditure (AE) function?

Accepted Answer

The AE function shifts upward by the amount of the increase in G.

Question 2

Given the consumption function $$C = 30 + 0.8 Y_D$$ and net taxes $$T = 0.1Y$$, what is the correct expression for consumption as a function of national income $$Y$$?

Accepted Answer

$$C = 30 + 0.8Y - 0.08Y$$

Question 3

If the marginal propensity to consume (MPC) is 0.75, the net tax rate (t) is 0.2, and the marginal propensity to import (m) is 0.1, what is the value of $$z in $$the multiplier formula for an open economy with government?

Accepted Answer

$$z = 0.75(1 - 0.2) - 0.1 = 0.5$$

Question 4

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

Accepted Answer

An increase in foreign income.

Question 5

If actual national income ($$Y) is $$less than desired aggregate expenditure ($$AE$$), what will happen in the economy according to the simple macro model?

Accepted Answer

Firms will increase production, causing national income to rise.

Question 6

Given $$AE = 128 + 0.82Y$$, what is the equilibrium level of national income ($$Y$$)?

Accepted Answer

$$Y = \frac{128}{1 - 0.82} = 711.11$$

Question 7

Which of the following best describes the effect of an increase in the marginal propensity to import ($$m) on $$the simple multiplier?

Accepted Answer

It decreases the value of the simple multiplier.

Question 8

If the government runs a budget deficit, which of the following is true?

Accepted Answer

$$T \u003c G$$

Question 9

Suppose the net tax rate ($$t) is $$reduced. What is the effect on the aggregate expenditure (AE) function?

Accepted Answer

The AE function rotates upward, increasing its slope.

Question 10

If imports are given by $$IM = mY$$ and $$m$$ increases, what happens to the slope of the AE function?

Accepted Answer

The slope of the AE function decreases.

Question 11

Which of the following equations correctly represents disposable income ($$Y_D) $$when net taxes are proportional to income?

Accepted Answer

$$Y_D = (1 - t)Y$$

Question 12

If exports ($$X) $$are autonomous and imports ($$IM) $$depend on income, what is the correct formula for net exports ($$NX$$)?

Accepted Answer

$$NX = X - mY$$

Question 13

Which of the following will shift the net export (NX) function downward?

Accepted Answer

A decrease in foreign income.

Question 14

If the simple multiplier is $$1/(1 - z)$$ and $$z = 0.6$$, what is the value of the multiplier?

Accepted Answer

$$2.5$$

Question 15

Which of the following best describes the effect of a depreciation of the Canadian dollar on net exports?

Accepted Answer

Net exports increase because exports become cheaper and imports more expensive.

Question 16

Suppose $$C = 30 + 0.7Y_D$$, $$I = 65$$, $$G = 51$$, $$NX = 72 + 0.1Y$$, and $$T = 0.1Y. $$What is the aggregate expenditure (AE) function in terms of $$Y$$?

Accepted Answer

$$AE = 168 + 0.73Y$$

Question 17

Which of the following is NOT a component of the aggregate expenditure (AE) function?

Accepted Answer

Net tax revenues ($$T)$$

Question 18

If the marginal propensity to spend ($$z) $$decreases, what happens to the equilibrium national income for a given level of autonomous expenditure?

Accepted Answer

Equilibrium national income decreases.

Question 19

Which of the following best explains why the multiplier is smaller in an open economy with government than in a closed economy with no government?

Accepted Answer

Because taxes and imports reduce the marginal propensity to spend.

Question 20

If the government wants to use fiscal policy to increase equilibrium national income, which of the following actions would be most effective?

Accepted Answer

Increase government purchases ($$G).$$

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

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