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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