Q: If actual GDP is below potential GDP ($Y < Y^*$), what type of gap exists and what is a likely policy response?

A recessionary gap; increase government spending

Q: Which of the following is a correct statement about the demand-determined output assumption in the simple macro model?

Output is determined by the level of aggregate demand, assuming prices are constant.

Question 1

Suppose the government increases its purchases (G) by $50 million in an open economy with government and foreign trade. If the marginal propensity to consume (MPC) is 0.75, the net tax rate (t) is 0.2, and the marginal propensity to import (m) is 0.1, what is the resulting change in equilibrium national income ($\Delta Y$)?

Accepted Answer

$\Delta Y = \$156.25$ million

Question 2

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

Accepted Answer

It decreases the value of the simple multiplier.

Question 3

Given the aggregate expenditure function $AE = [a + I + G + X] + [b(1-t) - m]Y$, what does the term $[b(1-t) - m]$ represent?

Accepted Answer

The marginal propensity to spend out of national income

Question 4

If the net tax rate (t) increases, what happens to the slope of the aggregate expenditure (AE) function and the equilibrium national income?

Accepted Answer

The AE function becomes flatter and equilibrium national income falls.

Question 5

Suppose Canadian exports (X) increase by $100 million due to a rise in foreign income. If the simple multiplier is 1.5, by how much will equilibrium national income change?

Accepted Answer

$\$150$ million

Question 6

Which of the following equations correctly represents net exports (NX) in the open economy macro model?

Accepted Answer

$NX = X - mY$

Question 7

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

Accepted Answer

$G > T$

Question 8

In the open economy macro model, which of the following will cause the net export (NX) function to shift upward?

Accepted Answer

A decrease in Canadian prices relative to foreign prices

Question 9

Suppose the marginal propensity to consume out of disposable income is 0.8 and the net tax rate is 0.1. What is the marginal propensity to consume out of national income?

Accepted Answer

$0.72$

Question 10

Which of the following best explains why the introduction of government and foreign trade reduces the value of the simple multiplier compared to the basic closed economy model?

Accepted Answer

Because taxes and imports reduce the marginal propensity to spend out of national income

Question 11

If the marginal propensity to spend ($z$) is 0.6, what is the value of the simple multiplier?

Accepted Answer

$2.5$

Question 12

Which of the following fiscal policy actions would be most appropriate to close a recessionary gap in the simple macro model?

Accepted Answer

Increase government purchases

Question 13

In the saving-investment approach to equilibrium in an open economy with government, which equation must hold?

Accepted Answer

$S + (T - G) = I + (X - IM)$

Question 14

If the marginal propensity to import (m) increases, what is the effect on the slope of the AE function and the equilibrium national income?

Accepted Answer

The AE function becomes flatter and equilibrium national income falls.

Question 15

Which of the following is NOT included as an autonomous component in the aggregate expenditure function $AE = [a + I + G + X] + [b(1-t) - m]Y$?

Accepted Answer

Marginal propensity to import ($m$)

Question 16

Suppose the government wants to increase equilibrium national income by $200 million. If the simple multiplier is 2, by how much should government purchases ($G$) increase?

Accepted Answer

$100$ million

Question 17

Which of the following best describes the effect of a 'Buy Canada' initiative that encourages domestic procurement and consumption?

Accepted Answer

It reduces imports and increases net exports.

Question 18

If actual GDP is below potential GDP ($Y < Y^*$), what type of gap exists and what is a likely policy response?

Accepted Answer

A recessionary gap; increase government spending

Question 19

Which of the following is a correct statement about the demand-determined output assumption in the simple macro model?

Accepted Answer

Output is determined by the level of aggregate demand, assuming prices are constant.

Question 20

If the marginal propensity to spend ($z$) is 0.62, what is the value of the simple multiplier?

Accepted Answer

$2.63$

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

Study Guide - Practice Questions

Study Guide - Flashcards