Q: In the Keynesian model, what is the effect of a $$200 decrease in investment when $$MPC = 0.8$?

$$\Delta Y = \frac{1}{1-0.8} \times (-200) = -1000$$

Q: If autonomous consumption increases by $$50 and $$MPC = 0.75$, what is the change in equilibrium income?

$$\Delta Y = \frac{1}{1-0.75} \times 50 = 200$$

Q: If the government increases spending by $100 and the MPC is 0.8, what is the total increase in equilibrium income?

$$\Delta Y = \frac{1}{1-0.8} \times 100 = 500$$

Question 1

Which of the following is a key assumption of the basic Keynesian model in the short run?

Accepted Answer

Prices are assumed to be fixed, and output is flexible.

Question 2

According to the Keynesian consumption function $$C = a + bY_d$$, what does the parameter $$b$$ represent?

Accepted Answer

The marginal propensity to consume (MPC)

Question 3

If the marginal propensity to consume (MPC) is 0.8, what is the value of the multiplier?

Accepted Answer

$$\frac{1}{1-0.8} = 5$$

Question 4

Suppose government spending increases by $$100 and the MPC is 0.75. If taxes are also increased by 100$$, what is the net change in equilibrium income?

Accepted Answer

$$100$$

Question 5

In the Keynesian model, what is the effect of a $$200 decrease in investment when $$MPC = 0.8$?

Accepted Answer

$$\Delta Y = \frac{1}{1-0.8} 	imes (-200) = -1000$$

Question 6

Which of the following best describes 'crowding out' in the classical model?

Accepted Answer

Government bond-financed spending is completely ineffective due to higher interest rates reducing private investment.

Question 7

In the Keynesian model, what is the primary determinant of savings?

Accepted Answer

Disposable income

Question 8

Which equation represents equilibrium in the product market in a closed economy according to the Keynesian model?

Accepted Answer

$$Y = C + I + G$$

Question 9

If autonomous consumption increases by $$50 and $$MPC = 0.75$, what is the change in equilibrium income?

Accepted Answer

$$\Delta Y = \frac{1}{1-0.75} 	imes 50 = 200$$

Question 10

Which of the following statements about Keynesian equilibrium is correct?

Accepted Answer

Equilibrium can occur at any level of income, including with high unemployment.

Question 11

What is the formula for the tax multiplier in the Keynesian model?

Accepted Answer

$$\Delta Y = \frac{-b}{1-b} \Delta T$$

Question 12

Which of the following best describes Keynes' view on investment expectations?

Accepted Answer

Investment expectations are formed by 'animal spirits' and may not be rational.

Question 13

If the government increases spending by $100 and the MPC is 0.8, what is the total increase in equilibrium income?

Accepted Answer

$$\Delta Y = \frac{1}{1-0.8} 	imes 100 = 500$$

Question 14

Which of the following is NOT a component of aggregate expenditure in the Keynesian model for a closed economy?

Accepted Answer

Net exports ($$NX)$$

Question 15

In the Keynesian model, what is the effect of a negative tax multiplier?

Accepted Answer

Tax cuts raise equilibrium income.

Question 16

Which of the following best explains the 'heresy of Keynes' compared to the classical model?

Accepted Answer

The Keynesian model can find equilibrium at any level of employment, including high unemployment.

Question 17

If the marginal propensity to save (MPS) is 0.2, what is the value of the multiplier?

Accepted Answer

$$\frac{1}{0.2} = 5$$

Question 18

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

Accepted Answer

Unemployment insurance payments

Question 19

In the Keynesian model, what is the effect of an increase in autonomous consumption on equilibrium income?

Accepted Answer

It increases equilibrium income by a multiple of the change in autonomous consumption.

Question 20

Which of the following best describes the relationship between savings and investment in the Keynesian model at equilibrium?

Accepted Answer

Savings equal investment at equilibrium.

Keynesian System I: Expenditure and Equilibrium in the Product Market

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