QUESTION 26 Suppose the MPC of Banana Republic is 9 and the

QUESTION 26

Suppose the MPC of Banana Republic is .9 and the country is in recession. The government wishes to get out of the recession through a massive expenditure program. If the recessionary gap is 900 million Euros, how much will the government need to spend?

900 million Euros

100 million Euros

200 million Euros

90 million Euros

2 points   

QUESTION 27

Which equation is correct?

MPC + APC = 1

MPC+APS =1

MPC+MPS=2

MPC = 1 -MPS

2 points   

QUESTION 28

The size of the money multiplier may not be equal to its theoretical value because

of calculation errors

of Fed\'s reluctance to increase money supply

not entire part of the loans are deposited

the reserve ratio is high

2 points   

QUESTION 29

Suppose the Fed assumed the economy would get out of recession in 18 months, and starts buying securities to ease the transition of the economy. After 18 months, inflation rate goes up from 3 per cent to 7 per cent. This is an example of

cost-push inflation

demand-pull inflation

counter-cyclical monetary policy

all of the above

2 points   

QUESTION 30

The paradox of thrift implies that

the average savings rate of 6% of Americans is too low

the average savings rate of 6% of Americans is too high

while high rate of savings by some citizens is good, higher rate of savings by Americans may reduce aggregate demand

Americans should not save at a higher rate than citizens of countries with whom we have high volumes of trade

2 points   

QUESTION 31

Suppose during a recessionary period, Apple Republic created a government-sponsored works program worth 150 million dollar and collected the entire 150 million dollar through new taxes. The MPS of Apple Republic is .2. GDP of Apple Republic will go up by

750 million dollars

600 million dollars

zero dollars

150 million dollars

2 points   

QUESTION 32

The balanced budget multiplier is

equal to the size of the budget

equal to the tax multiplier plus 1

equal to the tax multiplier minus 1

none of the above

2 points   

QUESTION 33

Economic growth is important because expansion in the output of goods and services

necessarily creates more jobs (more work for people)

makes it possible for individuals to consume more and achieve higher living standards.

leads to an increase in the general level of prices.

generates additional tax revenues for the government.

2 points   

QUESTION 34

GDP = C+ I+ G is a model of

closed economy equilibrium

private economy equilibrium

open economy equilibrium

no growth equilibrium

	1.	900 million Euros
	2.	100 million Euros
	3.	200 million Euros
	4.	90 million Euros

Solution

26. (4)

MPC of Banana Republic is .9, this means that the value of multiplier is 1/1- mpc.

Multiplier = 1/0.1 = 10

Recessionary gap or change in income required is 900 million euros, so the change in government spending that is required is:

Y = Multiplier × G

G = Y/multiplier

= 900/10

= 90 million euros.

27. (4) MPC = 1 – MPS

Since whatever is the marginal change in income, it is either saved or consumed so MPC and MPS are together equal to one. MPC + MPS = 1 or MPC = 1 – MPS.

28. (3) not entire part of the loans are deposited

This is because sometimes banks keep excess reserves.

29. (3) counter-cyclical monetary policy

It is monetary policy used to counteract the business cycle. The policy is counter cyclical, as it tries to slow the economy down during rapid expansion, and speed it up during contraction or recession.

30. (3) while high rate of savings by some citizens is good, higher rate of savings by Americans may reduce aggregate demand

It means that if the economy as a whole starts to save at a high rate, then this is not good for thr economy as that would affect the aggregate demand adversely. Individual saving is good, but the whole economy saving at high rates is not desirable.

31. (2) 600 million dollars

GDP will go up by multiplier times the change in government spending collected through new taxes. As this is tax financed program, this reduces the disposable income of the consumers and reduces the multiplier value.

Multiplier = mpc/1 – mpc

= 0.8/0.2 = 4

So,

Y = Multiplier × T

Y = 4 × 150

= 600 million dollars

32. (1) equal to the size of the budget

Balanced budget multiplier is when the change in equilibrium GDP from an equal change in government spending and taxes is equal to the change in spending. When T = G

Government spending multiplier is 1/1-mpc and lump sum tax multiplier is mpc/1-mpc

33. (2) makes it possible for individuals to consume more and achieve higher living standards.

Economic growth is related to the overall rise in income and output in the economy which raises the consumption opportunities for people.

34. (1) closed economy equilibrium

This is because foreign sector is not included in it, This is the three sector closed economy model.