Question 1

An increase in the marginal propensity to consume leads to an increase in the Keynesian multiplier.

Accepted Answer

A) True 
 B)False

Question 2

The formula for the Keynesian multiplier without net exports is

Accepted Answer

A)    .
B)    .
C)    .
D)    .
E)    .F) C) and E)
G) B) and D)

Question 3

In 2008,the government under the Bush administration implemented a tax cut in the form of a one-time tax rebate.That tax cut had only a small impact on personal consumption expenditure and real GDP.Explain.

Accepted Answer

Because the tax cut was good for only one year,meaning that the change in income was temporary.According to the forward-looking consumption model,the marginal propensity to consume for a temporary change in income would be small in comparison to a permanent change in income.As a result,consumption increased very little,leading to a relatively small impact on real GDP.

Question 4

Which of the following measures the change of real GDP in the short run as a result of a an increase in government purchases?

Accepted Answer

A)  Spending balance
B)  Potential GDP
C)  Life-cycle model
D)  Keynesian multiplier
E)  45-degree lineF) A) and E)
G) A) and D)

Question 5

The formula for the Keynesian multiplier with net exports is

Accepted Answer

A)    .
B)    .
C)    .
D)    .
E)    .F) B) and C)
G) C) and E)

Question 6

The Keynesian multiplier measures

Accepted Answer

A)  both the short-run and long-run impacts of an initial change in spending on real GDP.
B)  the long-run impact of an initial change in spending on real GDP.
C)  the short-run impact of an initial change in spending on real GDP.
D)  the long-run impact of a change in real GDP on consumption.
E)  the short-run impact of a change in real GDP on total spending.F) A) and E)
G) B) and D) C

Question 7

According to the forward-looking model,consumption

Accepted Answer

A)  reacts mostly to a permanent change in income.
B)  reacts mostly to a temporary change in income.
C)  reacts equally to permanent or temporary changes in income.
D)  is always subject to a liquidity constraint.
E)  does not react to either temporary or permanent changes in income.F) D) and E)
G) C) and D)

Question 8

If the expenditure line is steeper,the Keynesian multiplier will be larger.

Accepted Answer

A) True 
 B)False

Question 9

All else being equal,a higher propensity to import leads to a larger Keynesian multiplier.

Accepted Answer

A) True 
 B)False

Question 10

According to the permanent income model,the marginal propensity to consume is larger in the case of a permanent change in income than a temporary change in income.

Accepted Answer

A) True 
 B)False

Question 11

The size of the Keynesian multiplier depends on

Accepted Answer

A)  the location of the expenditure line.
B)  the level of spending.
C)  the level of income.
D)  the location of the 45-degree line.
E)  the marginal propensity to consume.F) None of the above
G) B) and D)

Question 12

Sketch the 45-degree line and the expenditure line on a diagram.Use this diagram to show what happens to the level of income if government purchases decline.Does income decrease by more or by less than the downward shift in government purchases? Explain.

Accepted Answer

As shown in the diagram below,a decline ...

Question 13

Which of the following is true about the marginal propensity to consume and the marginal propensity to import?

Accepted Answer

A)  The marginal propensity to import is typically smaller than the marginal propensity to consume because when income rises,not all goods we consume are imported.
B)  The marginal propensity to import is always larger than the marginal propensity to consume because when income rises,not all goods we consume are imported.
C)  The marginal propensity to import is always the same as the marginal propensity to consume because when income rises,not all goods we import are consumed.
D)  The sum of the marginal propensity to import and the marginal propensity to consume is always equal to one because when income rises,we either consume or import.
E)  The marginal propensity to import is sometimes larger and sometimes smaller than the marginal propensity to consume because when income rises,all goods we consume are imported.F) A) and E)
G) A) and D)

Question 14

Suppose in 2010,real GDP was $160 trillion.Suppose further that the marginal propensity to consume was 0.75 and the marginal propensity to import was 0.25.Using the Keynesian multiplier,how much should government purchases be changed if policymakers attempt to raise real GDP to $180 trillion by changing government purchases?

Accepted Answer

The expected change in real GDP is $180 trillion - $160 trillion = $20 trillion.The multiplier is 1/(1-0.75+0.25)= 2.Government purchases should be increased by $20 trillion/2 = $10 trillion.

Question 15

Suppose that MPC = 0.8 and MPI = 0.According to the Keynesian multiplier,an increase of $20 million in government purchases will

Accepted Answer

A)  increase real GDP by $16 million.
B)  decrease real GDP by $16 million.
C)  increase real GDP by $100 million.
D)  decrease real GDP by $100 million.
E)  have no impact on real GDP.F) B) and E)
G) C) and E)

Question 16

The permanent income model implies that

Accepted Answer

A)  a permanent tax cut has a larger effect on consumption than does a temporary tax cut.
B)  a permanent tax cut has a smaller effect on consumption than does a temporary tax cut.
C)  tax cuts should not be used because consumers are not rational.
D)  both permanent and temporary tax cuts are effective in changing consumption.
E)  both permanent and temporary tax cuts have no effects on consumption.F) A) and D)
G) D) and E)

Question 17

The permanent income model implies the same relationship between changes in consumption and income as

Accepted Answer

A)  the backward-looking model.
B)  the life-cycle model.
C)  the liquidity constraint model.
D)  the Keynesian multiplier.
E)  None of theseF) B) and D)
G) B) and E)

Question 18

The Keynesian multiplier is the ratio of the change in spending to a given change in real GDP.

Accepted Answer

A) True 
 B)False

Question 19

The Keynesian multiplier relies on the assumption that people are forward looking.

Accepted Answer

A) True 
 B)False

Question 20

The Keynesian multiplier will be higher if

Accepted Answer

A)  the marginal propensity to consume is larger.
B)  the marginal propensity to import is larger.
C)  real GDP is higher.
D)  the expenditure line is higher.
E)  the liquidity constraint is greater.F) A) and D)
G) A) and E)

Exam 37: Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

An increase in the marginal propensity to consume leads to an increase in the Keynesian multiplier.

Correct Answer
verified

The formula for the Keynesian multiplier without net exports is

Correct Answer
verified

In 2008,the government under the Bush administration implemented a tax cut in the form of a one-time tax rebate.That tax cut had only a small impact on personal consumption expenditure and real GDP.Explain.

Which of the following measures the change of real GDP in the short run as a result of a an increase in government purchases?

Correct Answer
verified

The formula for the Keynesian multiplier with net exports is

Correct Answer
verified

The Keynesian multiplier measures

Correct Answer
verified
C

According to the forward-looking model,consumption

Correct Answer
verified

If the expenditure line is steeper,the Keynesian multiplier will be larger.

Correct Answer
verified

All else being equal,a higher propensity to import leads to a larger Keynesian multiplier.

Correct Answer
verified

According to the permanent income model,the marginal propensity to consume is larger in the case of a permanent change in income than a temporary change in income.

Correct Answer
verified

The size of the Keynesian multiplier depends on

Correct Answer
verified

Sketch the 45-degree line and the expenditure line on a diagram.Use this diagram to show what happens to the level of income if government purchases decline.Does income decrease by more or by less than the downward shift in government purchases? Explain.

Correct Answer
verified
As shown in the diagram below,a decline ...
View Answer

Which of the following is true about the marginal propensity to consume and the marginal propensity to import?

Correct Answer
verified

Correct Answer
verified
The expected change in real GDP is $180 trillion - $160 trillion = $20 trillion.The multiplier is 1/(1-0.75+0.25)= 2.Government purchases should be increased by $20 trillion/2 = $10 trillion.

Suppose that MPC = 0.8 and MPI = 0.According to the Keynesian multiplier,an increase of $20 million in government purchases will

Correct Answer
verified

The permanent income model implies that

Correct Answer
verified

The permanent income model implies the same relationship between changes in consumption and income as

Correct Answer
verified

The Keynesian multiplier is the ratio of the change in spending to a given change in real GDP.

Correct Answer
verified

The Keynesian multiplier relies on the assumption that people are forward looking.

Correct Answer
verified

The Keynesian multiplier will be higher if

Correct Answer
verified

Exam 37: Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

An increase in the marginal propensity to consume leads to an increase in the Keynesian multiplier.

Correct AnswerverifiedShow Answer

The formula for the Keynesian multiplier without net exports is

Correct AnswerverifiedShow Answer

In 2008,the government under the Bush administration implemented a tax cut in the form of a one-time tax rebate.That tax cut had only a small impact on personal consumption expenditure and real GDP.Explain.

Which of the following measures the change of real GDP in the short run as a result of a an increase in government purchases?

Correct AnswerverifiedShow Answer

The formula for the Keynesian multiplier with net exports is

Correct AnswerverifiedShow Answer

The Keynesian multiplier measures

Correct AnswerverifiedC

According to the forward-looking model,consumption

Correct AnswerverifiedShow Answer

If the expenditure line is steeper,the Keynesian multiplier will be larger.

Correct AnswerverifiedShow Answer

All else being equal,a higher propensity to import leads to a larger Keynesian multiplier.

Correct AnswerverifiedShow Answer

According to the permanent income model,the marginal propensity to consume is larger in the case of a permanent change in income than a temporary change in income.

Correct AnswerverifiedShow Answer

The size of the Keynesian multiplier depends on

Correct AnswerverifiedShow Answer

Sketch the 45-degree line and the expenditure line on a diagram.Use this diagram to show what happens to the level of income if government purchases decline.Does income decrease by more or by less than the downward shift in government purchases? Explain.

Correct AnswerverifiedAs shown in the diagram below,a decline ...View AnswerShow Answer

Which of the following is true about the marginal propensity to consume and the marginal propensity to import?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThe expected change in real GDP is $180 trillion - $160 trillion = $20 trillion.The multiplier is 1/(1-0.75+0.25)= 2.Government purchases should be increased by $20 trillion/2 = $10 trillion.

Suppose that MPC = 0.8 and MPI = 0.According to the Keynesian multiplier,an increase of $20 million in government purchases will

Correct AnswerverifiedShow Answer

The permanent income model implies that

Correct AnswerverifiedShow Answer

The permanent income model implies the same relationship between changes in consumption and income as

Correct AnswerverifiedShow Answer

The Keynesian multiplier is the ratio of the change in spending to a given change in real GDP.

Correct AnswerverifiedShow Answer

The Keynesian multiplier relies on the assumption that people are forward looking.

Correct AnswerverifiedShow Answer

The Keynesian multiplier will be higher if

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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C

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As shown in the diagram below,a decline ...
View Answer

Correct Answer
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Correct Answer
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The expected change in real GDP is $180 trillion - $160 trillion = $20 trillion.The multiplier is 1/(1-0.75+0.25)= 2.Government purchases should be increased by $20 trillion/2 = $10 trillion.

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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