In the simple Keynesian model, if equilibrium output is less than the level required for full employment, what must happen for full employment to be achieved?
Answer(s): E
When equilibrium output is less than the economy's capacity, only an increase in expenditures will lead to full employment. This is because under the Keynesian model, aggregate expenditures are considered the catalyst the change in output; that is, aggregate output is accommodative of aggregate expenditures.
In the Keynesian model, if the marginal propensity to consume were 0.75, an independent decline in investment of $10 billion would cause equilibrium income to decline ________.
Answer(s): C
The expenditure multiplier is found by M = 1/(1-MPC). Thus, here M = 1/(1-3/4) = 4. Therefore the $10 billion decrease in aggregate expenditures is magnified four times to $40 billion.
In year 1, the nation of Economica has no government debt, production is at potential, the nominal interest rate is 8.6% and the real rate is 5.2%. In year 2, the nominal rate is 11.1% and the real rate is 6.7%. Which of the following would be most likely to cause such a situation?
Answer(s): A
In this case, the real rate has increased, as well as the rate of inflation. This is most likely to be caused by a budget deficit. Deficit spending causes the real rate to rise due to government demand for debt. Inflation would also increase because government spending amounts to an increase in aggregate demand, which would shift the price level higher.
If the money velocity is 5, the amount of money in circulation $200 million and real GDP $10 million, then prices are ________.
Answer(s): D
According to the equation of exchange which is defined as MV = PY we must solve for P in the following way:($200 million x 5) = ($10 million x P). This implies that P=100.
In the 1980s, the government cut back on the tax rates in an effort to spur the economy. This led to a significant decrease in real tax revenues. A breakdown of this decrease indicated that most of the decrease came from the lower tax brackets. Tax revenues from top tax bracket actually increased despite the cut. There was a modest growth in the GDP during this period, though amongst all the industrialized nations, only Japan matched this rate. This empirical evidence indicates that:
Answer(s): B
The important part in this empirical observation is the effect of a change in marginal tax revenues. Marginal tax rates are central to the effects postulated by Supply-side economists. According to this theory, a reduction in marginal tax rates increases the incentive to work and save more by increasing the disposable income. This causes people to shift away from leisure and toward more productive work, enlarging the effective resource base and improving the efficiency with which it is utilized. The empirical evidence in the study indicate that supply-side effects can be quite important in directing the growth of an economy.
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