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Free CFA-Level-I Exam Braindumps (page: 361)

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In the Keynesian model, if the multiplier is 3, then ________.

  1. MPS must be approximately .30
  2. MPC must be approximately 2/3
  3. MPC must be approximately .30
  4. MPC must be approximately 1/3
  5. MPS must be approximately 2/3

Answer(s): D

Explanation:

The expenditure multiplier is found by M = 1/(1-MPC). Therefore, 3= 1/(1-MPC) implies that MPC is .333)



If the government moves the entire tax schedule upward by 5%, the primary effect on the economy will be through:

  1. all of these answers.
  2. the demand side, wherein disposable income and private demand goes down.
  3. a decrease in the budget deficit due to increase in tax revenues.
  4. the supply side, wherein the relative attractiveness of productive activity goes down in relation to leisure and tax avoidance activities.

Answer(s): B

Explanation:

It is important to realize that "the supply side answer" is not entirely accurate. The supply side effects become important when the marginal tax rates are skewed in such a way that additional productiveactivity is discouraged due to higher taxes. When the entire tax schedule moves, the effect through the demand side is much bigger.



An economy is currently experiencing high inflation. A Keynesian would suggest which of the following to combat this:

  1. Increasing interest rates.
    II. Increasing tax rates.
    III. Decreasing government expenditure.
    IV. Raising reserve requirements.
  2. I & III
  3. I, II, III & IV
  4. I, II & III
  5. II & III

Answer(s): D

Explanation:

To control high inflation, Keynesians suggest cutting back on aggregate demand by either raising taxes or decreasing the size of the budget deficit by decreasing government expenditures. They thus recommend a restrictive fiscal policy to combat high inflation. Note that changing the reserve requirement is not an option available to the Federal government in the U.S. because the reserve requirement is set by an independent body, The Federal Reserve.



According to monetarists, ________ is a primary source of economic instability:

  1. fluctuations in aggregate demand for money
  2. erratic monetary policy
  3. fluctuations in aggregate demand for money and fluctuations in aggregate consumption demands
  4. fluctuations in aggregate consumption demands

Answer(s): B

Explanation:

Monetarists believe that monetary policy has a powerful influence on the economy but also realize that there are lengthy and unpredictable time lags between the implementation of a monetary policy and the realization of its primary effects. Hence, they reject the active use of discretionary monetary policy for controlling the economy, prescribing a steady growth in money supply to track the real growth rate.






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