1.Suppose that the Price level = 120, Supply of Money = $20 billion, and Real GD

Question

1.Suppose that the Price level = 120, Supply of Money = $20 billion, and Real GDP = $4 billion. If the velocity of money stays the same but Real GDP increases by 20%, what will happen to the price level if the supply of money increases by $10 billion?

a. It will increase to 125

b. It will increase to 132

c. It will increase to 144

d. It will increase to 150

e. It will increase to 155

2.Assuming no imports or taxes, if output increases by $16 billion when government spending increases by $2 billion, what is the Marginal Propensity to Consume in the economy?

Select one:

a. .320

b. .425

c. .750

d. .875

e. .920

3.According to Keynesians, what should the government do if inflation is relatively high and unemployment is relatively low?

Decrease consumer confidence and appreciate the currency

b. Increase taxes and lower government spending

c. Decrease the supply of money and raise interest rates

d. Cut down corporate taxes and give incentives for investment

e. Do nothing

4. Which of the following statements would be usually true if the federal government were required to balance its budget every year?

Government spending would decrease when unemployment rises

b. Government revenue would increase when unemployment rises

c. Government spending would decrease during expansions

d. Government revenue would decrease during expansions

e. None of these answers is correct

Explanation / Answer

1. According to Quantity theory of money:

MV = PY

20 billion x V = 120 x $ 4 billion

V = 24

After change in values:

MV = PY

30 billion X V = P' x 4.8 billion

V is same; so V = 24

30 billion x 24 = P' x 4.8 billion

P' = (30 billion x 24)/4.8 billion = 150

So, Price level will increase to $ 150.

d. It will increase to 150

2. Change in Y = Change in G / (1 - MPC)

$ 16 billion = $ 2 billion / (1 - MPC)

1 - MPC = 1/8

1 - MPC = 0.125

MPC = 1 - 0.125 = 0.875

Answer is d) 0.875

4. c. Government spending would decrease during expansions

When government need to balance then it will reduce its spending and increases taxation.

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