Figure 10.2 AS AD2 ADO ADI OF REAL OUTPUT (S billions per year) Suppose the MPC

Question

Figure 10.2 AS AD2 ADO ADI OF REAL OUTPUT (S billions per year) Suppose the MPC and MPI in the economy in Figure 10.2 equal 0.9 and 0.1 respectively and the shift from ADo to ADI was caused by a decrease in investment of $30 billion. What will the total decrease in aggregate demand be (i.e. ADo to AD2) as a result of the initial $30 billion decrease? A) $37.5 billion. B) $130 billion. C) $150 billion. D) $240 billion. 9. 10 Keynesians would recommend: A) Higher taxes when there is excess aggregate demand. B) Higher government expenditures when there is a shortfall in aggregate demand. C) Reliance on government rather than the market for adjustment when an undesirable level of aggregate demand occurs. D) All of the above. 11. Which of the following fiscal policies would cause a decrease in aggregate exenditures? A) An increase in transfer payments and an increase in government spending. B) An increase in transfer payments and a decrease in taxes C) A decrease in taxes and an increase in government spending. D) An increase in taxes and a decrease in government spending Which of the following would cause both an increase in the price level and an increase in real output? A) A tax hike. B) An increase in transfer payments. 12. C) D) A decrease in production costs. All of the above. Suppose the consumption function is C- 100+ 0.90Y. If the government stimulates the economy with $100 billion in increased government purchases, aggregate expenditure would rise by: A) $10 billion. B) $900 billion. C) $1,000 billion. D) $800 billion. 13. 14. If the multiplier is 5 and a change in fiscal policy leads to a $500 million decrease in total spending, we can conclude that: A) Government spending decreased by $500 million. B) Taxes increased by S500 million C) Taxes decreased by $100 million D) Government spending decreased by $100 million.

Explanation / Answer

9.

Correct Answer is : $300 billion

Decrease in aggregate demand = 30*(1/(1-MPC)) = 30*(1/(1-.9)) = $300 Billion

(data of the question is changed, but the alternative answers are not changed of the question)

10.

D

Keynes proposed for tax manipulation (increase / decrease), government spending (increase / decrease) ad proactive government interventions to bring the economy on the track of growth. It never relied upon the self-correcting market forces.

11.

D

Increase in tax, reduces and disposable income and reduction in government spending both, will contribute to the decrease in demand and aggregate expenditure will come down.

12.

B

Increase in transfer payments, lead to the increase in aggregate demand. As a result, the supply will increased to cater the increased demand, but at a higher price.

13.

C

Rise in Aggregate expenditure = 100 *(1/(1-MPC))

Rise in Aggregate expenditure = 100*(1/(1-.9) = $1000 Billion

14.

D.

Decrease in the government spending = 500/multiplier = 500/5 = $100 Million

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