(1) If businesses predict an upcoming recession, they will increase their invest
ID: 1136761 • Letter: #
Question
(1) If businesses predict an upcoming recession, they will increase their investments. true false
(2) If the marginal propensity to consume is 0.9, what happens to GDP if you dip into your savings to buy a $2,000 stereo system? Autonomous spending increases by $1,800, and GDP rises by $18,000. Autonomous spending increases by $2,000, and GDP rises by $20,000. Autonomous spending increases by $1,800, but GDP remains unchanged. Autonomous spending increases by $2,000, but GDP remains unchanged.
(3) Which of the following policy measures would help close a recessionary gap? An increase in the rate of savings An increase in government spending A decrease in government spending A decrease in the marginal propensity to consume
(4) How does the household savings rate affect the impact on output of an increase in government spending? If the rate of savings is low, the effect of the increase will be greater than it otherwise would have been. If the rate of savings is high, the effect of the increase will be greater than it otherwise would have been. If the increase in government spending is high, the effect will be large. It has no effect.
(5) Because savings are a leakage out of the circular flow model, the only way to maintain balance is the borrowing of savings by businesses for investment. true false
(6) If the level of imports remains constant and the marginal propensity to consume is 0.75, what happens to output when exports increase from $550 to $750 million? Output falls by $200 million. Output rises by $200 million. Output falls by $800 million. Output rises by $800 million.
(7) What would happen if the government increased its spending in response to an increase in consumer savings? The increase in government spending would cause output to rise by even more than it would as a result of the increase in savings. The increase in government spending would offset (fully or partially) the decline in consumer spending. The increase in government spending would cause investment spending to fall, causing output to decline. None of the above.
(8) An increase in taxes reduces aggregate expenditures by an amount equal to the change in taxes multiplied by b. the change in taxes multiplied by (b/1 b). the change in taxes multiplied by (1/1 b). the change in taxes.
(9) According to Say’s Law, supply creates demand. true false
(10) Which of the following statements regarding aggregate expenditures is correct? Consumer spending, or consumption, decreases as consumer income increases. When the interest rate is low, investment spending increases. If the exchange rate rises, foreigners will increase their purchases of U.S. goods and services. Government spending depends on aggregate income.
Explanation / Answer
1) The statement is false because with recession,the businesses will decrease their investments to prevent more losses as recession contracts the economy leading the demand for goods and services to fall.
2)The multiplier formula is as follows- 1/1-mpc
so, 1/1-0.9 = 10
Every $1 adds $10 and GDP increases by 10*2000 = 20000
Therefore,option (B)
3) To close a recessionary gap,government will use the policy of increasing the government spending as it will cause aggregate demand to increase.option(B)
4) The option (B) is correct as if the rate of savings is high,the effect of the increase will be greater than it otherwise would have been.
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