(1) If businesses predict an upcoming recession, they will increase their invest

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(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

Explanation / Answer

1) False. They will postpone their investment until the business pessimism impedes

2) Multiplier is 1/1-0.9 = 10. Hence A rises by 2000 and Y rises by 2000*10 = 20000. Autonomous spending increases by $2,000, and GDP rises by $20,000.

3) An increase in government spending will increase autonomous spending and this, via multiplier effect increase GDP

4) If the rate of savings is low, the effect of the increase will be greater than it otherwise would have been.

5) True

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