1.Suppose the government increases its spending in a closed economy by $2.5 bill
ID: 2439101 • Letter: 1
Question
1.Suppose the government increases its spending in a closed economy by $2.5 billion. If the crowding-out effect exceeds the multiplier effect, then the AD curve will only shift to the right by the $2.5 billion in government spending.
True
False
2.
Which of the following is an automatic stabilizer?
A. spending on public schools
B. military spending
C. spending on old age pensions
D. spending on employment insurance benefits
3.
Suppose the economy is in a recession and policymakers estimate that AD is $10 million short of the amount necessary to achieve potential output i.e. if the AD curve would shift rightward by $10 million, the recessionary gap could be closed. If the marginal propensity to consume is 0.75, the economy does not trade and there is no crowding out, by how much should the government increase its spending to close the recessionary gap?
$___ million
Please enter 1 digit after the decimal point.
4.
Suppose the economy is in a recession and policymakers estimate that AD is $10 million short of the amount necessary to achieve potential output i.e. if the AD curve would shift rightward by $10 million, the recessionary gap could be closed. If the marginal propensity to consume is 0.75, the marginal propensity to import is 0.25 and there is no crowding out, by how much should the government increase its spending to close the recessionary gap?
$ million
Please enter a whole number, with no decimal point.
5.
If a fall in disposable income from $40 000 to $30 000 causes consumption spending to fall by $8 000, then the marginal propensity to consume equals
A. -0.80
B. 1.25
C. 0.20
D. 0.80
1.Suppose the government increases its spending in a closed economy by $2.5 billion. If the crowding-out effect exceeds the multiplier effect, then the AD curve will only shift to the right by the $2.5 billion in government spending.
True
False
Explanation / Answer
1) False (AD curve would not shift to the right)
2) D - spending on employment insurance benefits
3)
multiplier = 1/(mps) = 1/(1-0.75) = 4
Increase in government spending x 4 = $ 10 mn
Increase in government spending = $ 2.5 mn
4)
multiplier = 1/(mps + mpm) = 1/(1-0.75 + 0.25) = 2
Increase in government spending x 2 = $ 10 mn
Increase in government spending = $ 5 mn
5) MPC = Change in consumption spending/ Change in disposable income = 8000/10000 = 0.8
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