1.Suppose the government increases its spending on warships by $25B, marginal pr

Question

1.Suppose the government increases its spending on warships by $25B, marginal propensity to save is 0.40 and the marginal propensity to import is zero.

11.1.  

What is the value of the spending multiplier?

Please enter 1 digit after the decimal point.

2.Suppose the government increases its spending on warships by $25B, marginal propensity to save is 0.40 and the marginal propensity to import is zero.

11.2.  

How much will the AD curve shift after all multiplier effects have occurred, assuming no crowding-out effect?

$____ billion
Please enter 1 digit after the decimal point.

3.When the economy is in long-run equilibrium (at full employment), expansionary fiscal policy will

A.  increase the price level in the short run but not in the long run

B.  increase the price level in the short run and in the long run

C.  increase both the price level and real GP in the short run, but leave them both unchanged in the long run

D.  increase both the price level and real GDP in the short run and in the long run

4.If the goal of Canadian macroeconomic policy is to close an inflationary gap without hurting our export industries, then the best policy to achieve this would be

A.  open-market purchases of government bonds by the Bank of Canada

B.  an increase in the target overnight rate

C.  a reduction in government spending on goods and services

D.  a decrease in taxes

5.A change in taxes or transfer payments affects consumption through a change in:

A.  disposable income

B.  the marginal propensity to save

C.  investment

D.  government spending

1.Suppose the government increases its spending on warships by $25B, marginal propensity to save is 0.40 and the marginal propensity to import is zero.

Explanation / Answer

Question (1).Multiplier= 1 / 1- MPC

MPC= 1- MPS = 1 - 0.40= 0.60

Multiplier= 1/ 1 - 0.60= 2.5

Question (2). To find change in AD use the formula given below:

Change in GDP= Change in AD * 1/1-MPC

Change in GDP is $25 billion ( increase in spending on warships)

1/ 1- MPC = 2.5

Using formula : 25= change in AD x 2.5

Change in AD= 25/2.5 = 10

Change in AD= $10 billion

Question (3). When the economy is in long run equilibrium (full employment) expansionary fiscal policy will- increase the price level and GDP in the short run but leave them both unchanged in the long run.

Question (4). If the Canadian macroeconomic policy is to close to close an inflationary gap without hurting the export industries, then the best policy to achieve this would be to - reduce government spending on goods and services.

Question (5). A change in taxes or transfer payments affects consumption through a change in - disposable income.

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