Question

1. Which of the following marginal propensities to consume results in the flattest consumption line in an aggregate expenditures model? 0.4 0.8 1.0 0.5 2. What does the “paradox of thrift” say? People who consume too much will go broke. An economy that saves too much can end up with lower total savings. People who save too little are harming the economy. Businesses that are greedy will make the most profit. 3. The 45-degree line in the Keynesian model represents a set of points where _____ equals _____. saving; investment disposable income; consumption saving; consumption disposable income; saving 4. If business expectations become less favorable, what will likely happen to the AD curve? AD shifts right. AD shifts left. AD decreases to zero. AD does not shift. 5. In a depressed economy with a MPC of 0.75, what effect will a $100 increase in government spending have on equilibrium GDP? It will raise it by $400. It will raise it by $750. It will reduce it by $250. It will raise it by $250. 6. The collapse of home values in 2008 led to _____ in Americans' saving rates, shifting aggregate demand to the _____. a decrease; left an increase; left an increase; right a decrease; right 7. Which of the following fiscal policies would least likely result in an increase in aggregate supply? an increase in grants to fund higher education an increase in infrastructure spending a reduction in marginal tax rates an increase in business regulations 8. Which of the following requires the government to balance its budget over the business cycle? functional finance annually balanced budget biannually balanced budget cyclically balanced budget 9. Social Security and Medicare are considered _____ liabilities and are expected to _____ over the next generation. funded; fall unfunded; rise unfunded; fall funded; rise 10. What function of money is BEST served by money that can last for hundreds of years? keepsake of assets unit of account medium of exchange store of value

Answer 1

1. 0.4
(slope of consumption line is marginal propensity to consume. Lower the marginal propensity to consume, flatter the consumption line)

2. An economy that saves too much can end up with lower total savings.
(Because as everyone saves more, demand will be reduced and as a result savings will decrease)

3. saving; investment
(On this line, output equals aggregate expenditure. Output = Consumption + Savings and aggregate expenditure = Consumption + investment so output equals aggregate expenditure implies savings equal investment)

4. AD shifts left
(As business expectations become less favourable, investment will decrease and demand will decrease)

5. It will raise by $400
Change in income = change in government expenditure/(1-mpc) = 100/(1-0.75) = 100/0.25 = 400