Question

q-1 Which of the following statements is true?

a Trade barriers in the 1930s contributed to the Great Depression.

b With the addition of government and net exports to aggregate expenditure (AE), the economy becomes a mixed, closed economy.

c An increase in Net Taxes (T) has an indirect negative effect on aggregate expenditure (AE) because the increase in T reduces disposable income first, and then consumption falls by an amount equal to the increase in T times the MPC, that is, ΔC = -b x ΔT.

d All of the above.

e Only a) and c)

q-2 Which of the following statements is true?

a When we have a government, changes in either G or T will have a multiplying effect on the economy.

b Expenditure gaps arise because equilibrium GDP and real GDP do not always match.

c A recessionary expenditure gap ("insufficient total spending") exists when aggregate expenditure falls short of full-employment GDP. In this situation output is "low" and unemployment is "high".

d All of the above.

e Only a) and b)

q-3 Which of the following statements is true?

a. An inflationary expenditure gap ("excessive total spending") exists when aggregate expenditure exceeds full-employment GDP.

b Possible solutions to an inflationary expenditure gap include increasing G, reducing T, or a combination of both.

c In the expenditure model we are studying, if GDP cannot expand, pure demand-pull inflation will occur.

d All of the above.

e Only a) and c)

please provide with a brief explanation.

Answer 1

1) Here statements a and c are correct. Trade barriers in the 1930s contributed to the Great Depression. An increase in Net Taxes (T) has an indirect negative effect on aggregate expenditure (AE) because the increase in T reduces disposable income first, and then consumption falls by an amount equal to the increase in T times the MPC, that is, ΔC = -b x ΔT. With the addition of government and net exports to aggregate expenditure (AE), the economy becomes a mixed, open economy. Hence the answer is option (e).