Q: If the marginal propensity to consume ($$Cm) is 0.5$$, and autonomous consumption ($$C_0) is$$ $$400$$, what is the consumption function if taxes ($$T_0) $$are $$100$$?

$$CP = 400 + 0.5 \times (Y - 100)$$

Q: Which of the following is the correct formula for equilibrium output ($$Y) in $$the simple Keynesian model with taxes?

$$Y = \frac{C_0$ - Cm \times T_0$ + I_0$ + G_0$ + NX_0$}{1 - Cm}$$

Question 1

Which of the following best explains why the short-run aggregate supply (AS) curve slopes upward?

Accepted Answer

Because as the price level rises and the money wage rate is constant, the real wage rate falls, increasing employment and output.

Question 2

Suppose the marginal propensity to consume ($$Cm) is 0.6. If $$the government increases spending by $$\100$ million, by how much will equilibrium output (Y$) increase, assuming no other changes?

Accepted Answer

$$\250$ million

Question 3

If the price level rises, what is the immediate effect on aggregate demand (AD)?

Accepted Answer

Aggregate demand decreases, resulting in a movement upward along the AD curve.

Question 4

Given the consumption function $$CP = C_0$ + Cm 	imes (Y - TP)$$, if $$C_0 = 500$, Cm = 0.7$, Y = 2000$, and TP = 400$, what is planned consumption (CP$)?

Accepted Answer

$$1,380$$

Question 5

Which of the following would cause a rightward shift of the aggregate supply (AS) curve?

Accepted Answer

A decrease in the money wage rate

Question 6

If the government wants to close a recessionary gap, which fiscal policy action is most appropriate?

Accepted Answer

Increase government spending or decrease taxes

Question 7

Suppose $$C_0 = 620$, Cm = 0.5$, T_0$ = 250$$, $$I_0 = 220$, G_0$ = 330$$, and $$NX_0 = 30$. What is the equilibrium output (Y$)?

Accepted Answer

$$2,150$$

Question 8

If the marginal propensity to consume ($$Cm) is 0.8$$, what is the value of the aggregate demand multiplier?

Accepted Answer

$$5$$

Question 9

Which of the following scenarios describes a budget deficit?

Accepted Answer

Government revenue from taxes is less than government expenditure

Question 10

If the equilibrium output ($$Y) is $$less than potential output ($$Y^*$$), what type of gap exists and what is the appropriate fiscal policy response?

Accepted Answer

Recessionary gap; increase government spending or decrease taxes

Question 11

If the marginal propensity to consume ($$Cm) is 0.75 $$and the government wants to increase output by $$\400$, by how much should it increase government spending ($$\Delta G$)?

Accepted Answer

$$\100$

Question 12

Which of the following best describes the self-correction mechanism in the macroeconomy?

Accepted Answer

When output is above or below potential, prices and wages adjust to restore equilibrium at potential GDP.

Question 13

If the marginal propensity to consume ($$Cm) is 0.8 $$and taxes are increased by $$\50$, by how much will equilibrium output (Y$) change?

Accepted Answer

Decrease by $$\200$

Question 14

Suppose the government wants to close an expansionary gap by $$\500$ and the marginal propensity to consume (Cm$) is 0.6. By how much should taxes be increased?

Accepted Answer

$$\1$$,250$

Question 15

Which of the following would NOT shift the aggregate demand (AD) curve?

Accepted Answer

A change in the price level

Question 16

If the marginal propensity to consume ($$Cm) is 0.5$$, and autonomous consumption ($$C_0) is$$ $$400$$, what is the consumption function if taxes ($$T_0) $$are $$100$$?

Accepted Answer

$$CP = 400 + 0.5 	imes (Y - 100)$$

Question 17

If the government increases both taxes and government spending by $$\100$ million and the marginal propensity to consume (Cm$) is 0.8, what is the effect on equilibrium output (Y$)?

Accepted Answer

Equilibrium output increases by $$\100$ million

Question 18

Which of the following is the correct formula for equilibrium output ($$Y) in $$the simple Keynesian model with taxes?

Accepted Answer

$$Y = \frac{C_0$ - Cm 	imes T_0$ + I_0$ + G_0$ + NX_0$}{1 - Cm}$$

Question 19

If the marginal propensity to consume ($$Cm) is 0.9$$, what is the effect on the multiplier and the economy's sensitivity to changes in autonomous spending?

Accepted Answer

The multiplier is large, so the economy is highly sensitive to changes in autonomous spending.

Question 20

Suppose the economy is at full employment and the government increases spending. What is the likely short-run effect?

Accepted Answer

An inflationary (expansionary) gap will emerge, with output above potential GDP.

Aggregate Supply, Aggregate Demand, Macroeconomic Equilibrium, and Fiscal Policy

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