Q: Suppose the consumption function is $$C = 100 + 0.8YD$$ and net tax revenue is $$T = 0.3Y. $$What is the marginal propensity to consume out of national income?

$$0.8 \times (1 - 0.3) = 0.56$$

Q: Given $$G = 50$$ and $$T = 0.3Y$$, what is the budget balance when $$Y = 200$$?

$$T - G = 0.3 \times 200 - 50 = 60 - 50 = 10 ($$Surplus)

Q: Suppose government expenditure decreases by $$25$$ and the simple multiplier is $$1.25. $$What is the resulting change in equilibrium national income ($$\Delta Y$$)?

$$\Delta Y = 1.25 \times (-25) = -31.25$$

Question 1

In the simple macro model with government and foreign trade, which of the following correctly describes the equilibrium national income ($$Y_0) as $$shown in the diagram?

Accepted Answer

It is the point where desired aggregate expenditure (AE) equals actual national income (Y), represented by the intersection of the AE curve and the 45° line.

Question 2

Suppose the consumption function is $$C = 100 + 0.8YD$$ and net tax revenue is $$T = 0.3Y. $$What is the marginal propensity to consume out of national income?

Accepted Answer

$$0.8 	imes (1 - 0.3) = 0.56$$

Question 3

Given $$G = 50$$ and $$T = 0.3Y$$, what is the budget balance when $$Y = 200$$?

Accepted Answer

$$T - G = 0.3 	imes 200 - 50 = 60 - 50 = 10 ($$Surplus)

Question 4

If exports are given by $$X = 25$$ and imports by $$IM = 0.3Y$$, what is the equation for net exports ($$NX$$)?

Accepted Answer

$$NX = 25 - 0.3Y$$

Question 5

If the marginal propensity to spend $$z is$$ $$0.2$$, what is the value of the simple multiplier ($$SM$$)?

Accepted Answer

$$SM = \frac{1}{1 - 0.2} = 1.25$$

Question 6

Suppose government expenditure decreases by $$25$$ and the simple multiplier is $$1.25. $$What is the resulting change in equilibrium national income ($$\Delta Y$$)?

Accepted Answer

$$\Delta Y = 1.25 	imes (-25) = -31.25$$

Question 7

Which of the following events would cause the net export function ($$NX) to $$shift down and rotate up?

Accepted Answer

An appreciation of the Canadian Dollar

Question 8

If the net tax rate ($$t) $$increases, what happens to the simple multiplier ($$SM$$)?

Accepted Answer

The simple multiplier decreases

Question 9

Which of the following is an assumption of the simple macro model described in the study materials?

Accepted Answer

Prices of goods and services are constant

Question 10

If actual national income ($$Y) is $$below equilibrium, what will happen according to the AE model?

Accepted Answer

Firms will increase production, causing national income to rise

Question 11

Given $$C = 100 + 0.56Y$$, $$I = 50$$, $$G = 50$$, $$X = 25$$, $$IM = 0.36Y$$, what is the equation for aggregate expenditure ($$AE$$)?

Accepted Answer

$$AE = 225 + 0.2Y$$

Question 12

If the Canadian-dollar price of foreign currency decreases, what is the effect on the simple multiplier ($$SM$$)?

Accepted Answer

The simple multiplier decreases

Question 13

Which of the following fiscal policy actions would help close a recessionary gap?

Accepted Answer

Increase government purchases or decrease the net tax rate

Question 14

If $$AE \u003c Y at a $$given level of national income, what will happen to inventories and output?

Accepted Answer

Inventories will accumulate and firms will decrease output

Question 15

Which of the following best describes the effect of an increase in Canadian national income ($$Y) on $$imports ($$IM$$)?

Accepted Answer

Imports increase because $$IM = mY$$

Macroeconomics: Government, Trade, and Equilibrium National Income – Step-by-Step Study Guidance ch 7

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