Question

Question 5

Consider a simple Keynesian model without government spending or taxation. Suppose autonomous consumption is 500 and autonomous investment is 300 and the equilibrium level of output is 2400.Then the marginal propensity to consume is:

a. 2/3

b. 3/5

c. Uncertain,not enough information

d. 3

Question 6

Suppose real GDP is growing at 4%per year and velocity is stable.According to the quantity theory of money,a central bank that wants to achieve inflation of 2%per year should:

a. Shrink the money supply at 2%per year

b. Expand the money supply at 2% per year

c. Keep the money supply constant

d. None of the other options

Question 7

Over time,the amount of government debt can decrease and yet the debt-to-GDP ratio can increase:

A. If GDP is growing at a rate faster than the decrease in the amount of government debt

B. None of the other options

C. If the rate at which GDP falls is faster than the rate at which government debt falls

D. If the government is running a sufficiently large(total)budget surplus

Question 8

In a(n)______open market operation,the Reserve Bank______ the money supply by making an open market______of bonds in the overnight interbank market.

A. expansionary,increases,sale

B. contractionary,reduces,purchase

C. expansionary,reduces,purchase

D. contractionary,reduces,sale

Answer 1

5. In a simple Keynesian model, Y = Consumption + Investment.

Or 2400= 500 + bY + 300 where b is the propensity to consume.

1600 = 2400b or b = 1600/2400 = 0.67 or 2/3.

Thus, the correct answer is (a).

6. The correct answer is (b) expand the money suppply at 2% per year. This is because the quantity theory of money says that the price level or inflation directly varies with the change in money supply. Thus, if we want to maintain inflation at 2%, we need to expand the money supply at 2% rate.

7. The correct answer is C. If the rate at which GDP falls is faster than the rate at which government debt falls. This is because the increase in debt to GDP ratio implies that the amount of debt as the percentage of GDP has increased. The only explanation for this in case the debt has fallen is that the GDP has fallen even faster.

8. The correct answer is D. This is because a contractionary open market operation is always intended to reduce the money supply. Moreover, the money supply will reduce if the central bank will sell the bonds and reduce the excess reserves of the banks through which they create more money.