Question

1. If the multiplier is 5 and a change in fiscal policy leads to a $500 million decrease in total spending, we can conclude that:

            A) Government spending decreased by $500 million.

            B) Taxes increased by $500 million.

            C) Taxes decreased by $100 million.

            D) Government spending decreased by $100 million.

2. Which of the following shifts, ceteris paribus, will cause an increase in both unemployment and inflation?

            A) An increase in aggregate demand.             C)   An increase in aggregate supply.

            B) A decrease in aggregate demand.             D)   A decrease in aggregate supply.

3. Given that autonomous consumption equals $1000, income equals $20,000, and the MPC equals 0.90, the level of:

            A) Saving equals $4,000.                                C)   Consumption equals $17,000.

            B) Consumption equals $19,000.                    D)   Consumption equals $16,000.

4. Assume the MPC is 0.80. The change in GDP because of an increase in Government spending of $150 billion would be:

            A) $75 billion.              B) $150 billion.            C) $600 billion.            D) $750 billion.

5. How might macroeconomic equilibrium be affected by the following events. Describe in words or draw a well labeled diagram.

            a) a stock market crash                                                b) the election of a new president

            c) severe food crop failures in Canada d) a spike in oil prices

Complete the following table:

Real Output Demanded (in $ billions) by:
Price Level	Consumption	Investment	Government	Net Exports	Agg’t Demand	Agg’t Supply
140	90	50	50	6		300
130	100	70	50	10		270
120	110	80	50	10		250
110	150	108	50	12		230
100	170	110	50	14		200

a) What is the equilibrium level of GDP?

b) What is the equilibrium price level?

c) If full employment occurs at real GDP = $230 billion, what kind of GDP gap exists?

d) How large is that gap?

e) Which macro problem exists here?

Answer 1

1. If the multiplier is 5 and a change in fiscal policy leads to a $500 million decrease in total spending, we can conclude that

            D) Government spending decreased by $100 million.

Explanation
Change in Output = Multiplier x Change in Government Spending

2. Which of the following shifts, ceteris paribus, will cause an increase in both unemployment and inflation?

D)   A decrease in aggregate supply.

Explanation
An adverse supply shock would result in stagflation.

3. Given that autonomous consumption equals $1000, income equals $20,000, and the MPC equals 0.90, the level of   

            B) Consumption equals $19,000.   
Explanation

Consumption = 1000 + 0.9x20,000 = 19,000

4. Assume the MPC is 0.80. The change in GDP because of an increase in Government spending of $150 billion would be:
   D) $750 billion.

Explanation
Change in GDP = 1/(1-MPC) x 150 = 750 billion