Question

In the Keynesian AE model, if the autonomous components of consumption, investment, government spending, and net export spending total $250 billion, and the MPS is 0.25, what will unplanned changes in inventory be when output is $1.010 trillion?

$4 billion

–$4 billion

–$5 billion

$5 billion

If real output is currently less than the natural level of real output, which of the following will result from an increase in aggregate demand?

It will make the current recessionary gap smaller.

It will make the current inflationary gap smaller.

It will make the current inflationary gap larger.

It will make the current recessionary gap larger.

What would be the impact on aggregate demand (AD) if the Canadian dollar appreciated?

AD would be unaffected.

AD could either increase or decrease.

AD would increase.

AD would decrease.

What would be the impact on aggregate demand (AD) if exports and imports both fell, but imports fell more than exports?

AD would be unaffected.

AD would decrease.

AD would increase.

AD could either increase or decrease.

During a boom, governments tend to run budget surpluses. What effect will these surpluses have on the savings supply curve?

It will result in a movement along the curve.

It will shift the curve to the right.

There will be no change in the curve.

It will shift the curve to the left.

Answer 1

Answer 1;–$5 billion.

The actual level of GDP = 1 / MPS * Autonomous Spending = $1000 billion. Thus, unplanned change in inventory is difference between actual and full employment GDP = -5 billion

Answer 2:It will make the current recessionary gap smaller.

If real output is less than natural rate of output in the economy, then increase in aggregate demand will increase real GDP in the economy and thus make the recessionary gap smaller in this case.

All other options are incorrect because expansionary policy reduces recessionary gap in the economy.

Answer 3: AD would decrease.

Appreciation of currency will reduce the value of net exports in the economy because it will increase the demand for imports and reduce the demand for exports.

Answer 4: AD would decrease..

If imports fell more than exports, then net exports in the economy will increase because net exports = Value of Exports - Value of imports and this would reduce aggregate demand in the economy.

Answer 5; It will shift the curve to the right.

This will increase government savings and leads to increase in the supply of loanable funds shifting the supply curve rightwards.