Question

Test 4 #1-5

(1)
If businesses predict an upcoming recession, they will increase their investments. true false
(2)
If the marginal propensity to consume is 0.9, what happens to GDP if you dip into your savings to buy a $2,000 stereo system? Autonomous spending increases by $1,800, and GDP rises by $18,000. Autonomous spending increases by $2,000, and GDP rises by $20,000. Autonomous spending increases by $1,800, but GDP remains unchanged. Autonomous spending increases by $2,000, but GDP remains unchanged.
(3)
Which of the following policy measures would help close a recessionary gap? An increase in the rate of savings An increase in government spending A decrease in government spending A decrease in the marginal propensity to consume
(4)
How does the household savings rate affect the impact on output of an increase in government spending? If the rate of savings is low, the effect of the increase will be greater than it otherwise would have been. If the rate of savings is high, the effect of the increase will be greater than it otherwise would have been. If the increase in government spending is high, the effect will be large. It has no effect.
(5)
Because savings are a leakage out of the circular flow model, the only way to maintain balance is the borrowing of savings by businesses for investment. true false

Answer 1

Solution -

1. If businesses predict an upcoming recession, they will increase their investments.

Given Statement Is False

Reason - If the economy is expected to fall into a recession, businesses will cut back on their investments because of decreasing profit opportunities during a recession.

2.if the marginal propensity to consume is 0.9, what happens to GDP if you dip into your savings to buy a $2,000 stereo system?

Option b. Autonomous spending increases by $2,000, and GDP rises by $20,000. is Correct Option

Reason -

Autonomous spending is the initial increase in spending. In this example, the $2,000 is the increase in autonomous spending. If the marginal propensity to consume is 0.9, the owner of the stereo store spends 90% of what he earns on the sale of the stereo, or $1,800. The incomes of the people from whom he buys things will increase their consumption, and so forth and so on. Output will rise by 1/1 − b (or 10) times the initial increase in spending.

3,Which of the following policy measures would help close a recessionary gap?

Option B.An increase in government spending​ is Correct Option.

4.How does the household savings rate affect the impact on output of an increase in government spending?

Option A.If the rate of savings is low, the effect of the increase will be greater than it otherwise would have been. is correct option.

5.Because savings are a leakage out of the circular flow model, the only way to maintain balance is the borrowing of savings by businesses for investment.

given Statement is True.

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