Question

1. an increase in government spending will have a greater effect on aggregate output if ______. Check all correct choices
= the economy begins to trade
= the resulting increase in the aggregate price level is smaller
= households save less out of every additional dollar of disposable income
= income is taxed at a higher rate

2. if the bank of canada's target for the overnight rate is 1.75% while the actual overnight rate is 1.70%, the appropiate monetary policy for the bank of canada would be to buy government securities in the open market

TRUE
FALSE

3. Which of the following is true?

= an economy's employment rate and level of aggregate output move in opposite directions
= when the number of jobs created by the economy equals the number of people in the labour force. it is normal to have some unemployment
= an economy is said to have full employment when there is no structural or frictional employment
= the unemployment rate may fall, increase or stay the same when the economy is creating more jobs

4. MPS= 0.2 there are no income taxes or transfers, economy does not trade. price level is constant. due to a fall in autonomus investment, real GDP falls from $6,000 million to $5.000 million. the reduction in autonomous investment was equal to???

Answer 1

1 - Option B, Option C

Resulting increase in aggregate price level is smaller

Household save less out of increase in each dollar of additional income

The greater MPC ensures greater consumption , this will have a good impact. If price level will not rise much , value of money will not fall. This will also be a positive effect. The other options are not the positive effect of the increase in government spending

2 - False

The Securities should be sold in market and not bought. This is because buying them will further reduce the discount rate , but it needs to be increased.

3 - Option B

When the number of jobs created by economy equals the number of people in labor force , it is normal to have some level of unemployment.

This is called the full level of employment , but the frcitional and structural unemployment will still exist.

Employment growth and output growth move in same direction and not opposite , when more jobs are created , unemployment rate falls. Hence only option B will be true.

4 - MPC = 0.2

Multiplier = 1/(1-0.2)

= 1/0.8

= 1.25

Fall in GDP = $ 1000 million

Reduction in investment = 1000/1.25

= $ 800 million

Hence the autonomous investment has decreased by $ 800 million