Question

Please explain correct answer

11. Which of the following is the component of GDP that tends to fluctuate the most from year-to-year in percentage terms?

a. Consumption

b. Investment

c. Government spending

d. Money supply

12. Assume that the economy starts from the long-run equilibrium. If the Federal Reserve increases the money supply, then _____________ increase(s) in the short-run and ____________ increase(s) in the long-run.

a. Prices, output

b. Output, prices

c. Output, output

d. Prices, prices

13. In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy:

a. Increases the amount of money in the economy

b. Changes income, which changes consumption, which further changes income

c. Is government spending, and therefore, more powerful than private spending

d. Changes the interest rate

14. According to the Keynesian cross analysis, if the marginal propensity to consume is 0.8, and government expenditures are increased by 100, then, holding other variables constant, equilibrium income will rise by.

a. 0

b. 80

c. 100

d. 500

15. Along an IS curve, all of the following are true except:

a. Planned expenditures equal actual expenditures

b. Planned expenditures equal income

c. The demand for real money balances equals the supply of real money balances

d. Savings equals investment

Answer 1

1) Of all the components of Aggregate demand (GDP), Investment is the most volatile. It gets affected by the interest rates, business confidence, investment policy etc. In all these the business confidence i.e. the business sentiments lead to the greatest fluctuation. It could turn bullish or bearish anytime. The correct answer to this question is "B".

2) If the economy is at potential output i.e. long run equilibrium then an increase in the money supply will increase the prices in the short run and increase the output in the long run. An increased money supply will give extra demand potential in hand of people because the output is already at full potential it will increase the inflation in the short run and in the long run, the output will increase. The correct answer is "A".

3) "B"

Government spending or fiscal policy changes the income in hand of the people. They demand more and increased expenditure increase the income of people again. MOre the government spends the more income increases and it goes on increasing the income further. This is Multiplier effect.

4) If the MPC is just 0.8 it means the people are spending only 0.8 out of every one dollar earned. If government spend $100 people will save 0.2 or $20 and spend only 80. Increasing the Equilibrium by only 80.

5) "C"

The demand for real money balance equals the supply of real money balance is correct for the LM curve, not the IS curve.