TRUE OR FALSE
If the statement is true, skip it. If the statement is false, write a sentence that explains why the statement is false.
1. The investment schedule is a schedule of planned investment rather than actual investment.
2. In an economy without a government or foreign sector, actual saving will always equal actual investment.
3. If Vietnamese Disposable Income were to decline by 5 trillion VN dong, households would reduce their consumption by less than 5 trillion VN dong.
4. A decrease in the equilibrium interest rate will tend to reduce the equilibrium level of income.
5. Among the components of autonomous expenditure are: Investment, government purchases of goods and services and imports.
6. Induced aggregate planned expenditure is equal to induced consumption plus all exports.
7. An increase in the Vietnamese marginal propensity to import would make make planned total spending in Viet Nam less responsive to changes in GDP.
8. An increase in the desire of Vietnamese households to save will tend to increase the level of autonomous expenditure.
9. Though increased savings by Ms. Vy would raise her own income, it will lower income for the Vietnamese economy as a whole.
10. An increase in autonomous spending will increase the slope of the Vietnamese aggregate expenditure curve.
11. The net exports of Viet Nam is equal to Viet Nam's exports plus Viet Nam's imports.
12. If Viet Nam's net exports were to increase, this would tend to increase the equilibrium level of Viet Nam's GDP.
13. An increase in Japanese incomes would tend to reduce Viet Nam's net exports to Japan.
14. A higher price level would tend to shift the Vietnamese aggregate expenditure curve upward.
15. The investment multiplier in Viet Nam is equal to 1 divided by the Marginal Propensity to Consume.
16. The larger the Marginal Propensity to Consume in Viet Nam, the larger the investment multiplier.
17. The equilibrium national income of Viet Nam can be calculated by multiplying the level of induced consumption spending by the multiplier.
18. The multiplier effect occurs because a change in autonomous spending causes an additional change in induced expenditure.
19. The autonomous spending multiplier is equal to 1 divided by the slope of the aggregate planned expenditure curve.
20. An increase in the Vietnamese Marginal Propensity to Save would increase the size of the investment multiplier in Viet Nam.
21. In Viet Nam, the government spending multiplier is larger than the export multiplier.
22. A tax based on the property that Mr. To owns would be an example of an autonomous tax.
23. An increase in autonomous transfer payments to Ms. Thu will cause a change in autonomous consumption expenditure by causing a change in disposable income.
24. The autonomous transfer multiplier is equal to the autonomous expenditure multiplier multiplied by the marginal propensity to save out disposable income.
25. The autonomous tax multiplier will be smaller than the autonomous expenditure multiplier and will have the opposite sign.
26. The autonomous tax multiplier will be larger than the autonomous transfer multiplier and will have the same sign.
27. A balanced budget change in fiscal policy refers to an increase in government expenditure that is balanced by an equal reduction in autonomous taxes.
28. The balanced budget multiplier is equal to the marginal propensity to save out of disposable income multiplied by the autonomous expenditure multiplier.
29. If the government of Viet Nam was required to maintain a balanced budget, it would require large increases in government spending to offset changes in private spending because the balanced budget multiplier is very small.
30. If the Vietnamese marginal propensity to save were .3, an increase of autonomous taxes of 20 trillion VN dong would reduce autonomous consumption by 14 trillion VN dong.
31. If the government of Viet Nam reduces autonomous taxes by 10 trillion VN dong and the Vietnamese marginal propensity to save is .4, the equilibrium level of Vietnamese GDP would rise by 25 trillion VN dong. (Assuming all other things remained constant.)
32. If the government of Viet Nam increases autonomous transfer payments, that would have no effect on the equilibrium level of output. (Assuming all other things remained constant.)
33. Other things being equal, the lower the tax rate imposed by the government of Viet Nam, the higher will be the equilibrium level of Vietnamese GDP.
34. It would not be possible for the Government of Viet Nam to conduct fiscal policy while maintaining a balanced budget.
35. The balanced budget multiplier is always equal to one.
36. Taxes and transfer payments that increase or decrease depending on the level of real GDP are automatic stabilizers.
37. An increase in the tax rate in Viet Nam would tend to increase the autonomous expenditure multiplier.
38. An increase in the tax rate in Viet Nam would tend to increase the slope of the aggregate planned expenditure curve.
39. An increase in the tax rate in Viet Nam would reduce the fluctuations in Vietnamese GDP.
40. The marginal propensity to import is like a built in stabilizer because it reduces fluctuations in GDP.
41. Income taxes are automatic stabilizers.
42. The automatic stabilizers cannot prevent recessions or inflations but they can reduce their severity.
43. The automatic stabilizers tend to increase the size of the autonomous spending multiplier.
44. All other things remaining constant, an increase in Viet Nam's real GDP will tend to cause an increase in its trade deficit.
45. Other things remaining constant, the government budget deficits in Viet Nam will tend to increase as real GDP increases and to decrease as real GDP decreases.
46. An increase in Viet Nam's real GDP will tend to increase its trade deficit and reduce its government budget deficit.
47. It is easy for most governments to carry out fiscal policy because they know precisely the value of the multipliers and the level of potential GDP in their nations.
48. Each point on Viet Nam's aggregate demand curve corresponds to an equilibrium level of aggregate planned expenditure.
49. An increase in autonomous spending in Viet Nam will tend to shift Vietnam's aggregate demand curve to the left.
50. In short-run equilibrium, wages can change but the prices of outputs cannot change.
51. In the intermediate range of Viet Nam's short-run aggregate supply curve, higher prices result in a higher level of real GDP.
52. Prices act like automatic stabilizers, they tend to reduce fluctuations in GDP.
53. If the Vietnamese economy is in long-run equilibrium and there is an increase in autonomous spending, Vietnam's aggregate demand curve will shift to the right and prices will rise. And this will cause Vietnamese money wage rates to rise.
54. If the Vietnamese economy is in long-run equilibrium, the long-term effect of an increase in autonomous spending is to increase the Vietnamese price level with no change in real GDP.
55. The equilibrium level of income in Viet Nam is the level at which there is full employment.
56. The existence of a recessionary gap in an economy implies that there is less than full employment.
57. If prices are free to adjust to the forces of Supply and Demand, the Vietnamese multiplier will be smaller than if prices were fixed.
58. An increase in Viet Nam's real GDP will tend to reduce its government budget deficit.
FILL IN THE BLANKS
1. ___________________________ expenditure is that part of aggregate planned expenditure that is not influenced by real GDP.
2. The increase in aggregate planned expenditures that results from an increase in GDP is equal to the increase in induced consumption minus the increase in ______________________________ .
3. The _________________________________ effect refers to the fact that an increase in autonomous spending will result in an even larger increase in GDP.
4. The autonomous transfer multiplier is _________________________ than the autonomous spending multiplier.
5. If the Government of Viet Nam increases autonomous taxes, that will tend to ___________________ real GDP.
6. The balanced budget multiplier can be calculated by adding the ________________________ multiplier to the autonomous tax multiplier.
7. An automatic stabilizer is a mechanism that _________________________ the size of the multiplier.
8. The distance that the Aggregate ___________________________ curve will shift will depend on the size of the change in autonomous spending and the size of the autonomous spending multiplier.
9. In the short-run, the size of the effects of fiscal policy will depend on: (1) the size of the change in autonomous spending, (2) the size of the relevant multipliers, and (3) the _____________________________________ of the short-run aggregate supply curve.
10. Government policy to fight inflation and unemployment by varying government purchases, taxes and transfer payments is known as ____________________ policy.
11. Assuming an expenditure multiplier of 4, the amount of government spending needed to raise GDP by 100 trillion VN dong is __________________ trillion VN dong.
12. Assuming an expenditure multiplier of 4, the amount of additional autonomous taxes needed to reduce GDP by 90 trillion VN dong is ________________________ trillion VN dong.
13. The autonomous transfer multiplier is ___________________ than the autonomous spending multiplier.
14. If the MPC out of GDP is .9, the autonomous tax multiplier will be __________________.
15. If the government of Viet Nam changed some of its tax laws in order to reduce aggregate demand it would be engaging in ______________________________ fiscal policy.
16. If the Government of Viet Nam would run a deficit at full employment, that deficit is called a _____________________________ deficit.
17. An automatic stabilizer is a mechanism that _______________ the size of the multiplier.
MULTIPLE CHOICE
____1. If the MPC is 2/3 and the Government of Viet Nam increases its expenditures and autonomous taxes by 30 trillion VN dong, GDP in Viet Nam will:
a. fall by 30 trillion VN dong
b. rise by 30 trillion VN dong
c. fall by 90 trillion VN dong
d. rise by 90 trillion VN dong
_____2. Which one of the following policies would do the most to increase the equilibrium level of GDP in Viet Nam?
a. decrease taxes by 40 trillion VN dong
b. increase highway building expenditures by 40 trillion VN dong
c. increase taxes and highway building expenditures by 40 trillion VN dong
d. reduce taxes and highway building expenditures by 40 trillion VN dong.
_____3. If the Vietnamese government wished to reduce the level of GDP in order to fight inflation, it could:
a. reduce taxes
b. increase its purchases of goods and services
c. reduce transfer payments
d. increase government purchases and taxes by the same amount
_____4. When an economy has automatic stabilizers, as incomes fall:
a. tax revenues fall and government transfer payments fall
b. tax revenues rise and government transfer payments rise
c. tax revenues rise and government transfer payments fall
d. tax revenues fall and government transfer payments rise
_____5. The fact that total tax collections rise as incomes rise:
a. tends to produce government surpluses during recessions
b. makes it easier for discretionary policy to increase GDP
c. makes it easier for discretionary policy to fight inflation
d. reduces the multiplier effect of a change in planned I
_____6. The "crowding-out" effect of expansionary fiscal policy is
the result of government borrowing to finance deficits which:
a. increases interest rates and Investment
b. increases interest rates and reduces Investment
c. decreases interest rates and increases Investment
d. decreases interest rates and Investment
_____7. If Viet Nam's GDP were to exceed its equilibrium level, which of the following would be true?
a. there would be unplanned investment
b. planned investment would exceed saving
c. there would be an inflationary gap
d. there would be an upward shift of the savings function
_____8. If the actual GDP of Viet Nam is 1,275 trillion VN dong, C is 1,000 trillion VN dong and planned investment is 300 trillion VN dong, the level of Vietnamese GDP will:
a. tend to increase
b. tend to decrease
c. tend to remain the same
d. be greater than equilibrium GDP.
_____9. Which of the following is an injection to spending?
a. investment
b. saving
c. taxes
d. imports
_____10. If Viet Nam's full employment GDP was 1,200 trillion VN dong and its equilibrium GDP was 1,100 trillion roubles there would be a recessionary gap of:
a. 100 trillion VN dong
b. 100 trillion VN dong divided by the multiplier
c. 100 trillion VN dong multiplied by the multiplier
d. 100 trillion VN dong divided by the MPC
_____11. Which of the following would tend to increase Viet Nam's equilibrium GDP?
a. an increase in Vietnamese tariffs on imported goods
b. a decline in incomes in Japan
c. an increase in the international value of the VN dong
d. a decrease in the international value of the Japanese yen
_____12. An increase in the price level:
a. lower the aggregate expenditure curves and lower equilibrium income
b. lower the aggregate expenditure curves and increase equilibrium income
a. raise the aggregate expenditure curves and increase equilibrium income
b. raise the aggregate expenditure curves and lower the equilibrium income
9. An increase in aggregate expenditures of 100 billion VN dong will shift the Vietnamese aggregate demand curve to the:
a. right by 100 billion VN dong
b. left by 100 billion VN dong
c. right by 100 billion VN dong times the multiplier
d. left by 100 billion VN dong times the multiplier
PART IV: Problems
1. An econometric study of the Russian economy, prepared by an underqualified and overpaid consulting firm (my own), calculated the following consumption function for Russia:
C = 30 + .8 * GDP
1. A team from the IMF projected the that Investment spending for 1995 will be 40. If there were no government or foreign sectors, what would be the equilibrium level of GDP?______________.
2. What would be the equilibrium level of C? ______________ .
3. What would be the equilibrium level of S? ______________ .
4. A government analysis of the Russian economy estimated that the full employment GDP is 400. How large a change in projected GDP would be required to bring the equilibrium GDP to 400? ___________
5. How large a change in investment spending would be required to bring the equilibrium GDP to 400? __________________________ .
6. How large would be the equilibrium level of GDP if the MPS were increased to .5? _____________________ .
2. An econometric study of the Independent Republic of Middlebury produced the following set of equations:
A. Consumption C = 50 + .80 * YD
B. Planned Investment I = 100 - 800 * r
C. Nominal interest rate i = 12%
D. Expected inflation rate INFRTE = 2%
(Note: r is expressed as a decimal in this problem. For example 70% would be expressed as .7, and 20% would be expressed as .2)
Calculate the following values:
a. The real interest rate ________________
b. Planned Investment ________________
c. Equilibrium GDP ________________
d. Consumption ________________
e. Saving ________________
3. Assume that the economy of The Independent Republic of Middlebury (IRM) is an open, mixed economy. Hence, the IRM has four types of spending, Investment, Government Spending, Net Exports and Consumption. The consumption function of the IRM is as follows:
C = 40 + 1/2 * Y
The level of Government spending is fixed. (G = 10)
The level of Net Exports is fixed. (XN = 20)
The level of planned Investment will vary with changes in the GDP deflator according to the following schedule:
GDP Deflator Planned Investment Equilibrium GDP
100 50 ____________
200 40 ____________
300 30 ____________
1. In the space above fill in the possible equilibrium values of GDP in The Independent Republic of Middlebury.
2. In the first quadrant below illustrate these equilibria using a Keynesian income-expenditure graph. (Label each axis. Label each curve and show the equilibrium values.)
3. In the second quadrant below illustrate these equilibria using an Aggregate Demand-Aggregate Supply graph. (Label each axis. Label each curve and show the equilibrium values.)
________________________________
________________________________
PROBLEM
I. An econometric study of the Tourovian economy produced the following set of equations:
A. Consumption C = 38 + .8 * YD (YD = Disposable Income)
B. Transfer Payments TR = 30 - .05 * Y (Y = GDP)
C. Taxes TX = 40 + .2 * Y
II. An economic team from the World Bank has projected the following levels of autonomous spending for 1996.
A. I = 40
B. G = 90
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PART A: (Computing the multipliers)
Calculate the following values:
1. The MPC out of GDP ________________
2. The Autonomous spending multiplier ________________
3. The Autonomous transfer payment
multiplier ________________
4. The Autonomous tax multiplier ________________
5. The Balanced budget multiplier ________________
(The Problem continues on the next page)
PART B: (Projecting GDP and its components)
Make the following projections for the Tourovian economy in 1996:
1. Total autonomous spending ________________
2. Equilibrium GDP ________________
5. Transfer payments ________________
6. Taxes ________________
7. The Government Surplus ________________
8. Disposable Income ________________
9. Consumption ________________
10. Saving ________________
PART C. (Analysis of the Budget)
1. At what level of GDP would the budget be in balance? ______________
2. If the full employment GDP were 600, would Tourovia have a structural deficit or surplus? ____________________________________
3. Is fiscal policy in Tourovia expansionary?______________________
PART D. (Fiscal Policy)
A government analysis of the Tourovian economy produced an estimate that the full employment GDP is 430.
1. How large a change in projected GDP would be required to bring the equilibrium real GDP to 430? __________________________
2. How large a change in government spending would be required to bring the equilibrium real GDP to 430? __________________________
3. How large a change in autonomous taxes would be required to bring the equilibrium real GDP to 430? ____________________________
4. How large a balanced change in the government budget would be required to bring the equilibrium real GDP to 430?_________________