Question 1

Suppose the government share of GDP is 20 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 5 percent, respectively. If the federal government introduces a national sales tax (a federal tax on consumption), then we would expect
A) the government share of GDP to increase.
B) the interest rate to decrease.
C) the interest rate to increase.
D) the government share of GDP to decrease.
E) the net consumption share of GDP to increase.

Accepted Answer

The answer of Suppose the government share of GDP is...

Question 2

The nongovernment share of GDP equals
A) saving as a share of GDP.
B) the sum of the consumption and investment shares of GDP.
C) 1 minus the government share of GDP.
D) the sum of the investment and net export shares of GDP.
E) the sum of the consumption and net export shares of GDP.

Accepted Answer

The nongovernment share of GDP is essentially the portion of GDP not accounted for by government spending. Therefore, it can be calculated as 1 minus the government share of GDP, as this subtracts the government's contribution from the total GDP, leaving the portion of GDP that is not related to government spending.

Question 3

Which of the following statements is true?
A) A decrease in the interest rate will cause the nongovernment share of GDP to decline.
B) A decrease in the interest rate will cause the government purchases share to decrease.
C) A decrease in the interest rate will cause the share of GDP available for nongovernment use to decline.
D) A decrease in the interest rate will cause the nongovernment share of GDP to increase.
E) A decrease in the interest rate will cause GDP to decrease.

Accepted Answer

A decrease in the interest rate will encourage spending and investment in the economy. This can lead to an increase in the nongovernment share of GDP as businesses and consumers have more money to spend. Additionally, a decrease in interest rates may make it cheaper for businesses to borrow money for investments, leading to increased economic activity and a potential increase in the nongovernment share of GDP.

Question 4

Which share is not sensitive to changes in the real interest rate?
A) All four shares are sensitive to changes in the real interest rate.
B) Consumption
C) Investment
D) Government purchases
E) Net exports

Accepted Answer

Government purchases are typically policy-driven and not directly sensitive to changes in the real interest rate, unlike consumption, investment, and net exports, which are more directly influenced by changes in borrowing costs and economic conditions.

Question 5

All else being constant, an increase in the government share of GDP would result in
A) an increase in net exports.
B) a higher dollar exchange rate.
C) the interest rate remaining constant.
D) a lower interest rate.
E) a higher interest rate.

Accepted Answer

An increase in government share of GDP means higher government spending, which will increase demand for loanable funds and thus increase interest rates.

Question 6

The sum of the consumption, investment, and net exports shares of GDP is called
A) the nongovernment share of GDP.
B) the real-economy share of GDP.
C) the privately held share of GDP.
D) None of these

Accepted Answer

The sum of the consumption, investment, and net exports shares of GDP is called the real-economy share of GDP. This is because these three components represent the actual production of goods and services in the economy.

Question 7

In the long run, the real interest rate is determined by
A) the exchange rate.
B) the amount of government spending only.
C) the balance between the demand for C, I, and X and the available supply of goods in the economy.
D) the rate of inflation.
E) a political process.

Accepted Answer

The real interest rate is determined by a balance between the demand for goods (C, I, and X) and the available supply of goods in the economy. This is because the real interest rate reflects the opportunity cost of consuming today versus saving and consuming in the future, and this decision by individuals and firms is based on the availability of goods and services in the economy. Factors like inflation may affect the nominal interest rate, but the real interest rate adjusts for inflation and reflects the underlying balance between supply and demand. Government spending, exchange rates, and political processes may also have some impact on the economy, but they are not necessarily the primary drivers of the real interest rate.

Question 8

Suppose the government share of GDP is 20 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 5 percent, respectively. If, all else held constant, businesses become more optimistic about the benefits of investment, then
A) investment spending as a share of GDP increases.
B) the nongovernment share of GDP remains constant.
C) the rate of interest increases.
D) the government share of GDP remains at 20 percent.
E) All of these

Accepted Answer

When businesses become more optimistic about the benefits of investment, they are likely to invest more, increasing investment spending as a share of GDP (A). This does not necessarily change the government's share of GDP, which can remain at 20 percent (D), because the increase in investment could come at the expense of other non-government components of GDP, such as consumption or net exports, keeping the nongovernment share constant (B). Increased demand for investment funds can also lead to an increase in the rate of interest (C), as more businesses compete for available funds.

Question 9

If the nongovernment share of GDP shifts to the right and the government share of GDP remains constant, then
A) there must be an increase in taxes.
B) the dollar exchange rate must weaken.
C) there must be a decrease in taxes.
D) the interest rate decreases.
E) the interest rate increases.

Accepted Answer

The answer of If the nongovernment share of GDP shifts...

Question 10

In a market economy, if the sum of the consumption, investment, and net export shares of GDP is greater than 1 minus the government share of GDP, market forces will result in
A) GDP contracting.
B) an increase in interest rates.
C) GDP expanding.
D) a decrease in interest rates.
E) an increase in the price level.

Accepted Answer

The answer of In a market economy, if the sum...

Question 11

The share of GDP available for nongovernment use is
A) negatively related to the nominal interest rate.
B) not dependent on the interest rate.
C) negatively related to the real interest rate.
D) positively related to the nominal interest rate.
E) positively related to the real interest rate.

Accepted Answer

The share of GDP available for nongovernment use, also known as private sector output or private sector GDP, is not dependent on the interest rate. Private sector output is determined by factors such as technology, labor productivity, capital accumulation, and the availability of natural resources. The interest rate may affect investment and consumption decisions, but it does not directly determine the level of private sector output.

Question 12

In a market economy, the interest rate adjusts to ensure equality among
A) the investment, consumption, and net export shares of GDP and the share of GDP available for nongovernment use.
B) the investment, consumption, and net export shares of GDP and the government share of GDP.
C) the investment, consumption, and net export shares of GDP and GDP.
D) imports and exports.
E) the budget and trade deficits.

Accepted Answer

In a market economy, the interest rate adjusts to ensure equality among the investment, consumption, and net export shares of GDP, and GDP. This is because interest rates affect investment and consumption, which in turn affect the overall size of the economy and the level of net exports. If the interest rate is too high, investment and consumption may decline, causing a decrease in GDP and potentially leading to a trade surplus. If the interest rate is too low, investment and consumption may increase, leading to an overall increase in GDP and potentially leading to a trade deficit. Therefore, the interest rate must be set at a level that ensures that the investment, consumption, and net export shares of GDP are in balance with overall GDP.

Question 13

In the spending allocation model, the government share of GDP is assumed to be unaffected by the real exchange rate, being instead directly determined by government officials.

Accepted Answer

The spending allocation model assumes that the government share of GDP is determined by government officials and is not affected by the real exchange rate.

Question 14

All else held constant, interest rates will increase if there is an increase in the nongovernment share of GDP.

Accepted Answer

The answer of All else held constant, interest rates will...

Question 15

If the sum of the consumption and investment shares of GDP is 78 percent, the government share of GDP has to be less than or equal to 22 percent.

Accepted Answer

The statement does not account for net exports (exports minus imports), which can be positive or negative, affecting the total GDP composition and allowing the government share of GDP to be potentially higher or lower than 22 percent.

Question 16

Suppose the government share of GDP is 25 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 3 percent, respectively. Under these circumstances, we would expect
A) the government share of GDP to increase.
B) the interest rate to increase.
C) the interest rate to remain constant.
D) the interest rate to decrease.
E) net exports to increase.

Accepted Answer

Given the shares of GDP components, the total exceeds 100% (25% government + 60% consumption + 15% investment + 3% net exports = 103%). This implies an economy operating at or beyond its capacity, likely leading to increased demand for funds for investment, consumption, and government spending, which can drive up interest rates.

Question 17

Suppose the government share of GDP is 20 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 5 percent, respectively. If the dollar exchange rate increases, then we would expect
A) the government share of GDP to increase.
B) the interest rate to decrease.
C) the interest rate to increase.
D) the government share of GDP to decrease.
E) the net export share of GDP to increase.

Accepted Answer

The answer of Suppose the government share of GDP is...

Question 18

It is the government's responsibility to ensure that the sum of all four shares of GDP equals 1.

Accepted Answer

The sum of all four shares of GDP (consumption, investment, government spending, and net exports) does not equal 1. GDP is measured in currency units (e.g., dollars), not as a proportion where the total would equal 1.

Question 19

The intersection between the sum of the nongovernment shares of GDP and the share of GDP available for nongovernment use determines
A) nothing, since the two are the same.
B) the price level.
C) GDP.
D) the optimal level of taxes.
E) the equilibrium interest rate.

Accepted Answer

The answer of The intersection between the sum of the...

Question 20

The share of GDP purchases is determined by
A) the rate of growth of real GDP.
B) the rate of interest.
C) the willingness of consumers to save.
D) the political process.
E) the exchange rate.

Accepted Answer

The share of GDP purchases is determined by the political process. Government spending is determined by the budget approved by the elected officials, which can change depending on the priorities and goals of politicians in power.

Quiz 7: The Spending Allocation Model

Suppose the government share of GDP is 20 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 5 percent, respectively. If the federal government introduces a national sales tax (a federal tax on consumption) , then we would expect

The nongovernment share of GDP equals

Which of the following statements is true?

Which share is not sensitive to changes in the real interest rate?

All else being constant, an increase in the government share of GDP would result in

The sum of the consumption, investment, and net exports shares of GDP is called

In the long run, the real interest rate is determined by

Suppose the government share of GDP is 20 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 5 percent, respectively. If, all else held constant, businesses become more optimistic about the benefits of investment, then

If the nongovernment share of GDP shifts to the right and the government share of GDP remains constant, then

In a market economy, if the sum of the consumption, investment, and net export shares of GDP is greater than 1 minus the government share of GDP, market forces will result in

The share of GDP available for nongovernment use is

In a market economy, the interest rate adjusts to ensure equality among

In the spending allocation model, the government share of GDP is assumed to be unaffected by the real exchange rate, being instead directly determined by government officials.

All else held constant, interest rates will increase if there is an increase in the nongovernment share of GDP.

If the sum of the consumption and investment shares of GDP is 78 percent, the government share of GDP has to be less than or equal to 22 percent.

Suppose the government share of GDP is 25 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 3 percent, respectively. Under these circumstances, we would expect

Suppose the government share of GDP is 20 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 5 percent, respectively. If the dollar exchange rate increases, then we would expect

It is the government's responsibility to ensure that the sum of all four shares of GDP equals 1.

The intersection between the sum of the nongovernment shares of GDP and the share of GDP available for nongovernment use determines

The share of GDP purchases is determined by