Question 1

The effect of a one-unit increase in autonomous expenditure on short-run equilibrium output is called:

Accepted Answer

The effect of a one-unit increase in autonomous expenditure on short-term equilibrium output is measured by the income-expenditure multiplier. It shows how much total output will change in response to a change in autonomous expenditure. The other options are not related to this concept.

Question 2

Government policy actions intended to increase planned spending and output are called ______ policies.

Accepted Answer

Expansionary policies are government actions aimed at increasing planned spending and output, typically through fiscal measures like increased government spending or tax cuts, or through monetary measures like lowering interest rates.

Question 3

The bursting of the housing bubble in 2006 caused ______ to cut back on their spending, thereby shifting the PAE line _____.

Accepted Answer

The bursting of the housing bubble in 2006 caused both businesses and households to cut back on their spending, as they were no longer able to rely on the value of their homes to finance consumption or business investment. This shift in behavior led to a downward shift in the PAE line, as lower levels of consumer and investment spending led to lower levels of aggregate demand. The government may also have cut back on spending in response to the economic downturn, but this would not be the primary cause of the shift in the PAE line.

Question 4

In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, government purchases must be:

Accepted Answer

In the short-run Keynesian model, the multiplier effect states that a change in autonomous spending will have a multiplied effect on aggregate demand. In this case, the marginal propensity to consume is 0.5, which means that for every $1 increase in disposable income, consumers will spend $0.5. Therefore, to offset a $1 billion decrease in autonomous consumption, government purchases must be increased by $2 billion.

Question 5

In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, government purchases must be:

Accepted Answer

A $1 billion increase in autonomous consumption shifts the PAE curve upward. To shift it back down to its original position, government purchases (another type of autonomous expenditures)must be decreased by $1 billion.

Question 6

The income-expenditure multiplier arises because one person's additional spending becomes another person's additional income that will generate additional:

Accepted Answer

The income-expenditure multiplier works on the principle that one person's spending becomes another person's income. When an individual or entity increases their spending, it leads to an increase in income for others who provide the goods and services, and this additional income generates further spending in the economy, leading to a multiplier effect. Therefore, the correct option is A) spending.

Question 7

Contractionary policies are government stabilization policy actions intended to decrease:

Accepted Answer

Contractionary policies are aimed at reducing the total spending in the economy, and thus decrease the planned spending. This is done through measures such as increasing taxes, reducing government spending, and raising interest rates to discourage borrowing and spending. The goal is to slow down economic growth to control inflation or reduce a trade deficit.

Question 8

In the Keynesian model, a $1 billion increase in autonomous consumption leads to ______ in short-run equilibrium output.

Accepted Answer

In the Keynesian model, an increase in autonomous consumption leads to a greater than one-for-one increase in equilibrium output. This is due to the multiplier effect, which occurs as the increase in autonomous consumption leads to an increase in aggregate demand, which in turn leads to an increase in output and further increases in consumption. The size of the multiplier depends on the marginal propensity to consume, but is typically greater than one. Therefore, a $1 billion increase in autonomous consumption would lead to a greater than $1 billion increase in short-run equilibrium output.

Question 9

The smaller the mpc, the ______ the income-expenditure multiplier and the ______ the effect of a change in autonomous spending on short-run equilibrium output.

Accepted Answer

The income-expenditure multiplier is equal to 1/(1-MPC). Therefore, if the MPC is smaller, the multiplier will be smaller as well (since the denominator will be closer to 1). Additionally, since the multiplier represents the effect of a change in autonomous spending on short-run equilibrium output, if the multiplier is smaller, the effect of a change in autonomous spending will be smaller as well.

Question 10

The income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes because:

Accepted Answer

When autonomous spending changes, it directly changes the income of producers who in turn spend some of that income. This leads to additional changes in spending, resulting in a multiplier effect. Therefore, the income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes.

Question 11

The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, disruptions in the financial market made it difficult:

Accepted Answer

The disruptions in the financial market made it difficult for businesses and consumers to borrow money, which in turn affected their ability to spend and invest in the economy. This led to a decrease in aggregate demand, which worsened the recession.

Question 12

Government policy actions intended to decrease planned spending and output are called ______ policies.

Accepted Answer

Contractionary policies are designed to decrease planned spending and output through measures such as decreasing government spending, increasing taxes, and tightening monetary policy. Aggregate policies refer to overall macroeconomic policies, fiscal policies refer to government revenue and spending measures, and monetary policies refer to measures taken by the central bank to influence the money supply and interest rates.

Question 13

In the Keynesian model, a $5 billion decrease in autonomous planned investment leads to ______ in short-run equilibrium output.

Accepted Answer

Due to the income-expenditure multiplier, a $5 billion decrease in autonomous consumption results in a final decrease in output greater than $5 billion.

Question 14

The larger the mpc, the ______ the income-expenditure multiplier and the ______ the effect of a change in autonomous spending on short-run equilibrium output.

Accepted Answer

The income-expenditure multiplier is 1/(1-MPC). Therefore, the larger the MPC, the smaller the denominator and the larger the overall multiplier. This means that a change in autonomous spending will have a larger effect on short-run equilibrium output.

Question 15

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then government purchases must ______ to eliminate any output gap.

Accepted Answer

If the multiplier is 10, a 100-unit decrease in government purchases results in a 1,000-unit decrease in output. This closes the expansionary output gap of 1,000.

Question 16

In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be:

Accepted Answer

Due to the income-expenditure multiplier, a short-run expansionary gap of $10 billion can be closed with decreased government purchases of less than $10 billion.

Question 17

Expansionary policies are government stabilization policy actions intended to increase:

Accepted Answer

Expansionary policies are intended to increase planned spending in the economy, which can lead to increased economic growth and reduced unemployment rates.

Question 18

The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, the ensuing financial crisis:

Accepted Answer

The financial crisis that followed the burst of the housing bubble in 2006 created a high level of uncertainty about the future, leading to a decrease in consumer and investor confidence. This, in turn, led to a reduction in spending and investment, causing a decline in overall economic activity and ultimately resulting in the recession of 2007-2009. Option A is incorrect as deficit financing by government played a role in managing the economic aftermath of the recession. Option B is not correct as inflation did not increase but was rather subdued during the period. Option D is incorrect as the PAE line did not shift upwards but drooped downward.

Question 19

In the short-run Keynesian model, to close a recessionary gap of $1 billion dollars government purchases must be:

Accepted Answer

Due to the income-expenditure multiplier, a short-run recessionary gap of $1 billion can be closed with new government purchases of less than $1 billion.

Question 20

Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called ______ policies.

Accepted Answer

Government policies that are used to eliminate output gaps by affecting planned aggregate expenditure are called stabilization policies. These policies aim to stabilize the economy during periods of instability such as recessions or booms. They include monetary and fiscal policies, as well as other measures aimed at managing the business cycle. Examples of stabilization policies include changing interest rates, increasing government spending, and cutting taxes.

Quiz 11: Financial Markets and International Capital Flows