Question

16) Consider a macro model with a constant price level and demand-determined output. A rise in the net tax rate ________ the simple multiplier and ________ equilibrium national income.
A) lowers; raises
B) lowers; lowers
C) raises; raises
D) lowers; has no effect on
E) raises; has no effect on

17) Other things being equal, an exogenous fall in the domestic price level leads to a rise in private-sector wealth. As a result, there is
A) a downward shift in the AE curve.
B) a downward shift in net exports.
C) domestic goods appearing less attractive to foreigners.
D) an increase in autonomous desired consumption.
E) an increase in the average propensity to save.

18) Other things being equal, what is the effect of an exogenous rise in the domestic price level?
A) The desired investment function shifts upward.
B) The aggregate expenditure function shifts upward.
C) Canadian goods become more expensive relative to foreign goods.
D) The net export function shifts upward.
E) Imports of foreign goods fall.

19) Which of the following statements about the economy's aggregate demand curve is correct? All points on the AD curve
A) show the direct relationship between the price level and net exports.
B) correspond to a particular point on industry demand curves for a particular product.
C) show only changes in relative prices and quantities.
D) relate a particular price level to the total demand for output at that price level.
E) show the direct relationship between the price level and the demand for consumer goods.

20) Other things being equal, as the price level falls exogenously, the aggregate expenditure (AE) function shifts
A) upward and the economy moves upward along the AD curve.
B) down and the economy will move downward along the AD curve.
C) upward and the economy moves downward along the AD curve.
D) down and the economy will move upward along the AD curve.
E) to the left, as does the AD curve.

Answer 1

16) Option B. This is because aggregate supply is a flat line and a higher tax rate will reduce spending multiplier which is 1/(1-mpc(1-t)). This causes real GDP to decline as taxes are now higher

17) Option D. This is called wealth effect where decrease in the price level moves the economy down along the same AD curve as consumption is increased when consumers feel rich

18) Option B. This is because AE-Y model considers price as fixed and when price falls, AE is higher

19) Option D

20) Option C.