Question

18.       If the federal government increases the dollar amount of Social Security benefit checks for the elderly, then

      a. the consumption schedule will shift upward in the 45-degree line diagram.

b. the aggregate demand curve will shift to the right in the aggregate demand aggregate supply curves diagram.

   c. the effect on the equilibrium real GDP will be the same as a cut in taxes.

   d. All of the above are correct.

19.       The paradox of thrift is the notion that the attempt of society to save:

a. less, as reflected in a downward shift of the consumption schedule, may be frustrated by the decrease in equilibrium GDP which will follow.

b. more, as reflected in the downward shift of the consumption schedule, may be frustrated by the decrease in equilibrium GDP which will follow.

c. more, as reflected in an upward shift of the consumption schedule, may be frustrated by the increase in equilibrium GDP which will follow.

d. more, as reflected in an upward shift of the consumption schedule, may be frustrated by the decrease in equilibrium GDP which will follow.

20.       The paradox of thrift emerges

            a. Whenever the savings rate increases.

            b. whenever the savings rate decreases.

            c. when the savings rate increases and investment increases.

            d. When the savings rate increases and investment does not increase.

Answer 1

18.) b. the aggregate demand curve will shift to the right in the aggregate demand aggregate supply curves diagram.

The correct answer is B because an increase in the dollar amount of social security benefit checks will cause the government expenditure component of aggregate demand to increase, and as established, a positive change in any one of aggregate demands components (Consumption, Government Expenditure, Investment, and Net Export) will cause the AD to shift to the right. Therefore, the AD shifts to the right.

With regards to option a., the factors that are responsible for a shift in consumption schedule are non-income determinants such as wealth, interest, expectation, and debt. Since we are talking about a change in income, the consumption schedule will not be affected.

With regards to option c., there isn't a mention of taxes. Also in order to facilitate an increase in the dollar amount of social security benefit checks the tax rates would have to increase to compensate for the rise n dollar amount of checks. The option cites a cut in taxes.

With regards to option d., since both option a and c are incorrect, this option is incorrect by default.

19. b. more, as reflected in the downward shift of the consumption schedule, may be frustrated by the decrease in equilibrium GDP which will follow.

The paradox of thrift occurs when an increase in savings rate leads to a decrease in aggregate demand and subsequently a decrease in gross output, which then leads to a lower overall total savings. By this definition, we can rule out all the other options.

20. a. Whenever the savings rate increases.

With regards to option b., the option says savings rate decreases. Which does not fit the definition.

With regards to option c. and d., one of the drawbacks of the concept of this paradox is that it does not take into consideration the saved income being loaned by the banks in the form of investment.