Question

4. Based on our understanding of the model presented in Chapter 3, we know that an increase in cl (where C c0+ elYD) will cause )a the ZZ line to become flatter. )cagiven change in autonomous consumption (c0) to have a larger effect on output ) b. the ZZ line to become steeper ) da given change in autonomous consumption (c0) to have a larger-effect on output Opater 5. Suppose the consumption equation is represented by the following: C-250 + 0.75YD then private savings is ) a -250+0.25 YD ) b. -250+0.75YD ( ) c -1000+0.25 YD ) d. -1000+0.75YD ( Which of the following leaves the output in the goods market equilibrium unchanged, assuming that the marginal propensity to consume is strictly between 0 and 1? ( 6. ) a government purchases and taxes increase, by the same amount. ) b. government purchases increase while investment decrease, by the same amount. ( ) c. private disposable income increases while investment decreases, by the same amount. ) d. consumption increases while government purchases decrease, by the same amount. ( ) e. private saving increases while government budget deficit decreases, by the same amount. ( 7. Which of the following will cause the money multiplier to become smaller? ) a. an increase in high powered money. ( ) b. an increase in reserve ratio. ( ) c. a decrease in the public's preferences for checking deposits as opposed to holding currency (d. an increase in the discount rate. e. an increase in the interest rate paid on reserves. 8. Which of the following will shift the LM curve down? ( )a. Aggregate price level decreases. ( ) b. Real income decreases. ( )c. Wealth decreases. ( )d. Money supply increases.

Answer 1

4) option C is correct. Increase in the marginal propensity to consume will increase the multiplier. This implies that for any given change in the autonomous spending, impact on the output will be greater

5) option A is correct. Note that Private savings = Yd - C or Yd - 250 - 0.75Yd. this will be come S = -250 + 0.25Yd.

6) option d is correct. final change in the autonomous spending will be zero which means real GDP will not change

7) option C is correct

8) option B is correct.