a)
To find: Whether the given statement “consumption is the largest component of
a)
Answer to Problem 1QAP
The given statement is true.
Explanation of Solution
The statement is true because it contains goods and services that are produced in an economy and which is bought by the consumer. Almost 68.3% of the GDP is composed of this component (consumption).
b)
To find: Whether the given statement “government spending, including transfer was equal to 18.1% of GDP of the year 2014” is true, false or uncertain.
b)
Answer to Problem 1QAP
The given statement is false.
Explanation of Solution
The statement is false because the government spending does not include transfers like Medicare transfer, payment related to social security, or interest payments on government debts. These are government expenditures but are not the purchases of goods and services.
Moreover, the given percentage of government spending in table 3.1 of the book is 18.1%, which is smaller than the total spending that includes transfers and interest payments.
When transfer and interest payment is including in government spending then the share will become 33% of GDP.
However, government spending is alone equal to 18.1% of GDP.
c)
To state: Whether the given statement that “the marginal propensity to consume must be positive and it can take any positive value” is true, false, or uncertain.
c)
Answer to Problem 1QAP
The given statement is False.
Explanation of Solution
Marginal Propensity to Consume (MPC) is the additional amount of expenditure set aside for consumption purposes out of every extra dollar earned by the consumers.
The statement is false because the sum of Marginal Propensity to Save (MPS) and MPC is equal to 1.
Here, the statement says that the value of MPC can be any positive value.
d)
To find: whether the given statement “in the recession of 2009, one factor was a drop in the value of the parameter c0” is true, false, or uncertain.
d)
Answer to Problem 1QAP
The given statement is true.
Explanation of Solution
The statement is true because the recession of 2009 was the result of a fall in two components out of four components of autonomous spending. The worries about the future after Bankruptcy led consumers to cut their spending, thus the co declined sharply.
e)
To find: Whether the given statement that “the fiscal policy describes the choice of government spending and taxes and is treated as exogenous” is true, false, or uncertain.
e)
Answer to Problem 1QAP
The given statement is true.
Explanation of Solution
The given statement is true because fiscal policy includes the choice of taxes (T) and spending by the government (G) to alter the level of Gross Domestic product (GDP) of a country.
However, to evaluate what would happen at given levels of G or T, it is necessary to take into consideration these choices (government spending and taxes). It is considered as exogenously given in the goods market model.
f)
To check the statement “consumption equals output in goods market” is true, false, or uncertain.
f)
Answer to Problem 1QAP
The given statement is False.
Explanation of Solution
The statement is false because consumption is a part of GDP {GDP = C + I + G + (X − M)}. Thus, the equilibrium condition for the goods market is not that the consumption itself equals the output. Thus, the given statement is false.
g)
To find whether the given statement “a rise in one unit of government spending induces a rise of one unit in equilibrium output” is true, false, or uncertain.
g)
Answer to Problem 1QAP
The given statement is False.
Explanation of Solution
The statement is false because an increase in one unit of government spending leads to an increase in a unit times the multiplier value. Thus, the statement is false.
h)
To find whether the given statement “the rise in the propensity to consume induce a decrease in output” is true or false.
h)
Answer to Problem 1QAP
The given statement is False.
Explanation of Solution
The given statement is false because the relationship between MPC and output is positive. Thus, a high value of MPC leads to the high value of multiplier and it increases the output.
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Chapter 3 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
- It appears that there was an economic drop during the 2019-2021 period as a result of the pandemic. Assume that we can view this as a negative shock to private investment, due to a combination of lockdowns and uncertainty about the world. In under 150 words, answer the following question: Was government consumption expenditure used as stabilisation policy following the slow-down during 2020 and 2021? (Note, you only need to discuss this in terms of our demand model of Income-Expenditure, IS-MPR, and Aggregate Demand.) Year Government consumption per capita ($) (rounded to a whole number) 2003 6672 2004 6820 2005 7016 2006 7394 2007 7515 2008 7757 2009 8040 2010 7892 2011 7931 2012 7969 2013 7955 2014 8041 2015 8154 2016 8124 2017 8096 2018 8238 2019 8371 2020 8658 2021 9207 2022 9962arrow_forwardChanges in taxes The following graph plots an aggregate demand curve. Using the graph, shift the aggregate demand curve to depict the impact that a tax cut has on the economy. Suppose the governments of two very similar economies, economy B and economy A, implement a permanent tax cut of equal size. The marginal propensity to consume (MPC) in economy B is 0.7 and the MPC in economy A is 0.85. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with the (SMALLER MPC or LARGER MPC).arrow_forwardC = 450 + 0.4Y I = 350 G = 150 X = 70 Z = 35 + 0.1Y T = 0.15Y Yf = 1550 Q.2.5 Calculate what the new equilibrium income should be if the government of this country decides to cancel all taxes, implying the tax rate would now be 0%. Q.2.6 Before the government decreased the tax rate, how much of government spending was required to bring the economy to full employment?arrow_forward
- C is consumer expenditure T is tax revenue Y is aggregate output I is investment expenditure r is interest rate G is government expenditure L is money demand M is money supply Derive the relevant matrix inverse (do not use Cramer's rule) to solve for the equilibrium level of income in terms of government expenditure (G). At what level of public spending does the government balance its budget? (Hint: the endogenous variables are Y and r).arrow_forwardHow do the instances when expansionary fiscal policy should be used compare with those for contractionary fiscal policy? Expansionary fiscal policy should be used during recessions to help build the economy and contractionary fiscal policy should be used when there is high inflation. Expansionary fiscal policy should be used to increase government revenue and contractionary fiscal policy should be used to increase consumer spending. Expansionary fiscal policy should be used to combat high inflation and contractionary fiscal policy should be used to increase government revenue. Expansionary fiscal policy should be used to decrease the unemployment rate and contractionary fiscal policy should be used when economic growth is too fast.arrow_forwardSuppose that autonomous consumption (a) is 300, private investment spending(I) is 420, government spending (G) is 400 , Net taxes (T) are 400 and marginal propensity to consume (b) is 80 %, and marginal tax rate (t) is 25 % . By using the above information which is also given in my graph: Suppose that the potential income level is 2500 in the economy. In this case, what kind of fiscal policy you can use to reach the full employment level. (show this numerically and explain it on the graph i sent Thanks in advance)arrow_forward
- Use the following information on economy X to answer the questions below.Consumption function: C = 250 + 0.8Y Investment spending: I = 150 Government spending: G = 500 Exports of goods and services: X = 200 Imports of goods and services: Z = 150 Proportional tax rate: t =25%Full employment level of income = 3575 1. Calculate the equilibrium income for the economy. 2. Calculate the change in government spending required to reach (3) full employment level of income.arrow_forwardThe graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by changing taxes to reduce the burden of this recession. Fiscal Policy Price Level 150 LRAS AS 140 130 120 110 100 90 80 70 60 50 40 30 AD1 AD 0 80 160 240 320 400 480 560 640 720 800 Real GDP (billions of dollars) Instructions: Enter your answer as a whole number. If you are entering a negative number Include a minus sign. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ billion b. If the MPC is 0.5, how much do taxes need to change to shift aggregate demand by the amount you found in part a? billion Suppose Instead that the MPC is 0.6. c. How much does aggregate demand and taxes need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $[ billion and taxes need to change by $[ billion.arrow_forwardAn economy's IS curve represents the following markets. Goods: slc = 4 MPC = 0.7 G = 10 T = 9 Finance: I = 10 - 90r and r = 0.047 Currently, expenditure Y0 = 44.9. However the government decides to embark on a fiscal expansion, setting G to G1=12. The expenditure reacts to the new government spending G. Before the interest rate or anything else has time to react, the new expenditure is 51.567 Now we're adding an LM curve to the economy from above. The money market is given by M/P = 0.02 / (r - Y/10,300)^2 M = 22 P = 2 1. We continue with the fiscal expansion scenario, with G0=10 and G1=12. Draw a new graph that includes the LM curve and both the IS curves. Show how at the same old unchanged r = 0.047 the volume of transactions supported by the money market is lower than the expenditure afforded by the goods and financial markets. That is, map r=0.047 into the expenditure, Y1, and into the original volume of transactions, Y0. 2. Now let's let the three markets interact and choose the…arrow_forward
- The following graph shows the aggregate demand curve. Shift the aggregate demand curve on the graph to show the impact of a tax hike. 130 120 Aggregate Demand 110 100 90 Aggregate Demand 80 70 10 20 30 40 50 60 OUTPUT Suppose the governments of two different economies, economy J and economy K, implement a permanent tax cut of the same size. The marginal propensity to consume (MPC) in economy J is 0.85 and the MPC in economy K is 0.8. The economies are identical in all other respects. The tax cut will have a larger impact on aggregate demand in the economy with the PRICE LEVELarrow_forwardIn a simple model without government spending or taxation, if C = a +bY where C is consumer spending and Y is GDP which of the following statements are correct? Note that some of these questions require you to have read relevant sections of Core Unit 13. [FOUR correct answers] Select one or more: a. The consumption function implies that if GDP is zero, consumption is zero b. b is known as the average propensity to consume c. If there is an increase in consumers who engage in "consumption smoothing", this will cause an increase in a and a decrease in b d. a is known as the marginal propensity to consume e. b is known as the marginal propensity to consume f. a is the level of consumption when Y is zero g. If consumption-smoothing consumers become more optimistic about the future, a will increase. h. If there are more credit-constrained consumers in the economy, this will cause the marginal propensity to consume, to fallarrow_forwardIn a simple model without government spending or taxation, if C = a +bY where C is consumer spending and Y is GDP which of the following statements are correct? Select one or more: a. a is known as the marginal propensity to consume b. a is the level of consumption when Y is zero c. b is known as the marginal propensity to consume d. b is known as the average propensity to consume e. The consumption function implies that if GDP is zero, consumption is zero f. If there is an increase in consumers who engage in "consumption smoothing", this will cause an increase in a and a decrease in b g. If there are more credit-constrained consumers in the economy, this will cause the marginal propensity to consume, to fall h. If consumption-smoothing consumers become more optimistic about the future, a will increase.arrow_forward
