National Income: Keynesian national income equilibrium - Question Bank

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National Income: Keynesian national income equilibrium

Q1. The principle of the multiplier states that

(Select one answer)

(a) * any increase in aggregate spending that causes the aggregate demand curve to shift will result in a larger increase in national income
(b) * in the long run, the aggregate demand curve becomes relatively flat as the economy approaches full employment
(c) * any increase in national income will result in a larger increase in aggregate spending
(d) * for any given increase in income, there will be a less than proportional increase in consumer spending


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Q2. Assuming there is no government or foreign sector, if the MPC is .8, the multiplier is

(Select one answer)

(a) * 0.2
(b) * 0.8
(c) * 1.25
(d) * 5


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Q3. If injections are less than withdrawals at the full-employment level of national income there is

(Select one answer)

(a) * a deflationary gap
(b) * hysteresis
(c) * hyperinflation
(d) * an inflationary gap


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Q4. Suppose that the government increases its spending by 10 per cent and also increases taxes by 10 per cent. We would expect this policy to

(Select one answer)

(a) * essentially have no effect on the level of national income
(b) * have a contractionary effect on national income
(c) * decrease the marginal propensity to save out of each extra pound of income
(d) * have an expansionary effect on national income


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Q5. A £1 increase in government spending will have a larger impact upon national income than a £1 cut in taxes since

(Select one answer)

(a) * the government prints the pound it spends
(b) * not all of a tax cut is spent
(c) * when taxes are cut, so too is government spending
(d) * taxes are an injection into the system


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Q6. Assume there is no government or foreign sector. If the MPC is .75, a £20 million decrease in planned investment will cause aggregate output to decrease by

(Select one answer)

(a) * £15 million.
(b) * £20 million.
(c) * £26.67 million.
(d) * £80 million.


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