# Question 6. 6. Given the basic Keynesian model-as a starting point: Y = C + I + G C = a + b Yd I = f (i) I ?

Question 6. 6. Given the basic Keynesian model-as a starting point: Y = C + I + G C = a + b Yd I = f (i) I ? f (Y) ie., MPI* = 0 G = Go Tx = Txo * MPI to represent marginal propensity of invest (NOT import) Assume that the current income level in the economy is \$600 billion. To reduce the unemployment rate to the desired level, it is determined that we must raise the income level to \$650 billion. Assume that C = 25 + 0.75 Yd . To accomplish this, taxes will have to be cut by how much? (Points : 3)

A. \$50 billio

B. \$40 billion

C. \$16.7 billion

D. \$12.5 billion

E. \$150 billion

7. Given the basic Keynesian model-as a starting point: Y = C + I + G C = a + b Yd I = f (i) I ? f (Y) ie., MPI* = 0 G = Go Tx = Txo * MPI to represent marginal propensity of invest (NOT import) And if we write a tax function so that TX = To + t Y, where t is the tax rate, then the effect on the multipliers would be to:

A. increase the value (in absolute value, ignore signs)

B. decrease the value

C. have no effect on the value

8. Given the basic Keynesian model-as a starting point: Y = C + I + G C = a + b Yd I = f (i) I ? f (Y) ie., MPI* = 0 G = Go Tx = Txo * MPI to represent marginal propensity of invest (NOT import) Assume C = 20 + .8Yd, a \$10 billion tax cut would shift the consumption function upward by:

A. \$10 billion

B. more than \$10 billion

C. less than \$10 billion

D. cannot be determined

9. Given the model Y = C + I + G + X – M C = a + bYd where Yd= Y -Tx I = f ( i …), MPI = 0 G, Tx, X, Ms are all exogenous variables M = Mo + mY (import function) Md = Mt + Ml (money demand) Mt = f ( Y…) Ml = f ( i…) Now assume there is an increase in government spending. This will result in:

A. a rightward shift of the LM curve

B. an increase in consumption spending

C. no change in aggregate income

D. an increase in the level of exports

10. Assume a four spending sector model where the following variables are exogenously determined: Ms, Tx, G, X; assume also that investment spending and the asset/liquidity preference demand for money are both inversely related to interest rates; that consumption is positively related to disposable income and imports are also positively related to the level of domestic income. Now assume that the Federal Reserve goes on a major bond buying binge (in normal times and under normal conditions). This would result in:

A. a rightward shift of the IS curve

B. a leftward shift of the IS curve

C. a rightward shift (or rotation) of the LM curve

D. a leftward shift (or rotation) of the LM curve

Question 6. 6. Given the basic Keynesian model-as a starting point:Y=C+I+GC = a + b YdI = f (i) I ? f (Y) ie., MPI* = 0G = GoTx = Txo* MPI to represent marginal propensity of invest (NOT…

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