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Unformatted text preview: E CONOMICS 102 S PRING 2004 S OLUTIONS TO PRACTICE QUESTIONS #5 M ULTIPLE C HOICES 1. B. Says Law implies that S+T=I+G but does not imply S=I or T=G 2. D. A and C are wrong statements. B is a correct statement from what we covered in class. Yet is not an IMPLICATION of the vertical government demand curve. Just by referring to the vertical government demand curve we cannot deduce whether private demand for funds has an impact on government demand or not. 3. Question deleted from file: poor question 4. A. When MPC increases, the multiplier 1/(1-MPC) increases as well. For the same change in private investment, a larger multiplier will result in a larger increase in equilibrium GDP. 5. C Be very clear that the idea of complete crowding out in classical model implies precisely that any change in GOVERNMENT DEFICIT will be counteracted by a change in BOTH INVESTMENT AND SAVING to keep the TOTAL SPENDING unchanged. It does not imply that government deficit has no effect in other aspects of the economy. (Note: we always assume this crowding out effect exists, but the crowding out is complete only in the classical school of thoughts. Keynesian ideas in future lectures crowding out is complete only in the classical school of thoughts....
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