Score for this quiz:
100
out of 100
Submitted Jul 21 at 8:17am
This attempt took 55 minutes.
Part 1: Multiple choice questions:
Questions 1-8 are worth 3 points each. Questions 9-12 are worth 4 points
each.
Question 1
3 / 3 pts
Consider the following model
i) C = 1500 + mpc (Y - tY)
ii) I = 800
iii) G = 500
iv) X - M = 500 - mpi (Y)
where:
t = the (flat) tax rate
mpc = the marginal propensity to consume
mpi = the marginal propensity to import
suppose mpc = .80, t = .25, mpi = .2
Given the information above, solve for the equilibrium output:
Y* = 3300
Y* = 1800
Y* = 1500
Y* = 5500
Y = C + I + G + X-M
Y = 1500 + mpc(1-t)Y + 800 + 500 + 500 - mpi Y
Y - mpc(1-t)Y + mpiY = 3300
Y [ 1 - mpc(1-t) + mpi ] = 3300
Y = 1 / [1 - mpc(1-t) + mpi] X 3300
Y = 1 / [1 - .8(1-.25) + .2] X 3300
Y = 1.66667 X 3300
Y = 5500
Question 2
3 / 3 pts

We know that the formula for the (government) spending multiplier is 1/(1-
[mpc(1-t) - mpi]). The value of the government spending multiplier in this
problem is:
Round to 2 decimal places.
3.33
1.33
1.67
2.55
Y = C + I + G + X-M
Y = 1500 + .mpc(1-t)Y + 800 + 500 + 500 - mpi Y
Y - mpc(1-t)Y + mpiY = 3300
Y [ 1 - mpc(1-t) + mpi ] = 3300
Y = 1 / [1 - mpc(1-t) + mpi] X 3300
Y = 1 / [1 - .8(1-.25) + .2] X 3300
Y = 1.66667 X 3300
Y = 5500
Question 3
3 / 3 pts
When we discussed the multiplier we discussed the impact effect. For
example, suppose that G increases by
100
to 600 and we assume, as we
often do, that firms match the increase in demand by increasing Y by 100. In
round two, this is an
increase in income of 100 to consumers
. We
will
trace out exactly where this 100 increase in income goes in the
second round
. Recall, there are three leakages to address (via taxes,
imports and savings).
Given that t=.25, we know that .25 of every dollar increase in gross income
is a leakage due to taxes. Since the increase in income is $100, we know the
leakage due to taxes is:
$25
$100
$75

25 cents
We have three leakages: tracing out 100: for every additional dollar in gross
income, the consumer saves 20 cents since the mpc = .8. The government
gets 25 cents since the tax rate is .25. And finally, 20 cents is leaked out to
the purchase of imported goods. Multiplying by 100 we have the following: Y
up by 100, savings up by 20, taxes up by 25, imports up by 20, consumption
up by 35
Question 4
3 / 3 pts
Given that mpi=.2, we know that .2 of every dollar increase in gross income
is a leakage due to imports. Since the increase in income is $100, we know
the leakage due to imports is:
$80
$20
$100
20 cents
We have three leakages: tracing out 100: for every additional dollar in gross
income, the consumer saves 20 cents since the mpc = .8. The government
gets 25 cents since the tax rate is .25. And finally, 20 cents is leaked out to
the purchase of imported goods. Multiplying by 100 we have the following: Y
up by 100, savings up by 20, taxes up by 25, imports up by 20, consumption
up by 35
Question 5
3 / 3 pts
Given that the MPC=.8, we know that .2 of every dollar increase in gross
income is saved. Since the increase in income is $100, we know the leakage
due to savings is:
$100
20 cents

$20
$80
We have three leakages: tracing out 100: for every additional dollar in gross
income, the consumer saves 20 cents since the mpc = .8. The government
gets 25 cents since the tax rate is .25. And finally, 20 cents is leaked out to
the purchase of imported goods. Multiplying by 100 we have the following: Y

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