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PP_Slides_Class_17_Wednesday_March_19

PP_Slides_Class_17_Wednesday_March_19 - Good Afternoon...

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Good Afternoon!! Class 17 Wednesday, March 19
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1. If equilibrium GDP is $1 trillion greater than full employment GDP and there is an inflationary gap of $250 billion, the multiplier is a. 4. b. 1. c. 2.5 d. zero e. impossible to find
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2. If equilibrium GDP is $500 billion greater than full employment GDP and the multiplier is 2.5, there is an inflationary gap a. of $500 billion b. of $250 billion c. of $200 billion d. of $100 billion e. that is impossible to find
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3. When there is an inflationary gap we are spending too ____ and taxes should be ____. a. little raised b. much lowered c. much raised d. little lowered
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4. The reason the multiplier is greater than 1 is that a. workers are capable of increasing their production when they have to b. income is respent a. the marginal propensity to save is 1 d. none of the above
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5. If the MPC is .8 and government spending falls by $20 billion, GDP will fall by a. $160 billion b. $100 billion c. $80 billion d. $20 billion e. $16 billion
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6. If the MPC were .75, what change in government spending (in billions of dollars) would be required to cause the equilibrium level of GDP to fall by 100? a. a decrease of 125 b. a decrease of 100 c. a decrease of 75 d. a decrease of 50 e. a decrease of 25
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The Inflationary Gap
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What is equilibrium GDP? $1,500T What is full employment GDP? $1,000T What is the inflationary gap? $200T How should we change G? decrease $200T What is the MPC? .6 What is the multiplier? 2.5 $1,000T = $1,500T + (- $200T x 2.5)
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Removing the Inflationary Gap
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****MPC**** central concept in Keynes’s solution to Great Depression Government doesn’t employ person A, doesn’t pay them $1, they spend MPC less of it, say -.333, so person B spends MPC less of it, say -.1089, etc.
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-$1.00 -.33 -.1089 -.035937 -.01185921 -.003913539 -.001291467 -.0004426184 total about - $1.492
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multiplier = 1 / (1 – MPC) here 1 / (1 - .33) = 1.492 chg in GDP = chg in gov’t spend * mult - $1.492 = - $1.00 * 1.492
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In Slavin, in these graphs the horizontal axis should be GDP, not Real GDP p. 265 Figure A p. 265 Figure B p. 266 Figure 13
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7. The national debt is ___ of the United States government and ___ of the people who hold it. a. an asset a liability b. a liability an asset c. an asset an asset d. a liability a liability
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8. Two ways to lower the deficit are to ____ taxes and ____ government spending.
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