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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
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
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
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
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
****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
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
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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