Quiz 2 with answers and hints

Quiz 2 with answers and hints - 1. The key assumption of...

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1. The key assumption of the basic Keynesian model is that in the short run, firms: a. meet demand at preset prices. b. adjust prices to bring sales in line with capacity. c. change prices frequently. d. operate just as they do in the long run. [Hint: BOF pp 189] 2. Suppose a household’s marginal propensity to consume out of disposable income is 0.75 and its exogenous consumption is $250. If household income is $2000 and taxes are a flat $200, how much will the household save each period? a. $200. b. $250. c. $400. d. $1,000. [Hint: $1600 is spent, $200 goes to taxes, $200 is saved] 3. A$100 million increase in government purchases will have a bigger impact on equilibrium output a. The larger are the marginal tax rate and marginal propensity to import and the larger is the marginal propensity to consume. b. The larger are the marginal tax rate and marginal propensity to import and the smaller is the marginal propensity to consume. c. The smaller are the marginal tax rate and marginal propensity to import and the smaller is the marginal propensity to consume. d. The smaller are the marginal tax rate and marginal propensity to import and the larger is the marginal propensity to consume. [Hint: See ‘multiplier’ in chapter 7] 4. The Federal Government decides that, as a matter of policy, it would like to raise Australia’s Gini coefficient, a measure of income (in)equality. It is most likely to achieve this by: a. Increasing the tax free threshold and raising unemployment benefits. b. Increasing the top marginal income tax rate and reducing the tax on capital gains. c. Introducing a flat income tax rate of 20%. d. Raising the tax rate that applies to interest income on bank savings and stock returns. [Hint: A higher Gini coefficient means lower income equality] 5. If the marginal propensity to consume equals 0.75, then a $100 increase in after- tax disposable income leads to a _____ increase in consumption.
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a. $0.25 b. $0.75 c. $25 d. $75 6. On January 1, 2009 Tom bought a 2 year government bond with a principal amount of $20,000 and a coupon rate (paid annually) of 6.5%.
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Quiz 2 with answers and hints - 1. The key assumption of...

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