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Quiz 2 with answers and hints

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

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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? [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 [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: [Hint: A higher Gini coefficient means lower income equality]
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