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Quiz 2 FEEDBACK

# Quiz 2 FEEDBACK - 1 The key assumption of the basic...

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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. e. change prices rather than quantities. The basic Keynesian model is a short-run model in which demand determines output and firms supply output at given prices. 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. e. \$1,500. S = - 250 + 0.25 (2000 – 200) = 450 – 250 = 200 Or S = Y – T – C = 2000 – 200 – [250 + 0.75(2000 – 200)] = 1800 – 250 – 1350 = 200 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. e. The smaller are the marginal tax rate and marginal propensity to consume and the larger is the marginal propensity to import. See lecture note and textbook 4. If the marginal propensity to consume equals 0.75, then a \$100 increase in after- tax disposable income leads to a _____ increase in consumption. a. \$0.25 b. \$0.75 c. \$25 d. \$75 e. \$100

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MPC times the extra income 5. Planned aggregate expenditure is total: a. value added in the economy. b. planned spending on final goods and services.
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Quiz 2 FEEDBACK - 1 The key assumption of the basic...

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