AP Macro - Keynsian Model & Keynes in AD / AS

An increase in government spending will have a greater impact in which of the following situations?

• The economy has a low MPC, meaning people spend a large portion of each additional dollar earned

• The economy has a high MPC, meaning people save a large portion of each additional dollar earned

• The economy has a high MPS, meaning people save a large portion of each additional dollar earned

• The economy has a high MPC, meaning people spend a large portion of each additional dollar earned

Identify which formula shows the consumption function of a country with largest amount of autonomous spending.

•  C = 450 + 0.75Y

• 300 = 500A - 0.75Y

•  C = 300 + 0.9Y

• C = 150Y + 0.75X

Which of the following is the most likely example of induced consumption?

• Spending on food items

• Spending on utilities

• Spending on luxury clothing

• Spending on education

If the consumption function is C = 700 + 0.75Y, what is the marginal propensity to save?

• 700

• 0.75

• 0.25

• 4

Using the provided consumption function, identify the tax multiplier:

C = 600 + 0.8Y

• 0.8

• 1.25

• 5

• 4

An increase in income taxes will likely cause which of the following:

• An increase in overall consumption

• An increase in disposable income

• A decrease in disposable income

• An increase in autonomous spending

Lisa’s disposable income is $78,000. She chooses to spend $54,000 of her disposable income. What is Jenni’s marginal propensity to consume (MPC)? What is Jenni’s marginal propensity to save (MPS)?

• 0.692

• 0.308

• 1.44

• $24,000

Choose the BEST option related to the tax multiplier formula

• The tax multiplier formula is MPC / (1-MPC)

• The tax multiplier is always one less than the spending multiplier

• The tax multiplier is 1 / MPC

• The tax multiplier formula is MPC / (1 - MPC) AND the tax multiplier is always one less than the spending multiplier

Which of the following is NOT a likely consequences of contractionary fiscal policy?

• A lower equilibrium price level

• More unemployment

• Lower RGDP

• Higher levels of investment

Which of the following is a TRUE statement?

• Reducing taxes has a weaker overall impact on GDP than increasing government spending

• Increasing government spending is a quicker method of boosting GDP, compared to reducing taxes

• Without fiscal policy, an economy in a recessionary gap would never return to long-run equilibrium

• Raising interest rates is an example of contractionary fiscal policy