LECTURE 3- THE GOODS MARKET

In the context of the Keynesian Cross model, what does the 45-degree line directly represent?

• The level of autonomous consumption.

• The relationship between investment and saving.

• All points where aggregate demand equals output.

• The maximum productive capacity of the economy.
  
  

The variable C₀ in the consumption function C = C₀ + C₁(Y-T) is best defined as:

• The marginal propensity to consume.

• The total consumption in the economy.

• Consumption that is independent of current disposable income.

• The change in consumption from a change in income.
  
  

If an economy is described as "demand-determined" in the short run, this means:

• The government sets the level of output.

• The level of production is fixed by its capital stock.
  
  

• Firms adjust production to meet the level of spending.
  
  

• International trade is the main driver of economic activity.

Which of the following would be considered a contractionary fiscal policy?

• An increase in government transfers.

• A decrease in the marginal propensity to consume.

• An increase in taxes.

• A decrease in the interest rate.

The multiplier effect describes the process where:

• An increase in imports leads to a decrease in exports.

• An initial change in spending leads to a larger overall change in output.

• Government spending automatically increases during a recession.

• Higher taxes lead to higher government revenue.

The "Paradox of Thrift" suggests that if all households decide to increase their saving, the likely macroeconomic outcome is:

• A permanent increase in the economy's growth rate.

• An increase in investment to match the higher saving.

• A fall in aggregate demand and equilibrium output.

• A significant reduction in the level of taxes.

In the simple model presented, which variable is explicitly considered endogenous?

• Government spending (G).
  

• The marginal propensity to consume (C).

• Taxes (T).

• Equilibrium output (Y).

What is the primary role of the equilibrium condition (Y = Z) in the model?

• It describes consumer behavior.

• It is a function that always holds true.

• It provides a second equation to solve for the two unknowns (Y and Z).

• It sets the level of government expenditure.
  
  

If the marginal propensity to consume (MPC) is 0.75, what is the value of the multiplier?

• 0.25

• 1.33

• 4

• 5

A sharp decline in consumer confidence would most directly affect which component of the model?

• It would increase the marginal propensity to consume (C₁).

• It would shift the aggregate demand (ZZ) curve downward.

• It would cause a movement along the consumption function.

• It would force the government to lower taxes.