Exam 11: The Income-Expenditure Model

The marginal propensity to import (mpi), where M = imports, is defined as

What happens to U.S. GDP when foreign countries experience prosperity?

Recall the Application about the U.S. "Locomotive Effect": how U.S. growth affects foreign economies and the demand for foreign products, to answer the following question(s). From the early 1990s until quite recently, the U.S. economy grew faster than the rest of the world, with its share of the world economy increasing from approximately 26 percent in 1992 to over 32 percent in 2001. Because the U.S. economy is such an important part of the world economy, its growth promoted growth in foreign countries. -According to this Application, as the U.S. economy grew from the early 1990s, U.S. exports also increased as our demand for foreign products promoted growth in foreign countries. This increase in exports would tend to

All else equal, a decrease in the level of imports allowed into the United States ________ the demand for goods and service produced in the United States.

In the simple Keynesian cross model with no government or foreign sectors, the value of the multiplier is defined as

A $50 billion increase in both government spending and taxes will

The slope of the consumption function is equal to the level of autonomous consumption.

As the marginal propensity to consume ________, the value of the multiplier increases.

Explain why, in a simple economy which does not include the government or taxation, saving equals investment at the equilibrium level of output.

The marginal propensity to consume is always

Recall the Application about Austrian economist Henry Hazlitt and the Broken Window Fallacy to answer the following question(s). Hazlitt questioned whether a hoodlum breaking a store window was actually good for society. -According to the Application, Hazlitt's argument that the broken window is NOT good for society

Let S =y - (100 + 0.5y). Assume no government or foreign sectors. At the equilibrium level of income, y* = 800, the level of saving is

Which of the following increases the slope of the consumption function?

Let S =y - (100 + 0.75y). Assume no government or foreign sectors. At the equilibrium level of income, y* = 400, the level of investment is

Recall the Application about the impact that home equity values have on consumer spending and wealth to answer the following question(s). From 1997 to mid-2006, housing prices rose nationally by approximately 90 percent and consumer wealth increased by $6.5 trillion, but in the summer of 2006, housing prices began to fall. Home equity is the single largest component of net wealth for most families in the United States, and changes in the value of home equity affect consumer spending. -According to this Application, home equity is the single largest component of net wealth for most families in the United States. As home equity falls

If firms are producing an output greater than planned expenditures, these firms will cut back on production, which decreases GDP.

An increase in the income tax rate ________ the value of the tax multiplier.

-Refer to Figure 11.2. Suppose that Ca = 40, MPC = 0.8, I = 10. What is the value of consumption in equilibrium?

When output exceeds planned expenditures, there is insufficient production in the economy.

-Refer to Figure 11.5. An increase in exports is best illustrated by diagram