Principles of Macroeconomics for AP Courses

Steven Greenlaw, David Shapiro

Chapter 11

The Keynesian Perspective - all with Video Answers

Educators

Chapter Questions

Problem 1

In the Keynesian framework, which of the following events might cause a recession? Which might cause inflation? Sketch AD/AS diagrams to illustrate your answers.
a. A large increase in the price of the homes people own.
b. Rapid growth in the economy of a major trading partner.
c. The development of a major new technology offers profitable opportunities for business.
d. The interest rate rises. The good imported from a major trading partner become much less expensive.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 2

In a Keynesian framework, using an AD/AS diagram, which of the following government policy choices offer a possible solution to recession? Which offer a possible solution to inflation?
a. A tax increase on consumer income.
b. A surge in military spending.
c. A reduction in taxes for businesses that increase investment.
d. A major increase in what the U.S. government spends on healthcare.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 3

Use the AD/AS model to explain how an inflationary gap occurs, beginning from the initial equilibrium in Figure 11.6.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 4

Suppose the U.S. Congress cuts federal government spending in order to balance the Federal budget. Use the AD/ AS model to analyze the likely impact on output and employment. Hint: revisit Figure $11.6 .$

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 5

Sketch the aggregate expenditure-output diagram with the recessionary gap.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 6

Sketch the aggregate expenditure-output diagram with an inflationary gap.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 7

An economy has the following characteristics:
$\mathrm{Y}=$ National income
Taxes $=\mathrm{T}=0.25 \mathrm{Y}$
$\mathrm{C}=$ Consumption $=400+0.85(\mathrm{Y}-\mathrm{T})$
$\mathrm{I}=300$
$G=200$
$X=500$
$\mathrm{M}=0.1(\mathrm{Y}-\mathrm{T})$
Find the equilibrium for this economy. If potential GDP is $3,500,$ then what change in government spending is needed to achieve this level? Do this problem two ways. First, plug 3,500 into the equations and solve for G. Second, calculate the multiplier and figure it out that way.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 8

Table 11.8 represents the data behind a Keynesian cross diagram. Assume that the tax rate is 0.4 of national income; the MPC out of the after-tax income is 0.8; investment is $\$ 2,000 ;$ government spending is $\$ 1,000 ;$ exports are $\$ 2,000$ and imports are 0.05 of after-tax income. What is the equilibrium level of output for this economy?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 9

Explain how the multiplier works. Use an MPC of $80 \%$ in an example.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 10

How would a decrease in energy prices affect the Phillips curve?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 11

Does Keynesian economics require government to set controls on prices, wages, or interest rates?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 12

List three practical problems with the Keynesian perspective.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 13

Name some economic events not related to government policy that could cause aggregate demand to shift.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 14

Name some government policies that could cause aggregate demand to shift.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 15

From a Keynesian point of view, which is more likely to cause a recession: aggregate demand or aggregate supply, and why?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 16

Why do sticky wages and prices increase the impact of an economic downturn on unemployment and recession?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 17

Explain what economists mean by "menu costs."

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 18

What is on the axes of an expenditure-output diagram?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 19

What does the 45 -degree line show?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 20

What determines the slope of a consumption function?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 21

What is the marginal propensity to consume, and how is it related to the marginal propensity to import?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 22

Why are the investment function, the government spending function, and the export function all drawn as flat lines?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 23

Why does the import function slope down? What is the marginal propensity to import?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 24

What are the components on which the aggregate expenditure function is based?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 25

Is the equilibrium in a Keynesian cross diagram usually expected to be at or near potential GDP?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 26

What is an inflationary gap? A recessionary gap?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 27

What is the multiplier effect?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 28

Why are savings, taxes, and imports referred to as "leakages" in calculating the multiplier effect?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 29

Will an economy with a high multiplier be more stable or less stable than an economy with a low multiplier in response to changes in the economy or in government policy?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 30

How do economists use the multiplier?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 31

What tradeoff does a Phillips curve show?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 32

Would you expect to see long-run data trace out a stable downward-sloping Phillips curve?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 33

What is the Keynesian prescription for recession? For inflation?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 34

How did the Keynesian perspective address the economic market failure of the Great Depression?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 35

In its recent report, The Conference Board's Global Economic Outlook 2015, updated November 2014 (http://www.conference-board.org/data/ globaloutlook.cfm), projects China's growth between 2015 and 2019 to be about $5.5 \%$. International Business Times (http://www.ibtimes.com/us-exports-china-havegrown-294-over-past-decade-1338693) reports that China is the United States' third largest export market, with exports to China growing $294 \%$ over the last ten years. Explain what impact China has on the U.S. economy.

Rashmi Sinha

Numerade Educator

Problem 36

What may happen if growth in China continues or contracts?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 37

Does it make sense that wages would be sticky downwards but not upwards? Why or why not?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 38

Suppose the economy is operating at potential GDP when it experiences an increase in export demand. How might the economy increase production of exports to meet this demand, given that the economy is already at full employment?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 39

What does it mean when the aggregate expenditure line crosses the 45 -degree line? In other words, how would you explain the intersection in words?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 40

Which model, the AD/AS or the AE model better explains the relationship between rising price levels and GDP? Why?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 41

What are some reasons that the economy might be in a recession, and what is the appropriate government action to alleviate the recession?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 42

What should the government do to relieve inflationary pressures if the aggregate expenditure is greater than potential GDP?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 43

Two countries are in a recession. Country A has an $\mathrm{MPC}$ of 0.8 and Country $\mathrm{B}$ has an $\mathrm{MPC}$ of 0.6 In which country will government spending have the greatest impact?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 44

Compare two policies: a tax cut on income or an increase in government spending on roads and bridges. What are both the short-term and long-term impacts of such policies on the economy?

Nick Johnson

Numerade Educator

Problem 45

What role does government play in stabilizing the economy and what are the tradeoffs that must be considered?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 46

If there is a recessionary gap of $\$ 100$ billion, should the government increase spending by $\$ 100$ billion to close the gap? Why? Why not?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 47

What other changes in the economy can be evaluated by using the multiplier?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 48

Do you think the Phillips curve is a useful tool for analyzing the economy today? Why or why not?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 49

Return to the table from the Economic Report of the President in the earlier Work It Out feature titled "The Phillips Curve for the United States." How would you expect government spending to have changed over the last six years?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 50

Explain what types of policies the federal government may have implemented to restore aggregate demand and the potential obstacles policymakers may have encountered.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator