Answer Quiz 4-

1. Holding the price level constant, if output in an economy is less than planned spending, which of the following is true?

I)  Inventories decrease

II)  Inventories increase

III)  Output decreases

IV)  Output increases

a. I and IV.

b. I and III.

c. II and III.

d. II and IV.

2. Use the simple Keynesian model presented in class to answer this question. Economic advisers have told the President of Bowzerland that she needs to decrease GDP by 80,000 bowzerbucks (the currency of the country). If the marginal propensity to consume in Bowzerland is 0.5, leaving everything else constant, how much should she increase net taxes?

3. Consider an economy using a Keynesian model.  The economy is initially in equilibrium at Y1. Holding everything else constant, if there is a decrease in the level of autonomous consumption this will

a. Shift the planned aggregate expenditure curve upward

b. Cause inventories to decrease if the economy continues to produce at its initial level of output.

c. Cause output to contract via the multiplier process.

d. (a), (b) and (c) are all true statements.

Use the information in the equations below to answer the next two questions.

Money Supply = 5000

Money Demand  = 20,000 - 30,000r

C= 8000 + .5(Y-NT)

I = 10000 - 4000r

G = 2000

NT= 2000

X-M = 1000

AE = Y  i.e, the economy is at equilibrium.

4. Find the equilibrium level of output.

5. How much should government spending increase to reach a level of output equal to 50,000?