The Short Run Practice Quiz (20 questions)

Question 1

1. In a closed economy with linear consumption, which formula gives equilibrium output?

Y = \frac{1}{1-c_1}(c_0 + I - G - c_1T)

Y = \frac{1}{1-c_1}(c_0 + I + G - c_1T)

Y = \frac{1}{1-c_1}(c_0 + I + G + c_1T)

Y = \frac{1}{1+c_1}(c_0 + I + G - c_1T)

Explanation

Equilibrium output equals autonomous spending, including the term $-c_1T$ , multiplied by $\frac{1}{1-c_1}$ . Using $1+c_1$ in the denominator does not capture the specified multiplier.

Answer

$$Y = \frac{1}{1-c_1}(c_0 + I + G - c_1T)$$

Question 2

2. A household has disposable income of $Y_D$ and consumes $C$ . How is its private saving defined?

Consumption minus disposable income,

S \equiv C-Y_D=C-Y+T

Income minus government spending,

S \equiv Y-G

Disposable income minus consumption,

S \equiv Y_D-C=Y-T-C

Disposable income plus consumption,

S \equiv Y_D+C=Y-T+C

Explanation

Private saving is the portion of disposable income that remains after consumption, expressed as $Y_D-C$ or $Y-T-C$ . Taxes minus government spending describes public saving, not private saving.

Answer

Disposable income minus consumption, $$S \equiv Y_D-C=Y-T-C$$

Question 3

3. Why can a collective effort to save more lower total saving in the paradox of thrift?

It can reduce aggregate demand and output, shrinking the income from which saving occurs

It can raise government spending and create a budget surplus that replaces private saving

It can increase investment automatically, making household saving irrelevant to output

It can raise aggregate demand and output, increasing consumption faster than income

Explanation

When individuals collectively try to save more, aggregate demand and output may fall, potentially reducing total saving. The household-level intuition that saving more raises one's own saving does not guarantee the same result for the whole economy.

Answer

It can reduce aggregate demand and output, shrinking the income from which saving occurs

Question 4

4. In the linear consumption function $C = c_0 + c_1Y_D$ , what does $c_0$ represent?

Disposable income when consumption is zero.

The share of additional income that consumers spend.

The amount of taxes net of government transfers.

Consumption when disposable income is zero.

Explanation

The intercept $c_0$ is consumption when disposable income equals zero. The propensity to consume is instead represented by $c_1$ .

Answer

Consumption when disposable income is zero.

Question 5

5. Why can it be difficult to assess the effects of changing taxes or government spending in practice?

Policy changes are easy to implement, while shifts in investment and imports complicate their effects

Policy changes can be difficult to implement, while shifts in investment and imports complicate their effects

Policy changes can be difficult to implement, while shifts in consumption and taxes are excluded from assessment

Policy changes can be difficult to implement, while investment and imports remain unaffected by them

Explanation

Fiscal changes are not easy to make, and changes in investment and imports can make their effects difficult to assess. The model's limitation is not that investment and imports remain unaffected.

Answer

Policy changes can be difficult to implement, while shifts in investment and imports complicate their effects

Question 6

6. Which expression gives total goods demand in an open economy?

Z \equiv C + I + X - G - IM

Z \equiv C + I + G - X + IM

Z \equiv C + I + G + X - IM

Z \equiv C + G + X + IM - I

Explanation

Open-economy goods demand adds consumption, investment, government spending, and exports, then subtracts imports. The expression that adds imports and subtracts exports reverses the net-export contribution.

Answer

$$Z \equiv C + I + G + X - IM$$

Question 7

7. Which expression represents autonomous spending in the closed-economy output model?

c_0 + I + G - c_1Y

c_0 + I + G - c_1T

c_0 + I + G + c_1T

c_0 + c_1Y_D + I + G

Explanation

Autonomous spending is $c_0 + I + G - c_1T$ and does not depend on output. The expression containing $c_1Y$ varies with output, so it is not autonomous spending.

Answer

$$c_0 + I + G - c_1T$$

Question 8

8. If a government collects more in taxes than it spends, how is its public saving classified?

As balanced spending, because public saving

T-G

equals zero

As a budget surplus, because public saving

G-T

is positive

As a budget deficit, because public saving

T-G

is positive

As a budget surplus, because public saving

T-G

is positive

Explanation

Public saving is taxes minus government spending, so it is positive when tax revenue exceeds spending and indicates a budget surplus. A deficit instead corresponds to negative public saving.

Answer

As a budget surplus, because public saving $$T-G$$ is positive

Question 9

9. What does the model imply about the government's ability to influence output, and what qualification applies?

The government can use consumption parameters to set output, though the model omits household choices

The government can use spending or taxes to affect output, and the model shows these changes are costless

The government can use investment or imports to set output, and the model captures the main real-world constraints

The government can use spending or taxes to affect output, though the model omits important real-world constraints

Explanation

The model indicates that government spending or taxes can be used to affect output, while acknowledging that it leaves out important real-world constraints. It does not establish that fiscal changes are costless or unconstrained in practice.

Answer

The government can use spending or taxes to affect output, though the model omits important real-world constraints

Question 10

10. In the model, what is the likely output effect when consumers decide to save more by lowering $c_0$ or $c_1$ ?

Output falls only when government spending rises alongside the decrease in consumption

Output falls as the decrease in either consumption parameter represents greater desired saving

Output stays fixed because consumption parameters do not affect equilibrium demand

Output rises as the decrease in either consumption parameter represents greater desired saving

Explanation

A decrease in $c_0$ and/or $c_1$ represents a decision by consumers to save more and leads to lower output in the model. The parameters do affect consumption and demand, so output is not fixed.

Answer

Output falls as the decrease in either consumption parameter represents greater desired saving

Question 11

11. If income is $Y$ and taxes net of transfers are $T$ , how is disposable income defined?

Y_D \equiv T - Y

Y_D \equiv Y - T

Y_D \equiv Y + T

Y_D \equiv Y \times T

Explanation

Disposable income is income remaining after taxes are paid and transfers are received, represented by income minus net taxes. Adding net taxes would increase disposable income as taxes rise, contrary to the definition.

Answer

$$Y_D \equiv Y - T$$

Question 12

12. In goods-market equilibrium, private saving is $S=80$ and public saving is $T-G=-15$ . What level of investment is consistent with equilibrium?

95

, because investment equals private saving minus public saving

80

, because investment equals private saving alone

65

, because investment equals private saving plus public saving

15

, because investment equals the absolute value of public saving

Explanation

The equilibrium relation is $I=S+(T-G)$ , so investment is $80+(-15)=65$ . The value $80$ would equate investment with private saving alone and omit the negative public saving.

Answer

$$65$$, because investment equals private saving plus public saving

Question 13

13. A country imports more than it exports. What is its trade position?

A trade deficit, because imports exceed exports.

A trade surplus, because imports exceed exports.

A balanced trade position, because both flows are present.

A trade deficit, because exports exceed imports.

Explanation

A trade deficit occurs when imports exceed exports. A surplus describes the opposite case, when exports exceed imports.

Answer

A trade deficit, because imports exceed exports.

Question 14

14. At goods-market equilibrium, what relationship holds between production $Y$ and demand $Z$ ?

Y < Z

, so demand exceeds production.

Y > Z

, so production exceeds demand.

Y = 0

, regardless of the level of demand.

Y = Z

, so production equals demand.

Explanation

Goods-market equilibrium means that all demanded goods are supplied, so production equals demand. Production exceeding demand would indicate that supply does not match the goods demanded.

Answer

$$Y = Z$$, so production equals demand.

Question 15

15. With prices and wages fixed, what sequence describes how a change in demand affects the economy?

Demand changes income, income changes production, and production changes demand.

Demand changes income, income changes demand, and demand changes production.

Demand changes production, production changes income, and income changes demand.

Demand changes production, production changes demand, and demand changes income.

Explanation

With prices and wages fixed, demand affects production, which affects income, which then feeds back into demand. The alternative sequence that puts income before production reverses the stated causal order.

Answer

Demand changes production, production changes income, and income changes demand.

Question 16

16. A firm buys new equipment that increases the economy's potential output. How is this classified in the economic definition of investment?

Economic investment, because it adds to global potential output.

Economic investment, because it changes the firm's financial position.

Financial investment, because the purchase involves an asset.

Financial investment, because the equipment is purchased by a firm.

Explanation

Economic investment is defined by adding to global potential output, as the new equipment does in this case. A purchase involving an asset is not automatically financial investment in the relevant distinction.

Answer

Economic investment, because it adds to global potential output.

Question 17

17. Which pair of statements describes goods-market equilibrium equivalently while accounting for public saving?

Production equals taxes; investment equals government spending minus saving

Production equals investment; investment equals private saving alone

Production equals saving; investment equals consumption plus public saving

Production equals demand; investment equals private saving plus public saving

Explanation

Goods-market equilibrium can be expressed directly as production equaling demand or as investment equaling total saving, including public saving. Investment equals private saving alone holds only when public saving is zero.

Answer

Production equals demand; investment equals private saving plus public saving

Question 18

18. What kind of relationship does the consumption function represent?

A production rule describing output as a function of capital and labour.

An accounting identity defining total goods demand from its components.

A behavioural relationship describing consumption as a function of disposable income.

A fiscal rule defining taxes as a function of government spending.

Explanation

The consumption function represents consumer behaviour by relating consumption to disposable income. The goods-demand identity is an accounting relation, not a behavioural equation.

Answer

A behavioural relationship describing consumption as a function of disposable income.

Question 19

19. After an increase in autonomous spending, how does the multiplier process generate further increases in demand?

Each round's further demand increase equals

1-c_1

times the preceding income increase.

Each round's further demand increase equals the preceding income increase divided by

c_1

.

Each round's further demand increase equals the preceding demand increase plus taxes.

Each round's further demand increase equals

c_1

times the preceding income increase.

Explanation

Higher autonomous spending raises demand, production, and income in successive rounds; each further demand increase is $c_1$ times the preceding income increase. Dividing by $c_1$ instead would not describe the consumption response to additional income.

Answer

Each round's further demand increase equals $$c_1$$ times the preceding income increase.

Question 20

20. How is the trade balance calculated?

Exports divided by imports.

Exports plus imports.

Imports minus exports.

Exports minus imports.

Explanation

Net exports, or the trade balance, equal exports minus imports. Subtracting exports from imports reverses the definition.

Answer

Exports minus imports.

The Short Run Practice Quiz (20 questions)

All questions and answers

1. In a closed economy with linear consumption, which formula gives equilibrium output?

2. A household has disposable income of $Y_D$ and consumes $C$ . How is its private saving defined?

3. Why can a collective effort to save more lower total saving in the paradox of thrift?

4. In the linear consumption function $C = c_0 + c_1Y_D$ , what does $c_0$ represent?

5. Why can it be difficult to assess the effects of changing taxes or government spending in practice?

6. Which expression gives total goods demand in an open economy?

7. Which expression represents autonomous spending in the closed-economy output model?

8. If a government collects more in taxes than it spends, how is its public saving classified?

9. What does the model imply about the government's ability to influence output, and what qualification applies?

10. In the model, what is the likely output effect when consumers decide to save more by lowering $c_0$ or $c_1$ ?

11. If income is $Y$ and taxes net of transfers are $T$ , how is disposable income defined?

12. In goods-market equilibrium, private saving is $S=80$ and public saving is $T-G=-15$ . What level of investment is consistent with equilibrium?

13. A country imports more than it exports. What is its trade position?

14. At goods-market equilibrium, what relationship holds between production $Y$ and demand $Z$ ?

15. With prices and wages fixed, what sequence describes how a change in demand affects the economy?

16. A firm buys new equipment that increases the economy's potential output. How is this classified in the economic definition of investment?

17. Which pair of statements describes goods-market equilibrium equivalently while accounting for public saving?

18. What kind of relationship does the consumption function represent?

19. After an increase in autonomous spending, how does the multiplier process generate further increases in demand?

20. How is the trade balance calculated?

Study with flashcards

Read the study guide

Related classes

Business Ownership Structures

Conhecimentos Específicos de Administração Pública

Financial Accounting Fundamentals

The Short Run: Goods Market

EMS Entrepreneurship and Economy

Conflict Management in Organisations

Make your own practice quizzes

The Short Run Practice Quiz (20 questions)

All questions and answers

1. In a closed economy with linear consumption, which formula gives equilibrium output?

2. A household has disposable income of YDY_DYD​ and consumes CCC. How is its private saving defined?

3. Why can a collective effort to save more lower total saving in the paradox of thrift?

4. In the linear consumption function C=c0+c1YDC = c_0 + c_1Y_DC=c0​+c1​YD​, what does c0c_0c0​ represent?

5. Why can it be difficult to assess the effects of changing taxes or government spending in practice?

6. Which expression gives total goods demand in an open economy?

7. Which expression represents autonomous spending in the closed-economy output model?

8. If a government collects more in taxes than it spends, how is its public saving classified?

9. What does the model imply about the government's ability to influence output, and what qualification applies?

10. In the model, what is the likely output effect when consumers decide to save more by lowering c0c_0c0​ or c1c_1c1​?

11. If income is YYY and taxes net of transfers are TTT, how is disposable income defined?

12. In goods-market equilibrium, private saving is S=80S=80S=80 and public saving is T−G=−15T-G=-15T−G=−15. What level of investment is consistent with equilibrium?

13. A country imports more than it exports. What is its trade position?

14. At goods-market equilibrium, what relationship holds between production YYY and demand ZZZ?

15. With prices and wages fixed, what sequence describes how a change in demand affects the economy?

16. A firm buys new equipment that increases the economy's potential output. How is this classified in the economic definition of investment?

17. Which pair of statements describes goods-market equilibrium equivalently while accounting for public saving?

18. What kind of relationship does the consumption function represent?

19. After an increase in autonomous spending, how does the multiplier process generate further increases in demand?

20. How is the trade balance calculated?

Study with flashcards

Read the study guide

Related classes

Business Ownership Structures

Conhecimentos Específicos de Administração Pública

Financial Accounting Fundamentals

The Short Run: Goods Market

EMS Entrepreneurship and Economy

Conflict Management in Organisations

Make your own practice quizzes

2. A household has disposable income of $Y_D$ and consumes $C$ . How is its private saving defined?

4. In the linear consumption function $C = c_0 + c_1Y_D$ , what does $c_0$ represent?

10. In the model, what is the likely output effect when consumers decide to save more by lowering $c_0$ or $c_1$ ?

11. If income is $Y$ and taxes net of transfers are $T$ , how is disposable income defined?

12. In goods-market equilibrium, private saving is $S=80$ and public saving is $T-G=-15$ . What level of investment is consistent with equilibrium?

14. At goods-market equilibrium, what relationship holds between production $Y$ and demand $Z$ ?