QUESTIONS AND PROBLEMS

QUESTIONS

1. What is on the axes of an expenditure-output diagram?
2. What does the 45-degree line show?
3. What determines the slope of a consumption function?
4. What is the marginal propensity to consume?
5. Why are the investment function, the government spending function, and the export function all drawn as flat lines?
6. What are the components on which the aggregate expenditure function is based?
7. What is an inflationary gap? A recessionary gap?
8. What is the multiplier effect?
9. How do economists use the multiplier?
10. 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?
11. Which model, the AD/AS or the AE model better explains the relationship between rising price levels and GDP? Why?
12. Two countries are in a recession. Country A has an MPC of 0.8 and Country B has an MPC of 0.6. In which country will government spending have the greatest impact?
13. 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?
14. If there is a recessionary gap of $100 billion, should the government increase spending by $100 billion to close the gap? Why? Why not?
15. From a Keynesian point of view, which is more likely to cause a recession: aggregate demand or aggregate supply, and why?
16. Why do sticky wages and prices increase the impact of an economic downturn on unemployment and recession?
17. Does it make sense that wages would be sticky downwards but not upwards? Why or why not?
18. Name some economic events not related to government policy that could cause aggregate demand to shift.
19. What is the Keynesian prescription to close a recessionary gap? To close an inflationary gap?
20. How did the Keynesian perspective address the economic market failure of the Great Depression?