CHAPTER 24
NATIONAL INCOME AND THE CURRENT ACCOUNT
B. Multiple-Choice Questions
6. If expansionary aggregate demand-oriented macroeconomic policy is to be used to move
the economy towards simultaneous external and internal balance, in which one of the
following situations would the policy indeed move the economy towards the attainment
of both goals?
7. Other things equal, in a Keynesian income model, the autonomous spending multiplier
will __________ if there is a decrease in the marginal propensity to consume, and the
autonomous spending multiplier __________ if there is a decrease in the marginal
propensity to import (MPM).
a. decrease; also will decrease
8. If the consumption function in a Keynesian model is C = 60 + 0.7Y, then the
associated saving function is __________.
d. S = – 40 + 0.3Y
9. If the “multiplier” in a Keynesian open economy is 2.0, this is consistent with which
one of the following combinations of the marginal propensity to consume (MPC) and the
marginal propensity to import (MPM)? (Assume that there is no government sector.)
d. MPC = 0.5, MPM = 0.2
10. (This question pertains to Appendix A material.)
In which one of the following situations is the “multiplier” for a given autonomous
change in investment spending the largest?
a. MPS = 0.4, MPM = 0.2, t = 0.25
11. The income elasticity of demand for imports (YEM) is defined as
a. the change in imports divided by the change in income.
12. In an open-economy Keynesian income model of the sort used in Chapter 24, at the
equilibrium level of income,
13. If an economy has a marginal propensity to import of 0.3 and the economy’s
balance-of-trade deficit is 15, how much must the economy contract its GNP if
income contraction is to be the method of removing the balance-of-trade deficit?
14. In a Keynesian open-economy income model, an increase in autonomous investment in a
country is likely to lead to what impact (if any) on national income in a trading partner
country?
15. Given the following import function for a country in a Keynesian income model:
M = 15 + 0.10Y
16. (This questions draws on Appendix A material.)
Other things equal, an increase in the marginal propensity to save will __________ the
size of the “autonomous spending multiplier” (or “the multiplier”); other things equal, an
increase in the marginal tax rate __________ the size of the “autonomous spending
multiplier” (or “the multiplier”).
17. If national income is greater than spending by domestic residents, then the country will
have, in its balance of trade (or balance on current account)
18. In a Keynesian model, if MPM = 0.2, MPC = 0.8, and there is no government sector,
what will be the ultimate effect of an autonomous increase in investment of 30 on the
imports of the country, other things equal?
19. If a country’s ratio of imports to national income rises as the country grows over time,
this implies, other things equal, that the country’s marginal propensity to import is
__________ the country’s average propensity to import and, consequently, that the
country’s income elasticity of demand for imports (YEM) is __________.
20. Other things equal, in a Keynesian income model with a foreign sector, the autonomous
spending multiplier that applies to an autonomous increase in the country’s investment
__________.
d. is larger than, is the same as, or is smaller when foreign repercussions are included in
the model in comparison to when such repercussions are not included in the
model – cannot be determined without more information
21. (This question pertains to Appendix A material.)
In a Keynesian open economy, suppose that the MPC = 0.8, the MPM = 0.10, and
t = 0.25. If it is desired to increase national income by 125 through an increase in
private investment, by how much will private investment have to increase in order
to generate the 125 increase in income?
22. (This question pertains to Appendix B material.)
Assume a two-country world (countries I and II) where taxes do not depend on income
and where MPSI = 0.2, MPMI = 0.2, MPSII = 0.1, and MPMII = 0.3. In this situation,
what is the numerical value of the autonomous spending multiplier that applies to a
change in autonomous investment in country I on country I’s income, taking account of
foreign repercussions?
24. Consider a Keynesian income model without a government sector. In a graph with
national income (Y) on the horizontal axis and both (S – I) and (X – M) on the vertical
axis, the graphical relationship between (S – I) and Y would be portrayed as __________,
and the graphical relationship between (X – M) and Y would __________.
25. In a Keynesian income model, if a country’s actual level of income is above the
equilibrium income level, then there will be an __________ of inventories of firms and,
consequently, firms will __________ their level of output.
26. Suppose that, at the equilibrium level of income in a country, the country has a current
account (X – M) deficit of 60. The country’s marginal propensity to consume = 0.7,
and the country’s marginal propensity to import = 0.2. If contraction in imports by
means
of reducing national income is the method to be used to eliminate the current account
deficit, by how much must national income be reduced?