Intermediate Macroeconomics Exam II
UPDATED ACTUAL Exam Questions and
CORRECT Answers
Model of aggregate demand and aggregate supply - CORRECT ANSWER✔✔- Long run:
prices flexible, output determined by factors of production & technology, unemployment
equals its natural rate
Short run: prices fixed, output determined by aggregate demand, unemployment negatively
related to output
The Keynesian cross - CORRECT ANSWER✔✔- Closed economy model; income
determined by expenditure.
I = planned investment
PE = C + I + G = planned expenditure
Y = real GDP = actual expenditure
Difference between actual & planned expenditure = unplanned inventory investment
Consumption function - CORRECT ANSWER✔✔- C = C(Y - T)
Government policy variables - CORRECT ANSWER✔✔- G = G[bar], T = T[bar]
Investment - CORRECT ANSWER✔✔- I = I[bar] -> exogenous
Planned expenditure - CORRECT ANSWER✔✔- PE = C(Y-T) + I[bar] + G[bar]
Slope of PE line = MPC
I and G are exogenous, so the only component of (C + I + G) that changes when income
changes is consumption. A one-unit increase in income causes consumption & therefore the
PE to increase by the MPC.
Equilibrium condition for the Keynesian cross - CORRECT ANSWER✔✔- Actual
expenditure = planned expenditure
Y = PE
, Graphing the equilibrium condition for the Keynesian cross - CORRECT ANSWER✔✔- PE
on vertical axis
Y on horizontal axis
45 degree line
An increase in government purchases and the Keynesian cross - CORRECT ANSWER✔✔-
At Y1, an unplanned drop in inventory causes firms to increase output, and income rises
toward a new equilibrium
At any value of Y, an increase in G by the amount deltaG causes an increase in PE by the
same amount. At Y1, there is an unplanned depletion of inventories because people are
buying more than firms are producing (PE > Y)
Solving for delta Y - CORRECT ANSWER✔✔- Y = C + I + G
delta Y = delta C + delta I + delta G
= delta C + delta G
= MPC x delta Y + delta G (because delta C = MPC x deltaY)
(1 - MPC) x delta Y = delta G. Solve for Y:
delta Y = (1/(1-MPC)) x delta G
Government purchases multiplier - CORRECT ANSWER✔✔- The increase in income
resulting from a $1 increase in G.
In this model, delta Y/delta G = (1-(1/MPC)
Example: If MPC = 0.8, then
delta Y / delta G = (1/(1-0.8)) = 5
An increase in G causes income to increase by 5 times as much
Why the government purchases multiplier is greater than 1 - CORRECT ANSWER✔✔-
Initially, the increase in G causes an equal increase in Y; that is, delta G = delta Y. But an
increase in Y -> an increase in C, which further increases Y, which further increases C, etc.
So the final impact on income is much bigger than the initial delta G.
UPDATED ACTUAL Exam Questions and
CORRECT Answers
Model of aggregate demand and aggregate supply - CORRECT ANSWER✔✔- Long run:
prices flexible, output determined by factors of production & technology, unemployment
equals its natural rate
Short run: prices fixed, output determined by aggregate demand, unemployment negatively
related to output
The Keynesian cross - CORRECT ANSWER✔✔- Closed economy model; income
determined by expenditure.
I = planned investment
PE = C + I + G = planned expenditure
Y = real GDP = actual expenditure
Difference between actual & planned expenditure = unplanned inventory investment
Consumption function - CORRECT ANSWER✔✔- C = C(Y - T)
Government policy variables - CORRECT ANSWER✔✔- G = G[bar], T = T[bar]
Investment - CORRECT ANSWER✔✔- I = I[bar] -> exogenous
Planned expenditure - CORRECT ANSWER✔✔- PE = C(Y-T) + I[bar] + G[bar]
Slope of PE line = MPC
I and G are exogenous, so the only component of (C + I + G) that changes when income
changes is consumption. A one-unit increase in income causes consumption & therefore the
PE to increase by the MPC.
Equilibrium condition for the Keynesian cross - CORRECT ANSWER✔✔- Actual
expenditure = planned expenditure
Y = PE
, Graphing the equilibrium condition for the Keynesian cross - CORRECT ANSWER✔✔- PE
on vertical axis
Y on horizontal axis
45 degree line
An increase in government purchases and the Keynesian cross - CORRECT ANSWER✔✔-
At Y1, an unplanned drop in inventory causes firms to increase output, and income rises
toward a new equilibrium
At any value of Y, an increase in G by the amount deltaG causes an increase in PE by the
same amount. At Y1, there is an unplanned depletion of inventories because people are
buying more than firms are producing (PE > Y)
Solving for delta Y - CORRECT ANSWER✔✔- Y = C + I + G
delta Y = delta C + delta I + delta G
= delta C + delta G
= MPC x delta Y + delta G (because delta C = MPC x deltaY)
(1 - MPC) x delta Y = delta G. Solve for Y:
delta Y = (1/(1-MPC)) x delta G
Government purchases multiplier - CORRECT ANSWER✔✔- The increase in income
resulting from a $1 increase in G.
In this model, delta Y/delta G = (1-(1/MPC)
Example: If MPC = 0.8, then
delta Y / delta G = (1/(1-0.8)) = 5
An increase in G causes income to increase by 5 times as much
Why the government purchases multiplier is greater than 1 - CORRECT ANSWER✔✔-
Initially, the increase in G causes an equal increase in Y; that is, delta G = delta Y. But an
increase in Y -> an increase in C, which further increases Y, which further increases C, etc.
So the final impact on income is much bigger than the initial delta G.
