Tackle the Test: Free-Response Questions

  1. Question

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    Assume the MPC in an economy is 0.8 and the government increases government purchases of goods and services by $60 million. Also assume the absence of taxes, international trade, and changes in the aggregate price level.

    Rubric for FRQ 1 (6 points)

    1 point: Spending multiplier = 1/(1 − MPC) = 1/(1 − 0.8) = 1/0.2 = 5

    1 point: $60 million × 5 = $300 million

    1 point: It would decrease.

    1 point: The spending multiplier is 1/(1 − MPC). A fall in MPC increases the denominator, (1 − MPC), and therefore decreases the spending multiplier.

    1 point: Decrease it

    1 point: $60 million × 1 = $60 million

  2. 217

    Question

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    A change in government purchases of goods and services results in a change in real GDP equal to $200 million. Assume the absence of taxes, international trade, and changes in the aggregate price level.