Directions: Please answer questions in order, as neatly as possible.
1) Decompose the following components of the Aggregate Expenditures identity: C+I+G (much like we did in class).
2) What was Keynes’ response–re the “Classicals”–with regard to:
a. Say’s Law
b. the neutrality of money
c. the self-correction of markets
d. laissez-faire policies
3) What is the “Paradox of Thrift”?
4) Assume a marginal propensity to consume (mpc) of 0.75.
a. Find the necessary change in government expenditures (G) to increase real GDP by $100 billion.
b. Find the necessary change in (net) taxes (T) to increase real GDP by $100 billion.
c. Using an AS/AD diagram, show the economy’s responses to question 4) a., first assuming fixed output prices, and second assuming variable output prices. Explain your graphs.
5) What is the “rationale” behind the (simple) expenditures multiplier–that is, how does it work?
6) What is fiscal policy? What type of (discretionary) fiscal policy would the government use in the face of a recession? Or demand-pull inflation? What are the limitations of fiscal policy?