In the Short-Run Keynesian Model, to Close an Expansionary Gap

question 49

Multiple Choice

In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be:

• A)increased by $10 billion.
• B)decreased by $10 billion.
• C)increased by more than $10 billion.
• D)decreased by less than $10 billion.

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Definitions:

Variable Costs

Costs that change in proportion to the level of output or activity, such as raw materials, labor, and utilities.

Output

The quantity of goods or services produced by a business, industry, or country.

Normal Profit

The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income that entrepreneurial ability must receive to induce entrepreneurs to provide their entrepreneurial ability to a firm; the level of accounting profit at which a firm generates an economic profit of zero after paying for entrepreneurial ability.

Implicit Cost

The monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market; equal to what the resource could have earned in the best-paying alternative employment; includes a normal profit.