Principles of Macroeconomics - Basic Macro Relationships and the AE model Practice Set1.
In the equation C = a + bY, which describes the aggregate consumption function, 'b' stands for?
A. The amount of consumption when income is zero.
B. The amount of income when consumption is zero.
C. The average consumption level.
D. The marginal propensity to consume.
2. As the MPS increases, the multiplier will:
A. either increase or decrease depending on the size of the change in investment.
B. increase.
C. remain constant.
D. decrease.
3. Assuming there is no government or foreign sector, if the MPC is .8, the multiplier is:
A. 0.2 B. 1.25
C. 0.8 D. 5
4.Assume there is no government or foreign sector. If the MPC is .75, a £20 million decrease in planned investment will cause aggregate output to decrease by:
A. £80 million.
B. £26.67 million.
C. £15 million.
D. £20 million.
5.If injections are less than withdrawals at the full-employment level of national income, there is:
A. an inflationary gap.
B. hyperinflation.
C. a deflationary/recessionary gap.
D. hysteresis.
6. The slope of the consumption function is
A)less than the slope of the 45-degree line but not equal to zero.
B)greater than the slope of the 45-degree line.
C)equal to the slope of the 45-degree line.
D)equal to zero.
7.Saving rather than dissaving occurs at any level of disposable income at which
A)the consumption function is above the 45-degree line.
B)the consumption function intersects the saving/income curve.
C)the consumption function is below the 45-degree line.
D)autonomous consumption is positive.
8. An increase in disposable income shifts
A)both the consumption and savings functions upwardB)the consumption function upward and leads to a movement along the savings function.
C)both the consumption and savings functions downward.
D)neither the consumption function or the savings function because it leads to a movement along both the consumption and savings function.
9.Which of the following events will make the consumption function steeper?
A)an increase in disposable income
B)an increase in real GDP
C)an increase in the marginal propensity to consume
D)an increase in unplanned inventory investment
10. If prices are fixed, when aggregate planned expenditure exceeds real GDP, then
A)inventories decrease, signaling firms to increase production and increase real GDP.
B)inventories increase, signaling firms to decrease production and decrease real GDP.
C)profits fall, signaling firms to decrease production and decrease real GDP.
D)None of the above answers are correct.
11.The multiplier effect exists because a change in autonomous expenditure
A)leaves the economy in the form of imports.
B)leads to changes in income, which generate further spending.
C)prompts further exports.
D)will undergo its complete effect in one round.
12. Suppose that the slope of the AE curve is 0.75. Then a $100 increase in autonomous spending causes equilibrium expenditure to
A)decrease by $400.
B)increase by $400.
C)decrease by $750.
D)increase by $750.
13. Imports
A)increase the size of the multiplier because imports make disposable income less than real GDP.
B)decrease the size of the multiplier because spending on imports does not increase real GDP in the domestic nation.
C)increase the size of the multiplier because imports are paid for by exports.
D)decrease the size of the multiplier because imports lead to an increase in taxes and government purchasesThe information below corresponds with questions #14-17.
Assume that a certain country has the following equations describing its macro economy:
C = 0.6(DI) + 800 I = 1000
G = T = 0 X - M = 0
14. When this economy produces at equilibrium GDP, what will be total consumption (C) and total savings (S)?
A. C = 2500, S = 2000
B. C = 1000, S = 2000
C. C = 3500, S = 1000
D. C = 4500, S = 2500
15. If this economy is producing at equilibrium GDP, what would be its average propensity to consume?
A. a. -2500/4500 (-56%)
B. b. 4500/4500 (100%)
C. c. 1000/4500 (22%)
D. d. 3500/4500 (78%)
16. The value associated with this country's spending multiplier is:
A. 2.5
B. 1.5
C. 0.6
D. 5
17. The value associated with this country's (simple) tax multiplier is:
A. - 0.6
B. - 1.5
C. - 2.5
D. - 5
*use the formula Mt = -MPC/MPS
Problem 1
Use responses a through g (representing line segments) to answer the following questions based
on this figure:
a. -0G b. 0G c. df/cf
d. -ab e. 0Y1 f. ed
g. dY2
1. The break-even level of income is ____?
2. Saving at income Y0 is equal to ____?
3. The MPC is equal to ____?
4. Autonomous consumption is equal to ____?
5. Autonomous saving is equal to ____?
6. Consumption at income Y2 is equal to ____?
7. Saving when income is Y2 is equal to ____?
Problem 2
If there is a recessionary gap of $100 billion and the MPC is 0.80, by how much must taxes be reduced to eliminate the recessionary gap?
Problem 3
Induced Consumption - that part of consumption that is dependent on income
Induced Saving - that part of savings that is dependent on income
Autonomous Consumption - the level of consumption when income is zero
Autonomous Saving - the level of saving when income is zero (hence dissaving)
Refer to this Aggregate Expenditures diagram to answer the following questions.
a. In equilibrium, the level of autonomous consumption equals_____ and induced consumption is ______; therefore, total consumption equals _____.
b. The equilibrium level of $800 is based on a marginal propensity to consume of _______.
c. The corresponding savings function that would go with this diagram would have autonomous saving equal to _____; a mps equal to _____; and induced savings of _____ at equilibrium.
d. If the level of autonomous consumption fell to $50, then the new level of equilibrium income would equal ______, and induced consumption would equal ______. At equilibrium, total consumption equals __________; and total saving equals __________.
Problem 4
Use the table below to answer the following questions:
Real GDP($) C ($)
500 495
510 504
520 513
530 522
540 531
550 540
560 549
(a) What is the size of the multiplier in this economy?
(b) If taxes were zero, government purchases were $5, investment is $3, and net exports are zero, what is the equilibrium GDP?
(c) If taxes are $10, government purchases are $10, investment is $6, and net exports are zero, what is the equilibrium GDP?
(d) Assume investment is $50, taxes are $50, and net exports and government purchases are each zero. The full-employment level of GDP is $545. How much of a reduction in taxes is needed to eliminate the recessionary gap?
(e) Assume that investment, net exports, and taxes are zero. Government purchases are $11 and the full-employment GDP without inflation is $530. By how much must government spending be reduced to eliminate the inflationary gap?