Congratulations. You've been appointed economic adviser to Happyland. Your research assistant says the country's mpe is .8 and autonomous expenditures (probably federal government spending) have just risen by $20.
1. What will be the actual dollar change in income and does it rise or fall?
2. Your research assistant comes in and says he's sorry but the mpe wasn't .8; it was .5. How does your answer change (in $ amounts)?
3. He runs in again and says exports have fallen by $10 and investment has risen by $10. How does your answer change (in $ amounts)?
4. Will the increase in autonomous expenditures be more likely to eventually lead to higher inflation or higher unemployment?
5. How could it possibly lower either inflation or unemployment?
1. See the attached graph. An increase in autonomous spending shifts the
The multiplier is 1/(1-mpe) = 5
The change in income is therefore 5 x 20 = $100
Income rises. An increase in autonomous expenditure (I, G or X) increases equilibrium by more than increase in autonomous expenditure.
2. Simply replace .8 with .5 to calculate the multiplier
1/(1-.5) = 2
Income increases by 20x 2 =$40.
Income has decreased by $60.
3. Changes ...
Macroeconomic concepts for national income calculations based on MPE and autonomous expenditures
Key concepts of macroeconomics
1. The consumption function measures the additional consumption due to increased income as a percentage of that increase in income.
2. At relatively high levels of disposable income:
a. APC is negative and APS is positive.
b. APC is low and APS is high.
c. APC is high and APS is low.
d. MPC is high and MPS is low.
3. From the data given below, this individual's marginal propensity to consume is:
Disposable Income Savings
d. not calculable without additional data.
4. The level of consumption increases as:
a. the amount of non liquid assets held increases.
b. credit availability is reduced.
c. consumers expect the rate of inflation to increase.
d. the level of disposable income decreases
5. The level of investment is determined by:
a. the business firm's sales outlook.
b. expectations concerning the size and apportionment of the
c. the expected rate of profit.
d. consumer expectations.
e. both a and c.
f. all of the above.
6. Investment will be high when:
a. the capacity utilization rate is high and interest rates are low.
b. the capacity utilization rate is low and interest rates are high.
c. the capacity utilization rate is high and interest rates are high.
d. none of the above.
7. The marginal efficiency of capital is a term Keynes used to describe:
a. the interest rate on investment opportunities.
b. the expected rate of profit.
c. the return on stock market investments.
d. none of the above.
8. Firms will most likely borrow money for investment when
a. interest rates are low.
b. interest rates are high.
c. interest rate is higher than the expected profit rate.
d. the expected profit rate is higher than the interest rate.
9. A sales tax on basic food items is an example of a(n):
a. direct tax.
b. nominally progressive tax.
c. indirect tax.
d. nominally regressive tax.
e. both a and b.
f. both c and d.
10. An individual's taxable income rises from $20,000 to $30,000 per year, and the taxes paid amount rises from $5,000 to $8,500. This individual's marginal tax rate is:
d. not calculable without additional information.
11. Gross domestic product (GDP) equals :
a. GNP minus depreciation.
b. national income plus indirect business taxes and subsidies.
c. national income plus depreciation.
d. GNP plus net exports.
e. GNP adjusted for factor income from abroad.
12. The largest sector of GDP is consumer spending.
Please answer questions 13 - 14 based on the following information:
The following are items from the national accounts (given in $billions) of
Country X for 2000:
Government spending 1,200
Factor income received from rest of world 230
Payments of factor income to rest of world 220
Indirect business taxes and subsidies 440
13. GDP for the year 2000 in Country X is:
14. Net national product and national income for 2000 are, respectively:
a. $4,230; 3,030
b. $4,680; 4,240
c. $5,120; 4,680
d. $5,700; 5,030
15. If GDP triples, the GDP deflator stays the same, and our population
doubles, our real per capita GDP:
a. rises by 33 1/3%
b. rises by 50%
c. rises by 66 2/3%
d. stays the same
16. GDP rises from $2 trillion to $3 trillion and prices rose by 50% over this period. Then:
a. real GDP rose by 50%.
b. real GDP rose by 25%.
c. real GDP fell by 50%
d. real GDP stayed the same.
17. GDP for a country in 1990, the base year, is $500 billion. In 1998, GDP is $750 billion and the GDP deflator is 130. Which of the following statements is TRUE?
a. Real GDP rose by $15.4 billion.
b. Real GDP fell by $77 billion.
c. Real GDP rose by $100 billion.
d. Real GDP rose by 15.4%.
e. Real GDP fell by 20%.
18. GDP calculations will include:
a. all individual investments in stocks and bonds.
b. an estimate of the total value of all underground economy
c. total savings by U.S. households.
d. money spent on additions and improvements to existing
19. Net domestic product is usually preferred to GDP by economists because net national product
a. includes depreciation.
b. excludes depreciation.
c. includes indirect business taxes.
d. excludes indirect business taxes.
20. At full employment cyclical unemployment is zero.
21. If inflation turns out to be much higher than expected, the real interest rate will be __________ than the expected interest rate.
c. the same
d. lower or higher, depending on other factors
22. Inflation occurs when aggregate demand exceeds the value of what the economy can produce at full employment.
23. Which of the following statements is FALSE?
a. A rising price level pushes up interest rates.
b. A price increase in the domestic economy relative to trading partners reduces exports and raises imports.
c. A decrease in the price level increases the quantity of real money.
d. An increase in the price level leads to an increase in investment.
e. All of the above statements are TRUE.
24. A decrease in the quantity of real money held by individuals due to a rise in the general price level is termed the:
a. real balance effect.
b. interest rate effect.
c. foreign purchase effect.
25. If equilibrium GDP is $500 billion greater than full-employment GDP and there is an inflationary gap of $100 billion, then the multiplier is:
e. not calculable without additional data.
26. In 1996 the budget deficit is $200 billion; in 1997 the budget deficit falls to $100 billion. If the national debt at the beginning of 1996 is $1 trillion, at the end of 1997 it is:
a. $700 billion.
b. $900 billion.
c. $1.1 trillion.
d. $1.2 trillion.
e. $1.3 trillion.
27. There is a deflationary gap when
a. equilibrium GDP is equal to full employment GDP.
b. equilibrium GDP is smaller than full employment GDP.
c. equilibrium GDP is larger than full employment GDP.
d. none of these occur.
28. The speculative demand for money is the least responsive to fluctuations in interest rates.
29. A reduction in taxes of $200 billion, with a MPC of 0.75, results in a:
a. $150 billion increase in equilibrium GDP.
b. $400 billion decrease in equilibrium GDP.
c. $600 billion increase in equilibrium GDP.
d. $800 billion increase in equilibrium GDP.
30. Which of the following will be an effect of the Fed selling open market securities?
a. Business investment will be discouraged.
b. Household savings will be discouraged.
c. Households consumption will be encouraged.
d. The money supply will increase.
31. The Depository Institutions Deregulation and Monetary Control Act:
a. made all depository institutions subject to the Fed's legal reserve requirements.
b. authorized all depository institutions to issue checking deposits.
c. penalized nonmembers of the Federal Reserve system by reducing check-clearing and borrowing services.
d. reduced the Fed's control over the money supply.
e. both a and b.
f. all of the above.
32. The opportunity cost of holding money varies:
a. inversely with the interest rate.
b. directly with credit availability.
c. inversely with the price level.
d. inversely with the level of income.
e. all of the above.
33. When the Fed purchases securities on the open market:
a. it drives up the price of U.S. government securities.
b. it raises interest rates.
c. it reduces the money supply.
d. both a and b.
e. all of the above.
34. If banks are subject to a reserve requirement of 10%, an open-market purchase of $2 billion by the Federal Reserve (assuming demand deposits are the only form of money) will tend to:
a. increase the money supply by $1.8 billion.
b. increase the money supply by $20 billion.
c. decrease the money supply by $2 billion.
d. decrease the money supply by $18 billion
35. Labor productivity is measured by:
a. the ratio of capital to labor.
b. real output per worker hour.
c. real output per capita.
d. the ratio of worker hours to real GDP.
36. The most important reason for our slow rate of economic growth over the last three decades (of those listed below) is
a. lagging business sales.
b. foreign imports.
c. our low savings rate.
d. high tax rates.
37. When one nation has an absolute advantage over another:
a. it will not benefit from trade with that nation.
b. both nations will tend towards self sufficiency.
c. it can produce all goods with fewer units of resources than the other nation.
d. it can produce one good using fewer units of resource than the other nation.
38. When the dollar is devalued in international currency markets:
a. foreign goods become more expensive on domestic markets and the U.S. trade deficit is reduced.
b. foreign goods become cheaper and the U.S. standard of living is improved.
c. foreign goods become more expensive and the U.S. trade deficit is increased.
d. U.S. exports become more expensive and the trade deficit is reduced.
39. If the United States were to devote all its resources to producing washing machines, it could turn out 45 billion a year; if it devoted all its resources to producing cars, it could turn out 15 billion a year. Our domestic exchange equation is:
a. 3 cars = 1 washing machine.
b. 5 washing machines = 1 car.
c. 3 washing machines = 1 car.
d. 1/3 of a washing machine = 1 car.
40. Using the data in question #39 above, if the United States were to trade its cars for another country's washing machines, it would not trade one car unless it received ___________ washing machines.
b. between one and three
c. more than three
d. more than five