Question

Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. Unsupported answers will receive no marks. It is the explanation that is important.

1. The transaction of a consumer who buys a “meal-kit” sent to their home adds less to GDP than a similar consumer who goes out to a restaurant for the same meal.

2. When Canada legalized cannabis consumption it likely led to an increase in Canadian GDP and an increase in general economic well-being.

3. In an economy with no government and no foreign sector, an increase in the marginal propensity to consume would result in a decrease in the size of the aggregate expenditure (AE) multiplier.

4. When inventories fall below planned levels, firms increase production so national income rises.

Answer 1

1. False since whether the meal is consumed at the restaurant or at home is immaterial as the value addtion in both cases is the same and hence its addition to GDP is same.

2. True since earlier although there was cannabis production and consumption, that was not considered in the GDP calculation. With cannabis being legalized, the entire sector will be under govt supervision, adding to the GDP calculation ; as well as improving the quality of the cannabis and it being used responsibly. Also prices may actually go down as legalizing it will reduce the charges of the middle men.

3.False, since AE multiplier = 1/(1-mpc) in the absense of govt or external sector. As mpc(marginal propensity to consume) increases, 1-mpc falls; i.e. 1/(1-mpc) increases.

4. True, as in a keynesian economy where prices are sticky, as inventory level falls, firms react to it by increasing production, leading to an increase in national income.