Question

11.

if a household’s disposable income increases from $50,000 to $100,000 and it’s consumption increases from $40,000 to $80,000, the MPS must be

A. 0.8

B. 0.4

C. 0.5

D. 0.2

E. 0.7

21

Assume we are at at income level where the C+I+G+X (consumption+investment+government spending+net exports) function lies above the 45-degree line. we can conclude that at this income level:

A. The economy is an equilibrium.

B. There will be pressure to expand more production.

C. Households will save more money than they spend.

D. Aggregate expenditures are less than output

E. Unplanned inventories are likely to accumulate

26

A hypothetical open economy has a marginal propensity to import (MPI) equal to 0.2 and a marginal propensity to consume equal to 0.7. Assume that the economy is initially in equilibrium. What is the marginal propensity to save this economy?

A. 0.9

B. 0.7

C. 0.6

D. 0.3

E. 0.2

When the government uses taxes and spending to affect national economy, it is engagingly in:

A. Interest rate policy

B. Monetary policy

C. Fiscal policy

D. Exchange rate policy

E. Fiscal policy

A hypothetical open economy has a marginal propensity to import (MPI) equal to 0.2 and a marginal propensity to consume equal to 0.7. Assume that the economy is initially in equilibrium.

What is the spending multiplier of this economy?

A. 0.7

B. 1.4

C. Cannot be determined with the given information

D. 2

E. 0.9

Answer 1

(1) Disposable income (DI) increases from $50,000 to $100,000

=> Change in DI = $100,000 - $50,000 = $50,000

Consumption increases from $40,000 to $80,000

=> Change in consumption = $80,000 - $40,000 = $40,000

MPC = (Change in consumption / Change in DI)

=> MPC = ($40,000 / $50,000)

=> MPC = 0.8

MPS + MPC = 1

=> MPS = 1 - MPC

=> MPS = 1 - 0.8

=> MPS = 0.2

Answer: Option (D)

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(2) AE = C + I + G + X.

AE line is above the 45 degree line. It means there is AE is greater than GDP, it will lead to decrease in inventories and lead to increase in production.

Hence, we can conclude that at this income level there will be pressure to expand more production.

Answer: Option (B)

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(3) MPC + MPS = 1

=> 0.7 + MPS = 1

=> MPS = 1 - 0.7

=> MPS = 0.3

Marginal propensity to save in this economy is 0.3

Answer: Option (D)

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(4) When the government uses taxes and spending to affect national economy, it is engagingly in Fiscal Policy.

Answer: Option (C) and option (E)

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(5) MPI = 02

MPC = 0.7

Multiplier = 1 / (1 -MPC + MPI)

=> Multiplier = 1 / (1 - 0.7 + 0.2)

=> Multiplier = 1 / 0.5

=> Multiplier = 2

Answer: Option (D)

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