Question

1

Menu costs are:

the costs of materials.

the cost of changing prices.

particularly low when inflation is high.

a reason that the inflation rate typically underestimates true price level changes.

A market basket costs $150 to buy in the base year and $60 to buy in year X.

A. the price index for year X is 250.

B. Year X probably occurred after the base year.

C. Year X is the base year.

D. the price index for year X is .4 or 40%.

A traditional expansionary gap is created when the aggregate demand curve moves to the:

A. right of the natural rate of output; inflation rises and unemployment falls.

B. left of the natural rate of output; inflation falls and unemployment rises.

C. right of the natural rate of output; inflation falls and unemployment rises.

D. left of the natural rate of output; inflation rises and unemployment falls.

Consumers change their purchases and move ALONG the same consumption function when:

Their income changes

Their tastes change

The price level changes

All of the above.

      12) If MPC is .75 then if consumer income rises by $10,000 we would predict that consumption will:

A. rise by $7500 while savings fall by $2500.

B. fall by $2500 while savings rise by $7500.

C. rise by $7500 while savings rise by $2500.

D. fall by $2500 while savings fall by $7500.

     13) Autonomous consumption is

A. that part of consumption that rises or falls with changes in disposable income.
B. the minimum that people will spend even if disposable income is zero.
C. the amount people will spend when the C line crosses the 45-degree line.
D. the amount people will spend when income is equal to consumption.

     14) A low rate of investment could be explained by a

A. low rate of saving and low interest rates.
B. low rate of saving and high interest rates.
C. high rate of saving and low interest rates.
D. high rate of saving and high interest rates.

     15) Mr. A makes $40,000 a year; Ms. B makes $20,000 a year. Mr. A pays $6,000 in taxes while Ms. B pays $4,000 in taxes. Which of the following is true?

A. Taxes are progressive because Mr. A pays a higher dollar amount in taxes than Ms. B

B. Taxes are neutral because Mr. A makes more money before and after taxes than Ms. B.

C. Taxes are regressive because Mr. A pays a lower tax rate than Ms. B.

D. Taxes are progressive because Ms. B pays a lower dollar amount in tax.

     16) The 45 degree line in the full AE model represents

A. all points where C = Y.

B. all points where AE = Y

C. all points where C + I = G + Xn

D. all points where C = I + G + Xn

       17) International trade:

A. Allows countries to specialize in the goods at which they are best at producing.

B. can increase the goods and services both trading partners have.

C. can be unbalanced where on partner exports more to the other than the other way around.

D. all of the above.

       18) If AD rises in the short run:

A. it pushes up the price level.

B. it decreases national output.

C. it increases full employment.

D. all of the above.

     19) We cut down trees and sell the timber for $8000. The timber is sawn up into lumber that sells for $18,000. The lumber is used to build furniture that sells to consumers for $30,000.

A. $30,000 goes into GDP.

B. $4000 goes into GDP.

C. $56,000 goes into GDP.

D. $22,000 goes into GDP.

     20) The long run annual growth rate of the U.S. economy tends to be about:

A. 1% or less.

B. 2%

C. 5%

D. 10% or more.

Answer 1

1.

The cost of changing prices

The menu cost arises when cost of inputs changes and due to this reason, cost of production also changes. It leads the firms to change the price menu frequently and incur a cost that is called as menu cost.

2.

D. The price index for year X is .4 or 40%.

Price index of year X = 60/150 = .4 or 40%

3.

A. right of the natural rate of output; inflation rises and unemployment falls

Expansionary gap means real output is higher than the potential output. In this case, the inflation will be at peak and aggregate demand will cut the supply curve to the rights of the natural output level.

4.

The price level changes

With change in price level, the consumption change along the curve. With the change in taste and income, the consumption shifts either to left or right direction.

12.

C. rise by $7500 while savings rise by $2500.

Working note:

Increase in consumption = 10000*MPC = 10000*.75 = $7500

Increase in savings = 10000*MPS = 10000*.25 = $2500

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