Question

1. The consumer price index is a cost-of-living index.

False

True

2.Labor productivity is a major determinant of

the money supply.

the skill level of the labor force.

the size of the labor force.

living standards.

3.If consumption falls from $600 billion to $575 billion and the marginal propensity to consume is 0.8, then equilibrium income will

fall by $25 billion.

rise by $25 billion.

rise by $125 billion.

fall by $125 billion.

Answer 1

1. TRUE

Explanation: A consumer price index measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households. A CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. It is often called cost of living index.

2. THE SKILL LEVEL OF THE LABOUR FORCE

Explanation: The higher the average level of education in an economy, the higher the accumulated human capital and skills of the labour and the higher the labor productivity.

3. FALL BY $125 BILLION

Explanation: The multiplier effect refers to the increase in final income arising from any new injection of spending. The size of the multiplier depends upon household's marginal decisions to spend, called the marginal propensity to consume (MPC), or to save, called the marginal propensity to save (MPS).

Here, Multiplier = 1/1-MPC = 1/1-0.8 =1/0.2 = 5

Thus, equilibrium income will fall by 5 times the fall in consumption. Since, consumption falls by $25 billion, the equilibrium income will fall by $25 x 5 = $125 billion.