Question

1. Which of the following is an example of a transfer payment by the government?

Group of answer choices

The government provides unemployment benefits to its citizens.

The local government invests in building a community center.

The government raises funds in order to build bridges and roads.

The government provides healthcare to its citizens at a subsidized price.

The government provides concessional rates to senior citizens who use public transport.

2. The GDP gap is:

Group of answer choices

the product of the potential real GDP and the equilibrium level of real GDP.

the distance between the current level of real gross domestic product and full employment real GDP.

the difference between potential real GDP and the actual equilibrium level of real GDP.

the difference between the present value of all of government's projected financial obligations and the present value of all projected future tax and other receipts.

the difference between the actual output of an economy and its potential output.

3. A U.S. federal budget deficit that raises real interest rates is most likely to:

Group of answer choices

lead to a depreciation of the dollar in the foreign exchange market.

encourage foreign investment in U.S. securities.

lead to an increase in exports.

lead to an appreciation of other currencies relative to the U.S. dollar.

discourage imports of foreign goods.

4. As disposable income rises:

Group of answer choices

consumption falls, but not by as much as the disposable income rises.

the average propensity to consume increases.

saving falls as a percentage of disposable income.

the average propensity to consume remains unchanged.

saving rises as a percentage of disposable income.

5. The marginal propensity to consume (MPC) is equal to the inverse of the marginal propensity to save (MPS).

Group of answer choices

True

False

6. When we assume that investment is autonomous we imply that:

Group of answer choices

it is a fixed constant amount.

it is independent of current real GDP.

it is a positive function of interest rates.

it is actually zero.

it has no impact on consumption.

7. If the MPS equals 0.25 and the MPI is 0.15, and assume that there are no government taxes, then an initial change in investment spending of $250 million will result in a total change in equilibrium real GDP of $625 million.

Group of answer choices

True

False

Answer 1

(1) (A)

Transfer payment is payment made by government, against which no service or product is received.

(2) (C)

GDP gap = Actual equilibrium GDP - Potential GDP

(3) (B)

Higher US interest rate increases foreign investment in US interest-paying assets.

(4) (C)

Saving as % of disposable income = (Saving / Disposable income) x 100%

Higher disposable income lowers this value.

(5) False

MPC = 1 - MPS

(6) (a)

An autonomous value is constant and fixed.

(7) False

Multiplier = 1 / (MPS - MPI) = 1 / (0.25 - 0.15) = 1/0.1 = 10

Increase in GDP ($ million) = Increase in investment x Multiplier = 250 x 10 = 2500