Principles of Economics

Economics 110

Mr. Beck

SUNY College at Oneonta

Review Questions for Chapter 27
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Review Questions for Economics
110
1. If the full employment level of
real GDP (Y) is $6,300 billion, the equilibrium level of real GDP (Y) is
$6,000 billion, and the MPC is 0.80, then an appropriate increase in government
spending (G) to move the economy to full employment would be (Round
off your answer to the nearest billion dollar, if necessary)
Q1 answer
2. Assume the marginal propensity to consume (MPC) = 0.60.
If the economy has a recessionary gap of $50 billion, then to eliminate
the gap the government should increase government spending (G) by (Round
off your answer to the nearest billion dollar, if necessary)
Q2 answer
3. If the marginal propensity to consume
(MPC) were equal to 0.80 and government spending (G) increases by $25 billion,
the resultant change in the economy's equilibrium level of real GDP (Y)
will be a change of (Round off your answer to the nearest billion dollar,
if necessary)
Q3 answer
4. Assume that the marginal propensity
to consume (MPC) = 0.80. If the economy has a recessionary gap of $40 billion,
then to eliminate the gap there would have to be an increase in investment
(I) of (Round off your answer to the nearest billion dollar, if necessary)
Q4 answer
5. The lower the value of the marginal propensity to consume
(MPC), then the

larger is the multiplier and the greater is the effect a given change in
government spending (G) would have on the economy's equilibrium level of
real GDP (Y).

larger is the multiplier and the smaller is the effect a given change in
government spending (G) would have on the economy's equilibrium level of
real GDP (Y).

smaller is the multiplier and the greater is the effect a given change
in government spending (G) would have on the economy's equilibrium level
of real GDP (Y).

smaller is the multiplier and the smaller is the effect a given change
in government spending (G) would have on the economy's equilibrium level
of real GDP (Y).
Q5 answer
6. The economy's equilibrium level of real GDP (Y) is
$5,700 billion. Government spending (G) then decreases. As a result, the
equilibrium level of real GDP (Y) decreases to $5,200 billion. If the marginal
propensity to consume (MPC) = 0.90, then by how much must government spending
(G) have decreased? (Round off your answer to the nearest billion dollar,
if necessary)
Q6 answer
7. If the marginal propensity to consume (MPC) were equal
to 0.98 and investment (I) increases by $13 billion, then the resultant
change in the economy's equilibrium level of real GDP (Y) will be (Round
off your answer to the nearest billion dollar, if necessary)
Q7 answer
8. The economy's equilibrium level of real GDP (Y) is
$5,000 billion. The government wants to change its spending (G) so that
the equilibrium level of real GDP (Y) will increase to $5,460 billion.
If the MPC = 0.75, then by how much must government spending (G) be changed?
(Round off your answer to the nearest billion dollar, if necessary)
Q8 answer
9. A decrease in investment (I) of 25 will cause a shift
in the entire real expenditure [C+I+G+(XIM)] line

up by: 25 X multiplier.

up by: MPC X 25.

up by: MPC X 25 X multiplier.

down by: 25.

down by: MPC X 25.

down by: 25 X multiplier.
Q9 answer
10. The economy's equilibrium level
of real GDP (Y) is $5,000 billion. Investment (I) then changes because
of President Clinton's business tax incentives. As a result, the equilibrium
level of real GDP (Y) increases to $5,400 billion. If the MPC = 0.80, then
by how much must investment (I) have changed? (Round off your answer to
the nearest billion dollar, if necessary)
Q10 answer
11. Assume that businesses increase their investment
spending (I) by $100 million. The larger the value of the marginal propensity
to consume (MPC), the

greater will be the value of the multiplier and the greater will be the
resultant change in real GDP (Y).

greater will be the value of the multiplier and the smaller will be the
resultant change in real GDP (Y).

smaller will be the value of the multiplier and the greater will be the
resultant change in real GDP (Y).

smaller will be the value of the multiplier and the smaller will be the
resultant change in real GDP (Y).
Q11 answer
12. An increase in government spending (G) of $100 will
cause a shift in the entire real expenditure [C+I+G+(XIM)] line

up by: $100 X multiplier.

up by: MPC X $100.

up by: MPC X $100 X multiplier.

down by: $100 X multiplier.

down by: MPC X $100.

None of the above answers is correct.
Q12 answer
Review Questions from Last Year's Exams
13. The government increases spending (G) by 100. The larger
the marginal propensity to consume (MPC) that exists in the economy,

the smaller the multiplier and the larger the resultant change in real
GDP (Y) that will occur.

the smaller the multiplier and the smaller the resultant change in real
GDP (Y) that will occur.

the larger the multiplier and the larger the resultant change in real GDP
(Y) that will occur.

the larger the multiplier and the smaller the resultant change in real
GDP (Y) that will occur.
Q13 answer
14. If the full employment level of real GDP (Y) is $9,000 billion,
the equilibrium level of real GDP (Y) is $8,000 billion, and the MPC is
0.75, then an appropriate increase in government spending (G) to move the
economy to full employment would be (Round off your answer to the
nearest billion dollar, if necessary)
Q14 answer
15. Assume the marginal propensity to consume (MPC) = 0.75. If the
economy has a recessionary gap of $200 billion, then to eliminate the gap
the government should increase government spending (G) by (Round off your
answer to the nearest billion dollar, if necessary)
Q15 answer
16. If the marginal propensity to consume (MPC) were equal to 0.95
and investment expenditures (I) increase by $23 billion, then the resultant
change in the economy's equilibrium level of real GDP (Y) will be (Round
off your answer to the nearest billion dollar, if necessary)
Q16 answer
17. Assume the economy’s marginal propensity to consume (MPC) = 0.85
and there are no taxes. Workers in industry X receive a salary increase
of $500,000. They devote all their additional consumption expenditures
(C) on clothing. As a result, what will be the $ increase in consumption
expenditures (C) by the income earners in the clothing industry?
Q17 answer
Formulas
Output (GDP) always equals income (Y).
Disposable Income (DI) = Income (Y) – Net taxes (T)
[Net Taxes (T) = Taxes  Transfer Payments]
Saving (S) = DI  C (S is saving, DI is disposable
income, C is consumption)
MPC = DC/DDI
(MPC is the marginal propensity to consume)
DC = MPC x DDI
MPS = DS/DDI
(MPS is the marginal propensity to save)
DS = MPS x DDI
MPC + MPS = 1
MPS = 1  MPC
[C + I + G + (XIM)] = Y is the equilibrium condition.
[C + I + G + (XIM)] is total real expenditures
C is consumption, I is investment, G is government spending, (XIM)
is net exports (exports  imports).
Inventory Change (Iu) = Y  [C + I + G + (XIM)]
Recessionary Gap = Amount by which full employment real GDP (Y) exceeds
the equilibrium level of real GDP (Y).
Inflationary Gap = Amount by which full employment real GDP (Y) is less
than the equilibrium level of real GDP (Y).
Multiplier = 1/(1MPC) or 1/MPS
Resultant D in Y = Initial D
in total real expenditures [C,I,(XIM) or G] x multiplier
Answers
1. $60 billion Return to Q1
Solution to Q1
2. $20 billion Return to Q2
Solution to Q2
3. $125 billion Return to Q3
Solution to Q3
4. $8 billion Return to Q4
Solution to Q4
5. d Return to Q5
Solution to Q5
6. Government spending (G) decreased by $50 billion Return
to Q6
Solution to Q6
7. $650 billion Return to Q7
Solution to Q7
8. $115 billion Return to Q8
Solution to Q8
9. d Return to Q9
Solution to Q9
10. $80 billion Return to Q10
Solution to Q10
11. a Return to Q11
Solution to Q11
12. f Return to Q12
Solution to Q12
13. c Return to Q13
Solution to Q13
14. $250 billion Return to Q14
Solution to Q14
15. $50 billion Return to Q15
Solution to Q15
16. $460 billion Return to Q16
Solution to Q16
17. $361,250 Return to Q17
Solution to Q17
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