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
  1. 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).
  2. 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).
  3. 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).
  4. 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).

  5. 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+(X-IM)] line
  1. up by: 25 X multiplier.
  2. up by: MPC X 25.
  3. up by: MPC X 25 X multiplier.
  4. down by: 25.
  5. down by: MPC X 25.
  6. down by: 25 X multiplier.

  7. 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
  1. greater will be the value of the multiplier and the greater will be the resultant change in real GDP (Y).
  2. greater will be the value of the multiplier and the smaller will be the resultant change in real GDP (Y).
  3. smaller will be the value of the multiplier and the greater will be the resultant change in real GDP (Y).
  4. smaller will be the value of the multiplier and the smaller will be the resultant change in real GDP (Y).

  5. Q11 answer
12. An increase in government spending (G) of $100 will cause a shift in the entire real expenditure [C+I+G+(X-IM)] line
  1. up by: $100 X multiplier.
  2. up by: MPC X $100.
  3. up by: MPC X $100 X multiplier.
  4. down by: $100 X multiplier.
  5. down by: MPC X $100.
  6. None of the above answers is correct.

  7. 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,

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

  5. 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 + (X-IM)] = Y is the equilibrium condition.

[C + I + G +  (X-IM)] is total real expenditures
C is consumption, I is investment, G is government spending, (X-IM) is net exports (exports - imports).

Inventory Change (Iu) = Y - [C + I + G +  (X-IM)]
 

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/(1-MPC)  or   1/MPS
 

Resultant D in Y = Initial D in total real expenditures [C,I,(X-IM) 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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