Question 1

Which of the following occurs when disposable income is zero?

Accepted Answer

When disposable income is zero, it does not necessarily mean that consumption must be zero, saving must be zero, saving must be positive, or consumption is negative. People can still consume using previously saved funds, credit, or other resources.

Question 2

Which of the following represents total saving for an economy?

Accepted Answer

Total saving for an economy is typically defined as the sum of private saving and public saving, where public saving is the difference between government tax revenues and government spending. None of the options provided accurately represents this definition.

Question 3

Suppose the consumption equation is represented by the following: C = 250 + .75YD.The multiplier in this economy is

Accepted Answer

The multiplier can be calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, MPC is 0.75. Therefore, the multiplier is 1/(1-0.75) = 4.

Question 4

Which of the following would NOT be considered part of fixed investment spending (I)?

Accepted Answer

Fixed investment spending includes purchases of new equipment, buildings, and software, as well as expenditures on research and development. Increasing inventories of unsold goods (such as gasoline) is not considered fixed investment spending. Option A, B, and D would all be considered fixed investment spending.

Question 5

Which of the following is true for a "closed economy"?

Accepted Answer

A closed economy is one that does not engage in international trade or have any cross-border transactions. Therefore, there are no imports or exports.

Question 6

Disposable income equals

Accepted Answer

Disposable income is the amount of money that households have available for spending and saving after income taxes have been accounted for. It is calculated as the sum of consumption and saving.

Question 7

Suppose the consumption equation is represented by the following: C = 250 + .75YD.Given this information,the marginal propensity to save is

Accepted Answer

The marginal propensity to save (MPS) is the complement of the marginal propensity to consume (MPC). Given the consumption equation C = 250 + .75YD, the MPC is .75, indicating that for every additional dollar of disposable income (YD), consumption increases by 75 cents. Therefore, the MPS, which is 1 - MPC, equals 1 - .75 = .25.

Question 8

Suppose the consumption equation is represented by the following: C = 250 + .8YD.The multiplier for the above economy equals

Accepted Answer

The answer of Suppose the consumption equation is represented by...

Question 9

Let the consumption function be represented by the following equation: C = c0 + c1YD.For this equation,we assume that c1 is

Accepted Answer

The marginal propensity to consume (c1) is typically a positive fraction less than one, indicating that as income (YD) increases, consumption (C) increases, but not by the full amount of the income increase.

Question 10

Suppose the consumption equation is represented by the following: C = 250 + .75YD.Now assume government spending increases by 100 for the above economy.Given the above information,we know that equilibrium output will increase by

Accepted Answer

The consumption equation is C = 250 + .75YD, which means that consumption depends on disposable income (YD). An increase in government spending will increase aggregate demand, which in turn will increase output/income. We can use the expenditure multiplier formula to find out by how much output will increase:

Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75) = 4

Where MPC is the marginal propensity to consume, which is 0.75 in this case (since C = 250 + 0.75YD).

So, an increase in government spending of 100 will lead to an increase in output of:
ΔY = Multiplier * ΔSpending = 4 * 100 = 400

Therefore, equilibrium output will increase by 400 units.

Question 11

Equilibrium in the goods market requires that

Accepted Answer

Equilibrium in the goods market occurs where production (supply) equals demand. At this point, firms are producing the right amount of goods and services to satisfy consumers' demands, and there is no excess supply or demand in the market. This equilibrium point leads to stable prices, output, and employment levels in the economy.

Question 12

For the U.S.economy,which of the following represents the largest component of GDP?

Accepted Answer

The largest component of GDP in the U.S. economy is consumer spending, which is not listed among the options provided.

Question 13

An economy is in equilibrium when which of the following conditions is satisfied?

Accepted Answer

In an economy, investment is necessary for the growth of the economy. When total saving equals investment, it means that there are enough funds available for investment, and the economy can sustain its growth. Hence, it is the best choice for equilibrium in an economy. The other options may not necessarily indicate equilibrium as consumption may be higher than output, total saving may not be zero, or consumption may not equal saving.

Question 14

The marginal propensity to consume represents

Accepted Answer

The marginal propensity to consume (MPC) represents the change in consumption caused by a one-unit change in disposable income. In other words, if disposable income increases by one unit, how much of that increase will be spent on consumption. The MPC is calculated as the change in consumption divided by the change in disposable income.

Question 15

Which of the following types of government spending is included when calculating GDP?

Accepted Answer

All levels of government spending, including federal, state, and municipal, are included in the calculation of GDP.

Question 16

Which of the following is an exogenous variable in our model of the goods market in Chapter 3?

Accepted Answer

Exogenous variables are those that cannot be explained by the model and are determined outside of it. Government spending (option D) is determined by the government and is not affected by the other endogenous variables in the goods market model, therefore it is an exogenous variable. Consumption (option A), saving (option B), and disposable income (option C) are endogenous variables that are determined by the model itself.

Question 17

Which of the following would tend to make the multiplier smaller?

Accepted Answer

The multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Therefore, as MPC increases, the denominator becomes smaller and the multiplier becomes larger. Conversely, if the MPC decreases (i.e. if the marginal propensity to save increases), the denominator becomes larger and the multiplier becomes smaller.

Question 18

Which of the following is an endogenous variable in our model of the goods market in Chapter 3?

Accepted Answer

In the model of the goods market discussed in Chapter 3, all the listed variables—consumption (C), disposable income (YD), saving (S), and total income (Y)—are considered endogenous. This means they are determined within the model itself based on the relationships and equations that define the model's behavior.

Question 19

Which of the following is included in G?

Accepted Answer

G stands for government purchases or government spending on goods and services. Therefore, only option D, government purchases, is included in G. Medicare and social security payments are transfer payments, while interest payments on government debt are categorized under government transfer payments or government payments to individuals.

Question 20

Which of the following will NOT increase equilibrium output in the short run?

Accepted Answer

Increases in R&D may lead to long-term economic growth and potential increases in output, but in the short run, it does not directly increase the current level of equilibrium output. The remaining options (B, C, D, E) can all directly stimulate demand and increase output in the short run.

Quiz 3: The Goods Market