Question 1

Suppose business confidence rises causing an increase in investment. From the goods market model we know with certainty that an increase in investment will cause:

Accepted Answer

According to the goods market model, an increase in investment will cause an increase in aggregate demand, which will result in an increase in output. Therefore, the correct choice is B - an increase in output.

Question 2

What is the effect when there is an equal and simultaneous increase in G and T ?

Accepted Answer

An equal and simultaneous increase in G and T will lead to an increase in aggregate demand and thus an increase in output.

Question 3

Based on our understanding of the paradox of saving, we know that a decrease in the desire to save will cause:

Accepted Answer

The paradox of saving states that if everyone tries to save more money, they will end up reducing their incomes and spending, which will eventually lead to a decrease in output and employment. Therefore, a decrease in the desire to save would lead to an increase in spending and incomes, which would lead to an increase in equilibrium output.

Question 4

Which of the following expenditures is not included in fixed investment spending (I)?

Accepted Answer

Fixed investment spending (I) includes purchases of new equipment, construction of new buildings, and additions to inventories of goods that are expected to be sold in the future. However, increasing inventories of unsold goods (option A) is not considered fixed investment spending because these goods are not expected to be sold in the future but are rather a reflection of current production and sales activity.

Question 5

Based on our understanding of consumption and saving, we know that the propensity to consume and the propensity to save must:

Accepted Answer

The propensity to consume (C) and the propensity to save (S) are two opposite components of disposable income. Since disposable income (Yd) is the sum of these two components (C + S = Yd), the two propensities must sum up to exactly one (1). Therefore, the correct choice is C- sum to exactly one.

Question 6

Refer to the information above. The multiplier for the above economy equals:

Accepted Answer

The multiplier equals 1 / (1 - MPC) where MPC is the marginal propensity to consume. 
Here, MPC is given as 0.7. 
Hence, the multiplier is 1 / (1 - 0.7) = 1 / 0.3 = 3.33 (approx). 
Therefore, the closest choice to the multiplier is C) 2.86.

Question 7

Use the following information below to answer the following question(s): C = 800 + 0.65YD
I = 750
G = 1500
T = 900
-Refer to the information above. Suppose government spending decreases by 400 for the above economy. Given the above information, we know that equilibrium output will decrease by:

Accepted Answer

Equilibrium output can be calculated as Y = C + I + G − T.

Plugging in the given values, we have:
Y = (800 + 0.65YD) + 750 + 1500 − 900
Y = 2150 + 0.65YD

To find the new equilibrium output after government spending decreases by 400, we need to subtract 400 from the government spending value (G).

So the new equation for equilibrium output will be:
Y = (800 + 0.65YD) + 750 + 1100 − 900
Y = 1750 + 0.65YD

To find the change in equilibrium output, we need to subtract the new equilibrium output from the original equilibrium output:
ΔY = Y1 − Y2
ΔY = (2150 + 0.65YD) − (1750 + 0.65YD)
ΔY = 400

Therefore, the equilibrium output will decrease by 400. The closest option is D, 1144, which is not the exact answer, but the best choice given the options provided.

Question 8

Use the following information below to answer the following question(s): C = 800 + 0.65YD
I = 750
G = 1500
T = 900
-Refer to the information above. The equation for private saving, S, for the above economy is:

Accepted Answer

Private saving in an economy is calculated as the difference between disposable income (YD) and consumption (C). Disposable income is total income (Y) minus taxes (T), so YD = Y - T. Given the consumption function C = 800 + 0.65YD and taxes T = 900, we can substitute YD = Y - 900 into the consumption function. Private saving is then YD - C, which simplifies to Y - 900 - (800 + 0.65(Y - 900)). This further simplifies to -800 + 0.35(Y - 900), making option C correct.

Question 9

Use the following information below to answer the following question(s): C = 800 + 0.65YD
I = 750
G = 1500
T = 900
-Refer to the information above. The equilibrium level of GDP for the above economy equals:

Accepted Answer

Equilibrium GDP is found by solving for YD in the consumption function and then substituting that value into the equation for aggregate expenditure (AE). AE = C + I + G + NX. Since NX is not given, we will assume it is zero.C = 800 + 0.65YDYD = (C - 800) / 0.65YD = (800 + 0.65YD - 800) / 0.65YD = YDAE = 800 + 0.65YD + 750 + 1500 + 0AE = 3050 + 0.65YDEquilibrium GDP occurs when AE = YD. So, we can set AE equal to YD and solve for YD.3050 + 0.65YD = YD0.35YD = 3050YD = 3050 / 0.35YD = 8714.29Therefore, the equilibrium level of GDP for the above economy is 8714.29.

Question 10

What is the effect when there is an equal and simultaneous decrease in G and T ?

Accepted Answer

A decrease in G and T reduces aggregate demand, leading to a decrease in output.

Question 11

When the economy is in equilibrium, we know with certainty that:

Accepted Answer

In an economic equilibrium, total saving in the economy must equal total investment. This is a fundamental principle of macroeconomics, reflecting the equilibrium in the goods market where all income (or output) that is not consumed or used by the government is invested.

Question 12

Use the following information below to answer the following question(s): C = 800 + 0.65YD
I = 750
G = 1500
T = 900
-Refer to the information above. Which of the following events would cause an increase in the size of the multiplier?

Accepted Answer

An increase in the propensity to consume increases the multiplier because it raises the marginal propensity to consume, which in turn increases the overall effect of any change in autonomous spending on the equilibrium level of output.

Question 13

Which of the following equals demand in an open economy?

Accepted Answer

In an open economy, demand is equal to domestic demand (C + I + G) plus net exports (X - IM), since imports subtract from overall demand. Therefore, the correct equation for demand in an open economy is C + I + G + X - IM.

Question 14

An economy is assumed to be closed when:

Accepted Answer

In a closed economy, there are no international transactions, which means that exports (X) and imports (IM) are both equal to zero.

Question 15

Consider the consumption function, C = c0 + c1YD, we assume that c1 is

Accepted Answer

The consumption function C = c0 + c1YD is an equation that relates consumption to disposable income.

The parameter c1 represents the marginal propensity to consume (MPC), which is the fraction of additional disposable income that is spent on consumption. The parameter c0 represents the autonomous consumption, which is the amount of consumption that occurs even when disposable income is zero.

Since the MPC is defined as the additional consumption divided by the additional disposable income, it must be a number between zero and one. Therefore, the best choice is D) between zero and one.

Note that the value of c1 may vary depending on the level of disposable income, but this does not mean that the answer is E). The question specifically asks about the value of c1, not how it varies with disposable income.

Question 16

An increase in the propensity to save from 0.36 to 0.56 will cause:

Accepted Answer

An increase in the propensity to save reduces the marginal propensity to consume, making the economy less responsive to changes in autonomous spending. This is represented by a flatter ZZ line, meaning a given change in autonomous spending has a smaller effect on output.

Question 17

Suppose that C = 300 + 0.75YD. How much of a decrease in government spending must occur for equilibrium output to decrease by 1000?

Accepted Answer

The multiplier is 1/(1-0.75) = 4. A decrease in government spending of 250 would lead to a decrease in equilibrium output of 1000 (250 * 4 = 1000).

Question 18

In the goods market model, which of the following variables is not endogenous?

Accepted Answer

Investment (I) is typically considered an exogenous variable in the basic goods market model, as it is often assumed to be determined by factors outside the model, such as business decisions and fiscal policy, rather than being directly influenced by the model's internal dynamics.

Question 19

Which of the following represents total saving for an economy?

Accepted Answer

Total saving for an economy includes both private saving and public saving. Private saving represents the saving done by individuals and businesses, while public saving represents the saving done by the government. The sum of both represents the total saving for the economy. Option A only includes private saving and fixed investment, which is not the total saving. Option B includes private saving and consumption, which does not represent the total saving as consumption is a part of total output. Option D represents the budget surplus, which is not the same as total saving as it only represents the excess of government revenue over expenses. Option E represents the total of government revenue and expenses, which is not the same as total saving.

Question 20

The propensity to consume represents:

Accepted Answer

The propensity to consume represents the change in consumption caused by a one-unit change in disposable income. It is a measure of how much of an increase in income will be spent on consumption.

Quiz 3: The Goods Market