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ECON 2105
Homework #3
Chapters 8 – 10
You may work together on the homework, however, you must hand in your own answers.
Please type or print neatly on a separate paper. I will give no credit for unsupported,
unreadable or ambiguous answers.
Part I (20 points): Matching
Match the correct definition to the word or phrase below
1.
2.
3.
4.
5.
6.
The amount of additional savings generated by an additional dollar of income
Short run aggregate expenditures that exceed potential output at a price level
Improvements in methods of production brought about by experience
Increases in consumption that result from a fall in the aggregate price level
The amount of additional expenditures generated by an additional dollar of income
A model of the relationship between the price level in an economy and aggregate
expenditures on goods and service in an economy
7. Increases in investment that result from a fall in the aggregate price level
8. A belief that all economic decisions are based upon knowledge of what the
economy’s expected equilibrium is
9. A belief that all consumption decisions are based upon knowledge of a person’s
lifetime income
10. The amount by which potential output exceeds short run equilibrium output
A.
B.
C.
D.
E.
F.
Aggregate demand
Exchange rate effect
Inflationary gap
Interest rate effect
Learning by doing
Marginal propensity to save
G.
H.
I.
J.
K.
Marginal propensity to consume
Permanent income hypothesis
Rational expectations model
Recessionary gap
Wealth effect
Part II (25 points): True/False, Explain
State whether the following statements are true or false and explain your answer. No
points will be awarded for unsupported answers.
1. An economy that successfully encourages the accumulation of physical and human
capital can be assured of steady real economic growth.
2. If labor productivity and wages both rise by three percent, then the short-run
aggregate supply curve will shift up.
3. Starting from long-run equilibrium, an increase in government expenditures may
increase output in the short-run but not the long-run.
4. The larger the marginal propensity to consume, the more repercussions there are from
a change in expenditures or production and the greater the multiplier.
5. Expenditures that would exist at a zero level of income are called induced
expenditures.
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ECON 2105
Homework #3
Chapters 8 – 10
Part III (30 points): Multiple Choice
Choose the best answer for each of the following questions.
1.
The concept of borrowing circles used by the Grameen Bank was successful
because it:
A) relied on social pressure.
B) required that borrowers possess adequate collateral.
C) allowed borrowers to default if their ventures were unsuccessful.
D) relied on foreign investment from banks in developed countries.
2.
An increase in education that makes labor more productive usually leads to
decreased birth rates because when labor is more productive:
A) men and women are too tired to have children.
B) the opportunity cost of having children increases.
C) pollution from the additional output reduces the fertility of the population.
D) workers do not earn enough to support as many children.
3.
Potential output is that level of output:
A) an economy always produces.
B) toward which an economy always gravitates in the short-run.
C) an economy is capable of producing without generating higher inflation.
D) an economy is capable of producing without generating higher
unemployment.
4.
In the mid-1990s, Treasury Secretary Paul Rubin pressured Japan to institute
policies that would encourage growth in its economy. Policies that increase
growth in Japan are likely to increase U.S. exports and:
A) cause the U.S. to move up its aggregate demand curve.
B) cause the U.S. to move down its aggregate demand curve.
C) shift the U.S. aggregate demand curve to the right.
D) shift the U.S. aggregate demand curve to the left.
5.
The paradox of thrift occurs when:
A) an increase in savings raises output.
B) an increase in savings reduces output.
C) a decrease in savings raises output.
D) a decrease in savings reduces output.
6.
Which of the following statements would a Classical economist in the 1930s most
likely disagree with?
A) The market, left to it own devices, is self-adjusting.
B) Wages and prices will adjust to eliminate unemployment.
C) In the short-run the economy might experience some problems due to
disequilibrium.
D) Unions have no impact on wage and price adjustments.
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ECON 2105
Homework #3
Chapters 8 – 10
Part III (continued)
7.
The change in expenditures produced by the multiplier effect is really a change in:
A) induced expenditures.
B) autonomous expenditures.
C) exogenous expenditures.
D) the marginal propensity to consume.
8.
If autonomous expenditures are $1,000, income is $5,000 and the marginal
propensity to consume is 0.6, then total expenditures according to the
expenditures function would be:
A) $3,000.
B) $4,000.
C) $5,000.
D) $13,500.
9.
For levels of income to the right of the point where the expenditures function
intersects the aggregate production function line:
A) planned expenditures exceed production.
B) production exceeds planned expenditures.
C) there is a shortage of goods.
D) expenditures equals income.
10.
Suppose AE = 4,000 + 0.8Y. According to the multiplier equation, equilibrium
income will be:
A) $5,000
B) $15,000.
C) $20,000.
D) $32,000.
Part IV (25 points): Real World Applications
According to the Bureau of Labor Statistics (www.bls.gov), the percent change in
the Consumer Price Index (CPI) for January 2005 was 190.7. This is 3.0 percentage
points higher than a year ago. The average change in the CPI over the past 20 years has
been about 3.1 percent per year. (The average CPI in 1982-1984 was 100.) According to
the Bureau of Economic Analysis (www.bea.gov), real GDP for the fourth quarter of
2004 was $11,988.9 billion. This number represents a 4.4 percent increase from the
previous year.
1. Let CPI stand for the general level of prices in the economy. Let real GDP stand
for the general level of output in the economy. Draw an appropriate Aggregate
Demand curve and Short-run Aggregate Supply curve that intersect at the above
observed short-run equilibrium. Label your graph completely.
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ECON 2105
Homework #3
Chapters 8 – 10
Part IV (continued)
2. Given the information above, does it appear that output (real GDP) is above,
below or at Potential Output? Add the Potential Output curve to your graph.
(You do not have a number that is associated with it but you should be able to tell
if potential output is above, below or right at current output.)
3. What evidence do you have from the information above for your answer to the
previous question?
4. Pretend you are a Classical economist. Explain what you expect to happen to the
short run equilibrium if the government chooses to raise taxes to address concerns
about Social Security. Describe how the economy will adjust to the increase in
taxes in the log run (using your Classical economist insight).
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