Download Problem Set 6

Problem Set 6
Econ 201 (03,04) Spring 2002
(Dr. Tin-Chun Lin)
1. Autonomous expenditure is not influenced by:
(A) The interest rate.
(B) The foreign exchange rate.
(C) Real GDP.
(D) Any other variable
(E) Investment
(Answer: (C))
2. The slope of the aggregate expenditure curve is equal to:
(A) One minus the marginal propensity to save.
(B) One minus the marginal propensity to import.
(C) The marginal propensity to consume out of disposable income minus the marginal
propensity to import.
(D) The marginal propensity to consume out of real GDP minus the marginal
propensity to import.
(Answer: (D))
3. When all households in the economy decide to increase saving with no associated
increase in investment, it turns out that real GDP decreases. This is known as the:
(A) Paradox of thrift.
(B) Expenditure paradox.
(C) Negative multiplier effect.
(D) Autonomous saving effect.
(E) Positive multiplier effect.
(Answer: (A))
4. The government wants to increase aggregate expenditure by $12 billion. If the
multiplier is 3, by how much should the government increase its spending on goods
and services?
(A) $3 billion.
(B) $4 billion.
(C) $12 billion.
(D) $36 billion.
(E) $48 billion.
(Answer: (B))
5. If there is a proportional tax in an economy, then the balanced budget multiplier is:
(A) Greater than the government purchases multiplier.
(B) Greater than the transfer payment multiplier but less than the government
purchases multiplier.
(C) Greater than 1 but less than the transfer payment multiplier.
(D) Less than 1.
(E) Equals 1.
(Answer: (D))
6. Suppose the multiplier is 2 and that the aggregate supply curve is positively sloped.
Suppose further that, due to an increase in expected future profit, investment
increases by $10 billion. Equilibrium real GDP will
(A) Increase by $20 billion.
(B) Increase by more than $20 billion.
(C) Increase by less than $20 billion.
(D) Be unaffected.
(Answer: (C))
7. You are given the following information about the economy of Zeeland: Autonomous
consumption expenditure is $100 billion, and the marginal propensity to consume is
0.9. Investment is $460 billion, government purchases of goods and services are $400
billion, and taxes are a constant $400 billion—they do not vary with income. Exports
are $350 billion, and imports are 10 percent of income. The government of Zeeland
makes no transfer payments.
a. Calculate the slope of the Aggregate Expenditure curve. (Answer: 0.8)
b. The government cuts its purchases of goods and services to $300 billion. What is
the change in real GDP? What is the government purchases multiplier? (Answer:
reduces real GDP by $500 billion; the multiplier is 5)
c. The government continues to purchase $400 billion worth of goods and services
and cuts taxes to $300 billion. What is the change in real GDP? What is the tax
multiplier? (Answer: raises real GDP by $450 billion; the tax multiplier is -4.5)
d. The government simultaneous cuts both its purchases of goods and services and
taxes to $300 billion. What is the change in real GDP? What is the name of the
multiplier now at work, and what is its value? (Answer: the change in real GDP
is: reduces real GDP by $50 billion; the multiplier is the balanced budget
multiplier and it equals 0.5)