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  1. Chapter Sixteen: A Basic Model of the Determination of GDP in the Short Term

Chapter Sixteen: A Basic Model of the Determination of GDP in the Short Term

1
Question 1

If the marginal propensity to consume out of personal disposable income is 0.8 and the net income tax rate 10%, what is the marginal propensity to consume out of national income (GDP) (assume a closed economy so GDP and GNI are the same thing).

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) 0.72Your answer has been saved.
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2
Question 2

In the simple model with no taxes and no foreign trade, if the consumption function is given by C = 200 + 0.8Y, what will be the value of saving when income, Y, is 1000?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) 0Your answer has been saved.
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3
Question 3

In the simple model with no government and no trade, which is given by the two equations Y = C + I and C = a + bY; what is the size of the multiplier when a=10 and b=0.75?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is e) 4Your answer has been saved.
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4
Question 4

In the simple model with no government and no trade, which is given by the two equations Y = C + I and C = a + bY; if a=100, b=0.9 and I = 500 what is the value of Y?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) 6000Your answer has been saved.
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5
Question 5

In the simple model with no government and no trade, which is given by the two equations Y = C + I and C = a + bY; if the initial values of a=100, b=0.8 and I = 500, how much will GDP, Y, increase if investment, I, now increases from 500 to 600?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is a) By 500 from 3000 to 3500Your answer has been saved.
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6
Question 6

In the simple model with no government and no trade, which is given by the two equations Y = C + I and C = a + bY, what will be the value of the multiplier if the marginal propensity to consume is 0.6?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) 2.5Your answer has been saved.
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7
Question 7

In the simple model with no government and no trade, which is given by the two equations Y = C + I and C = a + bY, what will be the value of the multiplier if the marginal propensity to consume is 0.4?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is a) 1.67Your answer has been saved.
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8
Question 8

Why do countries experience business cycles?

Hint: re-read 'The macro problem: inflation and unemployment' pp358-59. As a guide, you may wish to use the following categories:

(a) trough;

(b) recovery;

(c) peak;

(d) recession;

(e) booms and slumps.

These terms are set out more explicitly in Box 16.1 p359.

Hint

9
Question 9

What does a macroeconomist mean when s/he refers to the 'short-run' and the 'long-run'? How does this terminology differ from that use in microeconomics?

Hint: re-read 'Time-scale' pp361-62. In terms of the second question, you may also wish to reconsider the content of Chapter Six, pp120-32.Hint

10
Question 10

Why should governments be particularly interested in the level of consumption expenditure within an economy?

Hint: re-read 'A simple model', p363.Hint

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Question 11

Draw a set of axes with 'time' measured along the x-axis and 'consumption' measured along the y-axis. Now:
(a) draw a line that reflects how you expect the level of your overall consumption expenditure to change between the ages of 16 and 80 (you need not be precise with respect to the actual figures, after all, how many people have such privileged information available?!);
(b) draw a second line that depicts your expected average lifetime income relative to the line you drew for (a) (there is no need to draw fluctuations because it is an average figure).

What is the difference between the two lines during your:
(a) Twenties;
(b) Forties;
(c) Seventies.

Hint: re-read 'Desired private consumption spending' pp364-67.Hint

12
Question 12

(a) What does an economist mean by the term 'consumption function'?
(b) What is the difference between 'autonomous consumption' and 'income induced consumption'?
(c) Draw a set of axes with 'real disposable income' measured along the x-axis and 'desired consumption expenditure' along the y-axis. Now draw a consumption function that depicts for which autonomous consumption is greater than zero and the marginal propensity to consume is constant.

Hint: re-read 'Desired private consumption spending' pp364-67.Hint

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Question 13

Why might an individual's marginal propensity to consume actually fall as real disposable income rises?

Hint: re-read 'Desired private consumption spending' pp364-67.Hint

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Question 14

Why is investment spending a more volatile component of GDP than consumption expenditure?

Hint: re-read 'Desired investment spending' pp369-70 alongside 'Desired private consumption spending' pp364-67.Hint

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Question 15

Explain why: 'At any level of GDP at which aggregate desired spending exceeds total output, there will be pressure for GDP to rise' (p372)

Hint: re-read 'Equilibrium GDP' pp371-73.Hint

16
Question 16

Draw two diagrams that illustrate that the size of the multiplier is positively related to the marginal propensity to consume

Hint: re-read 'The size of the simple multiplier' pp377-79. Hint, to make your diagrams visually explicit, ensure that the change in autonomous expenditure is the same in both diagrams.Hint

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Question 17

Why do you think that the size of the multiplier for a country will be higher than it would be for a region within the same country?

Hint: remind yourself of the factors that enable an injection of money to have a multiplied effect (pp376-77). Hint