ECON 295 Lecture Notes - Lecture 4: Real Interest Rate, Disposable And Discretionary Income, Consumption Function
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Question 1
Which of the following describes the relationship between the change in inventories and aggregate expenditure?
| A. | Aggregate expenditure equals the change in inventories minus GDP. |
| B. | The change in inventories equals GDP divided by aggregate expenditures. |
| C. | Aggregate expenditures equals GDP divided by the change in inventories. |
| D. | Aggregate expenditures equals GDP minus the change in inventories. |
| E. | The change in inventories equals GDP multiplied by aggregate expenditure. |
1 points
Question 2
Suppose the marginal propensity to consume is 0.80 and taxes decrease by $10 billion. Which of the following is true?
| A. | Disposable income and consumption fall by $10 billion |
| B. | Disposable income and consumption rise by $10 billion |
| C. | Disposable income rises by $10 billion and consumption rises by $8 billion |
| D. | Disposable income falls by $10 billion and consumption falls by $8 billion |
| E. | Disposable income rises by $10 billion and consumption falls by $8 billion |
1 points
Question 3
If aggregate expenditure at a particular level of income is less than output,
| A. | output will increase |
| B. | output will decrease |
| C. | output will remain the same |
| D. | output will rise slightly and then level off |
| E. | we cannot determine what will happen to output |
1 points
Question 4
The consumption function
| A. | illustrates the relationship between real disposable income and real consumption spending |
| B. | illustrates the relationship between the price level and real consumption spending |
| C. | is the relationship between productivity and real consumption spending |
| D. | shows how real consumption increases when real disposable income decreases |
| E. | illustrates the relationship between real consumption spending and employment |
1 points
Question 5
The focus of the short-run macro model is on the role of
| A. | spending in explaining economic fluctuations |
| B. | labor in explaining economic fluctuations |
| C. | financial markets in explaining economic fluctuations |
| D. | output in explaining economic fluctuations |
| E. | resources in explaining economic fluctuations. |
1 points
Question 6
If the output level is such that the aggregate expenditure line lies below the 45-degree line, which of the following is true?
| A. | Aggregate expenditure is greater than output, so inventories will increase and output will be raised. |
| B. | Aggregate expenditure is greater than output, so inventories will decrease and output will be increased. |
| C. | Aggregate expenditure is less than output, so inventories will decrease and output will be raised. |
| D. | Aggregate expenditure is less than output, so inventories will increase and output will be lowered. |
| E. | Aggregate expenditure is greater than output, so inventories will increase and output will be lowered. |
1 points
Question 7
If the marginal propensity to consume is 0.7, the expenditure multiplier is
| A. | 7.0 |
| B. | 0.7 |
| C. | 3.0 |
| D. | 3.3 |
| E. | not determinable without additional information. |
1 points
Question 8
Aggregate expenditure is the sum of
| A. | all types of spending by households and firms |
| B. | spending and savings by households |
| C. | spending by households and governments on final goods and services |
| D. | spending by households, government, firms, and foreigners on final goods and services |
| E. | all spending and saving by households, firms, and governments |
1 points
Question 9
If the marginal propensity to consume is 0.5 and disposable income increases by $10,000, by how much will consumption spending increase?
| A. | $10,000 |
| B. | $500 |
| C. | $50 |
| D. | $5,000 |
| E. | $9,524 |
1 points
Question 10
When real consumption expenditure is plotted against real disposable income the resulting relationship is
| A. | very weak. |
| B. | virtually flat . |
| C. | positive and very close to linear. |
| D. | negative and very close to linear. |
Assume that the equations below describe the expenditures within a particular macroeconomy and that these equations conform to the assumptions we've made in the lecture regarding the fixed price level Aggregate Expenditure model. All values for expenditure and income are dollar amounts, but for simplicity, we've dropped the $ below.
| C = 0.8(DI) + 1000 | C = Consumption expenditure, DI = Disposable Income |
| I = 2000 | I = Investment expenditure |
| G = 1000 | G = government expenditure |
| X = 1600 | X = spending on exports |
| M = 1800 | M = spending on imports |
| DI = Y - T | Y = real GDP, T = tax revenues/> |
| T = 1000 | |
| Yp = 12000 | Yp = Potential GDP |
Given the equations above, we can describe the GDP, government budget, and net exports in this economy. Select three characteristics from the list below which accurately describe this economy. Note that there is no partial credit on this question. I.e., your answer will either be all correct, or all wrong.
| a. |
inflationary gap |
|
| b. |
recessionary gap |
|
| c. |
no output gap |
|
| d. |
government budget surplus |
|
| e. |
government budget deficit |
|
| f. |
balanced government budget |
|
| g. |
trade deficit |
|
| h. |
trade surplus |
|
| i. |
net exports of zero |
Calculate the missing data.
Calculate missing data from the table.
| Income/Expenditure Flows | Amount (in billions) |
| Consumption expenditure | $7 |
| Government expenditure | $5 |
| Depreciation | $3 |
| Net taxes | $2 |
| Investment | $4 |
| Net exports | $1 |
| Expenditures | |
| Income | |
| GDP |
Calculate the following.
Using the data from a partial set of national income and expenditure data, address the following:
Calculate gross domestic product (GDP) using the expenditure approach.
Determine net domestic product, gross national product (GNP), and statistical discrepancy.
| Item | Amount in 2010 (in billions) |
| Government expenditure (G) = | $8 |
| Consumption expenditure (C) = | $20 |
| Investment (I) = | $5 |
| Net exports (NX) = | $1.5 |
| GDP (expenditure approach)= | |
| Total wages = | $21 |
| Net operating surplus = | $11 |
| Net domestic product = | |
| Indirect taxes minus subsidies = | $3.5 |
| Capital consumption = | $2 |
| GDP (income approach)= | |
| Statistical discrepancy = | |
| Net factor income from abroad = | $5.5 |
| GNP = |
Consider the tables.
Given production and price data below, address the following:
Calculate an economy's nominal GDP and real GDP.
In 2000:
| Item | Quantity (millions) | Price ($/unit) | Expenditure (millions of $) |
| Socks | 15 | 5 | 75 |
| SIM cards | 20 | 2 | 40 |
| Defense Budget | 9 | 5 | 45 |
Real/Nominal GDP = 160
In 2003:
| Item | Quantity (millions) | Price ($/unit) | Expenditure (millions of $) |
| Socks | 15 | 5 | 75 |
| SIM cards | 20 | 5 | 100 |
| Defense Budget | 20 | 10 | 200 |
Nominal GDP =
2003 Quantities valued at 2000 prices:
| Item | Quantity (millions) | Price ($/unit) | Expenditure (millions of $) |
| Socks | |||
| SIM cards | |||
| Defense Budget |
Real GDP =
Answer the following questions.
How do you measure GDP?
How do you measure real and nominal GDP?
How do you determine Consumer Price Index and what are its limitations?
Which of the following expenditures will be included in GDP which will be excluded from the calculation? Explain your answers.
Spare tires bought by Across America, a car rental company
Textbooks bought by college students
Cabinets purchased by a furniture store
A new car purchased by an NFL player
A cruise ship bought by Carnival