1 Suppose that the level of GDP increased by 100 billion in

1.      Suppose that the level of GDP increased by $100 billion in a private closed economy where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by:

a)      $100 billion

b)      $50 billion

c)      $500 billion

d)      $5 billion

2.      If a $10 billion decrease in lump-sum taxes increases equilibrium GDP by $40 billion then:

A)     The multiplier is 4

B)     The MPC for this economy is .8

C)      The MPC for this economy is .6

D)     The multiplier is 3

3.      An increase in the investment demand curve will

a)      Shift the investment schedule downward

b)      Shift the investment schedule upward

c)      Decrease the quantity of investment

d)      Decrease the real rate of interest

4.      Saving and investment are, respectively:

A)     An injection and a leakage

B)     A leakage and an injection

C)      Wealth and income

D)     Income and wealth

5.      If GDP exceeds aggregate expenditures:

a)      Saving will exceed planned investment

b)      Planned investment will exceed saving

c)      Planned investment will exceed actual investment

d)      Injections will exceed leakages

6.      Over time, an increase in the real output and incomes of the trading partners of the United States will:

a)      Increase U.S. exports and U.S. imports

b)      Decrease U.S. exports and U.S. imports

c)      Increase U.S. exports and decrease U.S. imports

d)      Decrease U.S. exports and increase U.S. imports

Solution

1) The value of the multiplier, m = 1 / MPS = 1 / 0.5 = 2. So, aggregate expenditure must have increased by Change in GDP / 2 = 100 / 2 = $50 billion. The correct answer is (B).

2) If a $10 billion decrease in lump sum taxes increases GDP by $40 billion, the multiplier is equal to 4. Hence the correct answer is (A).

3) An increase in investment demand will shift the investment schedule upward. The correct answer is (B).

4) Saving and Investment are respectively a leakage and an injection. The correct answer is (B).

5) Over time, an increase in the real output and incomes of the trading partners of the US will increase US exports and US imports. The correct answer is (A). Exports increase due to rise in income of foreign consumers. Imports increase because due to higher production, prices fall thus imports rise.