The Level of Household Debt Answer Key 3

112. The equilibrium level of GDP is associated with: A) an excess of planned investment over saving. B) no unintended changes in inventories. C) an unintended decrease in business inventories. D) an unintended increase in business inventories. Answer: B 113. Which aggregate expenditure schedule AE in the above diagram for a private closed economy implies the largest MPC, assuming investment is the same at each level of income? A) AE4 Answer: A B) AE3 C) AE2 D) AE1 114. If at some level of GDP the economy is experiencing an unintended decrease in inventories: A) the aggregate level of saving will decline. C) the business sector will lay off workers. B) the price level will fall. D) domestic output will increase. Answer: D 115. The equilibrium GDP is the level of domestic output: A) where consumption equals saving. C) which is sustainable. B) where actual investment equals consumption. D) where full employment exists. Answer: C 116. If an unintended increase in business inventories occurs: A) we can expect aggregate production to be unaffected. B) we can expect businesses to increase the level of production. C) we can expect businesses to lower the level of production. D) aggregate expenditures must exceed the domestic output. Answer: C 117. Assume that in a private closed economy consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output. Thus: A) saving is $10 billion. B) unplanned decreases in inventories of $10 billion will occur. C) the MPC is .80. D) unplanned increases in inventories of $10 billion will occur. Answer: B 118. A private closed economy will expand when: C) aggregate expenditures are less than GDP. A) actual GDP is less than potential GDP. B) unplanned decreases in inventories occur. D) unplanned increases in inventories occur. Answer: B 119. If aggregate expenditures exceed GDP in a private closed economy: A) leakages will exceed injections. C) unplanned investment in inventories will occur. B) planned investment will exceed saving. D) saving will exceed planned investment. Answer: B 120. For a private closed economy, an unintended decline in inventories suggests that: A) aggregate expenditures are less than the business sector expected them to be. B) aggregate expenditures exceed GDP. C) actual investment exceeds saving. D) planned investment is greater than consumption. Answer: B 121. Refer to the above diagram for a private closed economy. The equilibrium GDP is: A) $60 billion. B) $180 billion. Answer: B C) between $60 and $180 billion. D) $60 billion at all levels of GDP. 122. Refer to the above diagram for a private closed economy. In this economy investment: A) decreases as GDP increases. C) is $40 billion at all levels of GDP. B) increases as GDP increases. D) is $60 billion at all levels of GDP. Answer: C 123. Refer to the above diagram for a private closed economy. In this economy aggregate expenditures: A) do not change as GDP increases. B) increase by $2 for every $5 increase in GDP. C) increase by $2 for every $4 increase in GDP. D) increase by $2 for every $3 increase in GDP. Answer: D 124. Refer to the above diagram for a private closed economy. Aggregate saving in this economy will be zero when: A) C + Ig cuts the 45-degree line. B) GDP is $180 billion. Answer: C C) GDP is $60 billion. D) GDP is also zero. 125. For a private closed economy aggregate expenditures consist of: A) C + Ig. Answer: A B) C - Ig. C) C + S. D) C - S. Use the following to answer questions 126-128: Answer the next question(s) on the basis of the following consumption and investment data for a private closed economy. Figures are in billions of dollars. C = 60 + .6Y I = I0 = 30 126. Refer to the above data. The equilibrium level of income (Y ) is: A) 360. B) 225. Answer: B C) 200. D) 135. 127. Refer to the above data. In equilibrium the level of consumption spending will be: A) 170. B) 270. Answer: D C) 160. D) 195. 128. Refer to the above data. In equilibrium the level of saving will be: A) 30. B) 26. Answer: A C) 25. D) 60. Use the following to answer questions 129-131: Answer the next question(s) on the basis of the following information for a private closed economy, where Ig is gross investment, S is saving, and Y is gross domestic product (GDP). _ Ig = Ig = 80 S = -80 + .4Y 129. Refer to the above information. The equilibrium GDP will be: A) $160. Answer: B B) $400. C) $360. D) $480. 130. Refer to the above information. In equilibrium consumption will be: A) $400. B) $280. C) $320. D) $360. Answer: C 131. Refer to the above information. In equilibrium saving will be: A) $40. Answer: D B) $120. C) $60. D) $80. 132. What will be the effect of an excess of planned investment over saving in a private closed economy with unemployed resources? A) a decline in the rate of interest B) an unintended accumulation of inventories by businesses C) a rise in the real GDP D) the Federal budget will automatically move toward a deficit Answer: C 133. Which of the following statements is correct for a private closed economy? A) Saving equals planned investment only at the equilibrium level of GDP. B) All levels of GDP where planned investment exceeds saving will be too high for equilibrium. C) Planned and actual investment are identical at all possible levels of GDP. D) Saving equals actual investment only at the equilibrium level of GDP. Answer: A 134. At the $180 billion equilibrium level of income, saving is $38 billion in a private closed economy. Planned investment must be: A) $138 billion. Answer: C B) $126 billion. C) $38 billion. D) $180 billion. 135. In which of the following situations for a private closed economy will the level of GDP expand? A) when planned investment exceeds saving C) when saving exceeds consumption B) when planned investment exceeds consumption D) when consumption exceeds investment Answer: A 136. Planned investment plus unintended increases in inventories equals: C) consumption minus saving. A) actual investment. B) consumption of fixed capital. D) unintended saving. Answer: A 137. Planned investment equals saving: C) at all above-equilibrium levels of GDP. A) at all levels of GDP. B) at all below-equilibrium levels of GDP. D) only at the equilibrium GDP. Answer: D 138. That the economy has achieved aggregate equilibrium is indicated by: A) an equality of saving and planned investment. B) an equality of aggregate expenditures and GDP. C) the absence of unplanned changes in inventories. D) all of the above. Answer: D 139. Unintended changes in inventories: A) cause the economy to move away from the equilibrium GDP. B) are treated as components of consumption. C) bring actual investment and saving into equality only at the equilibrium level of GDP. D) bring actual investment and saving into equality at all levels of GDP. Answer: D 140. Investment and saving are, respectively: A) income and wealth. B) stocks and flows. Answer: C C) injections and leakages. D) leakages and injections. 141. In a private closed economy (a) the marginal propensity to save is 0.25, (b) consumption equals income at $120 billion, and (c) the level of investment is $40 billion. What is the equilibrium level of income? A) $280 billion Answer: A B) $320 billion C) $262 billion D) $198 billion 142. If the marginal propensity to consume is 0.9 in a private closed economy, a $20 billion decline in investment spending will decrease: A) GDP by $20 billion. B) GDP by $100 billion. Answer: C C) saving by $20. D) consumption by $200 billion. 143. 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. Answer: B B) $50 billion. C) $500 billion. D) $5 billion. 144. Assume the consumption schedule for a private closed economy is C = 40 + 0.75Y , where C is consumption and Y is gross domestic product. The multiplier for this economy is: A) 3. Answer: B B) 4. C) 5. D) 10. 145. Assume the saving schedule for a private closed economy is S = -20 + 0.2 Y , where S is saving and Y is gross domestic product. The multiplier for this economy is: A) 3. Answer: C B) 4. C) 5. D) 10. 146. Refer to the above diagram for a private closed economy. The marginal propensity to consume is: A) GF/GB. Answer: C B) DA/GB. C) FE/DE. D) FB/0B. 147. Refer to the above diagram for a private closed economy. The up-shift of the aggregate expenditures schedule from (C + Ig)1 to (C + Ig) 2 reflects: A) an increase in investment expenditures. B) a decrease in consumption expenditures. Answer: A C) an increase in the MPC. D) an increase in the APS. 148. Refer to the above diagram for a private closed economy. The multiplier is: A) GF/DE. Answer: D B) GF/GB. C) FE/GF. D) AB/GF. Q2. True Or false 1. In the private closed economy, equilibrium GDP occurs where C + Ig = GDP. Answer: True 2. When C + Ig = GDP in a private closed economy, S = I and there are no unplanned changes in inventories. Answer: True 3. If C + Ig exceeds GDP in a private closed economy, GDP will decline. Answer: False 4. If the MPC is .8 in a private closed economy, a $30 billion increase in planned investment will increase equilibrium real GDP by $120 billion. Answer: False 5. Actual investment consists of planned investment plus unplanned changes in inventories (plus or minus.) Answer: True 6. A $20 billion decrease in investment in a private closed economy that has an MPS of .5 will reduce saving by $10 billion once the multiplier process has ended. Answer: False 7. The sum of APS and APC must be one True, APC APS = 1 Because YD C S   =1 YD YD YD Y D C S 8. MPC is constant along a straight line consumption line. True, M PC  M PS = 1 Because YD C S   =1 YD YD YD Y D  C S 9. An increase in interest rate leads to an increase in equilibrium national income. False, because an increase in interest rate leads to a decrease in autonomous investment and finally the AE function. So final equilibrium national income will be less (from Y1to Y2) (with graph) 10. There is an inverse relation between income and APS. S True, Because APS  Y D , APS is decreasing. at higher the levels of income 11. The slope of the income line equals zero. (With graph) False, The slope is one because the income line is a 45 ο line where C= Y and its slope equals one. Along the 45 ο line (vertical distance (e n) = horizontal distance (e' n). 12. A change in wealth (a) by 50 will cause the national income (Y*=1000) to change by 100 assuming Z=0.75. False, an increase in (a) leads to an increase in autonomous consumption and AE= A+Z Yd Y 1 1 Y   4 K  , Y 200 a ,4 1 b 1 0.75 50 13. The change in real wealth has the same effect as the increase in autonomous investment on the new equilibrium level of national income True, as (a) or (I) increase , that will cause the AE function to shift upward and it leads to an increase in equilibrium national income ( graph of No. 12) 14. When consumption function intersects with income line APC is zero. False, because it is a break even point where C= Y and S= 0 , So APC=1 and APS=0 15. An increase in real interest rate leads to an increase in equilibrium level of national income False, because an increase in real interest rate leads to a decrease in autonomous investment and that causes a decrease in equilibrium national income . 16. If the slope of the consumption function is decreasing then the slope of the saving function is increasing . True, Because MPC+MPS =1 , so the slope of the saving function is increasing at the expense of the decrease in the slope of the consumption function and vice versa, 17. The multiplier (Keynesian multiplier) is always greater than 1 if T = 0 and G =0. True. Goods Market Eqm Y = C + I + G Y = [c0 + c1 Y - c1 T] + I + G 1 Y = [ 1/(1-c1)] [c0 + I + G - c1 T ] multiplier → [ 1/ (1 −c1)] If 0 < c1 < 1 → 1/(1 −c1) >1 If the marginal propensity to consume is less than 1, it means that people consume less than 100% of their disposable income. It also implies that the multiplier is greater 1. The fact that T = 0 and G = 0 is irrelevant. Q3. If you are given the following consumption function: C=50+0.9 Y Calculate the change in equilibrium national income due to an increase in desired investment by $100 and explain the result. Solution: K = 1 / (1-b) = 1 / (1-0.9)= 10. K= ΔY/ΔI , then 10 = ΔY/ 100 ΔY= 100X10 =1000 Equilibrium national income increased by 1000 due to an increase in desired investment by $100 as long as the multiplier equals 10. Q4. If the value of simple multiplier in a closed economy is (K= 2.5) . Calculate the MPS out of disposable income Solution: K = 1 / (MBS) , then 2.5 = 1 / (MBS) , MBS= 1/ 2.5 = 0.4 Q5. An economy is characterized by the following relationships: C=500+0.6 Y I= 300 a) Derive the AE function b) Calculate the equilibrium national income. c) Calculate consumption on that level of Y*. d) Find the value of the simple Multiplier e) If investment rises by 100 calculate ΔY and Y* f) Show graphically your results. Solution: a) In closed economy without government AE = 500 +0.6 Y +300 = 800 + 0.6 Y b) In equilibrium : AE=Y Y = 800 + 0.6 Y Y - 0.6 Y = 800 Y= 800/ 0.4 = 2000 c) C=500+0.6 (2000) = 500 +1200 = 1700 AE = C+ I 0.4 Y=800 d) K = 1 / (1-b) = 1/ (1-0.6) = 1/0.4 = 2.5 e) K= ΔY/ΔI , 2.5 = ΔY/ 100 ΔY= 100X 2.5 =250 Y' = Y+ ΔY = 2000+ 250= 2250 f) AE 900+0.6Y e AE2 800+0.6Y 900 AE1 800 ΔY 2000 2250 Y