Answer the question(26 multiple choice)

Economics 321 Problem Set #1

Rules: Please post your answers on Canvas. Answers will be available shortly after the deadline.

I. Numerical example Let consumption be represented by

C = C + cY;

where C = 50 and c = 0:55: The investment function is I = I + dY;

where I = 25 and d = 0:2: 1. What is the value of autonomous consumption: (a) 0.55; (b) 50; (c) 50.55; (d) 25; 2. What is the marginal propensity to consume: (a) 0.55; (b) 50; (c) 0.75; (d) 0.2; 3. What is the value of autonomous investment: (a) 50; (b) 0.55; (c) 10; (d) 25; 4. What is the constant term in the aggregate demand function: (a) 75; (b) 50; (c) 25; (d) 100.75; 5. What is the slope of the aggregate demand function: (a) 0.2; (b) 0.55; (c) 75; (d) 0.75; 6. What is the equilibrium level of income: (a) 200; (b) 300; (c) 400; (d) 500;

Increase autonomous consumption by 10. 7. What is the constant term in the consumption function: (a) 40; (b) 50.55; (c) 60; (d) 70; 8. What is the slope of the consumption function: (a) 0.55; (b) 0.75; (c) 0.2; (d) 0; 9. What is the new level of equilibrium income: (a) 340; (b) 400; (c) 50; (d) 75; 10. What is the multiplier: (a) 1; (b) 0.75; (c) 4; (d) 2; 11. Why is the multiplier not equal to 1=(1� c): (a) The multiplier is always less than 1/(1- c); (b) It is equal to 1/(1-c); (c) interest rates have risen; (d) investment is also in‡uenced by the level of income;

II. General equilibrium 12. What is a general equilibrium model: (a) a model with lots of endogenous variables; (b) a model in which all prices and quantities in more than one market are determined within the model; (c) any macro model; (d) a partial equilibrium model in which we add government expenditure; 13. Why is the model of question I. not a general equilibrium model? (a) there is no aggregate supply equation; (b) aggregate demand always exceeds output; (c) investment is not completely autonomous; (d) there is only a goods market; 14. Which of these investment functions could make model I a general equilibrium model: (a) I = 25; (b) I = 25 + Y ;(c) I = 25 + 0:25Y � 3i;(d) I = 0;

III. Government spending, taxes and transfers Now assume that there is a government which spends G and collects taxes which are a fraction of income, TA = tY . Let G = 75, t = 0:20; and TR = 10. Consumption is a function of disposable income, Y D = Y � TA+ TR,

C = 10 + 0:75Y D

and investment is exogenous, I = 5. 15. What is the constant term of the aggregate demand function: (a) 100; (b) 84.5; (c) 92.5; (d) 97.5;

16. What is the slope of the aggregate demand function: (a) 0.2; (b) 0.4; (c) 0.6; (d) 0.8; 17. What is the value of equilibrium income: (a) 243.75; (b) 275; (c) 285; (d) 315.4; 18. Calculate the budget de…cit (TA�G� TR) (a) -24.5; (b) -36.25; (c) -22; (d) 34;

Cut government expenditure by an amount equal to the de…cit you found in 18. 19. The new level of equilibrium income is: (a) 167.3; (b) 253.75; (c) 153.13; (d) 250; 20. The new level of tax collection is: (a) 30.63; (b) 35; (c) 37.5 (d) 48.75; 21. The budget de…cit is now: (a) 19; (b) -18.13; (c) -24.6; (d) -17.9; 22. What is the ratio of the change in the budget de…cit to the change in government expenditure: (a) 0.5; (b) 0.75; (c) 1.25; (d) 1.45;

Now cut transfers by 5. 23. The new level of equilibrium income is: (a) 143.75; (b) 157.5; (c) 189.6; (d) 212.5; 24. The budget de…cit is now: (a) -10; (b) -12.5; (c) 16; (d) -15; 25. What is the ratio of the change in the budget de…cit to the change in transfers: (a) 0.72; (b) 0.52; (c) 0.63; (d) 0.77; 26. Why is the ratio in 25 larger (in absolute value) than in 22: (a) transfers have no impact on aggregate demand; (b) the multiplier on transfers is smaller than the multiplier for changes in government expenditure; (c) transfer payment recipients rarely save money; (d) government expenditure cuts hurt education and limit the growth rate;