Assignment

Part I: Multiple Choice Questions

The table given below shows the levels of real GDP (Y) and the corresponding levels of consumption (C), investment (I), government spending (G), export (EX), and import (IM) of an open economy. Assume that in this country, the aggregate price level is constant, the interest rate is fixed, and there are no taxes.

Table 1

1. Refer to Table 1. The marginal propensity to consume in the economy equals:
a. 0.50
b. 0.65
c. 0.80
d. 0.85
e. 0.90

2. Refer to Table 1. The marginal propensity to save in the economy equals:
a. 0.10
b. 0.15
c. 0.20
d. 0.35
e. 0.50

3. Refer to Table 1. At an income level of $3000, the average propensity to save equals:
a. 0.20.
b. 0.32.
c. 0.50.
d. 0.68.
e. 0.75.

4. Refer to Table 1. What is the equilibrium level of real GDP?
a. $1,500
b. $3,000
c. $4,500
d. $6,000
e. $7,500

5. Refer to Table 1. The marginal propensity to import for the economy equals:
a. 0.90
b. 0.85
c. 0.50
d. 0.25
e. 0.15

6. Refer to Table 1 and assume that there are no taxes. Calculate the spending multiplier.
a. 1.5
b. 2
c. 2.5
d. 4
e. 5

7. Refer to Table 1 and assume that there are no taxes. At an income level of $1,500, total injections exceed total leakages by:
a. $500
b. $750
c. $1,500
d. $2,000
e. $2,250

8. Refer to Table 1 and assume that there are no taxes. Calculate the value of leakages from the economy when the economy is in equilibrium.
a. $670
b. $1,420
c. $2,170
d. $2,920
e. $3,670

Part II: Short-Answer Questions

Please answer the following questions in the space provided. Show your work.

9. Due to an increase in consumer wealth, there is a $40 billion autonomous increase in consumer spending in the economies of Westlandia and Eastlandia. Assume that the aggregate price level is constant, the interest rate is fixed in both countries, and there are no taxes and no foreign trade, and the marginal propensity to consume is 0.5 in Westlandia and 0.75 in Eastlandia.

9a. Show the total change in GDP from this increased spending for Westlandia.

9b. Show the total change in GDP from this increased spending for Eastlandia.

9c. What do your results indicate about the relationship between the size of the marginal propensity to consume and the multiplier?

10. Assuming that the aggregate price level is constant, the interest rate is fixed, and there are no taxes and no foreign trade, what will be the change in GDP if the following events occur?

10a. There is an autonomous increase in consumer spending of $25 billion; the marginal propensity to consume is 2/3.

10b. Firms reduce investment spending by $40 billion; the marginal propensity to consume is 0.8.

10c. The government increases its purchase of military equipment by $60 billion; the marginal propensity to consume is 0.6.