1. The baseline level of consumption Co
a). is the amount by which consumption spending changes in response to a $1 change in total income.
b). is the amount households would spend on consumption goods if they had no income at all.
c). is the amount by which consumption spending changes in response to a $1 change in disposable income.
d). is the amount by which consumption spending would change in response to a $1 change in household wealth.
2. If the marginal propensity to consume is equal to .75, then
a). the marginal propensity to save is equal to .15
b). the marginal propensity to save is equal to .65
c). the marginal propensity to save is equal to .25
d). the marginal propensity to save is equal to .35
3. If consumption spending changes by $5 trillion when disposable income changes by $8 trillion, the marginal propensity to save is equal to
a). $3 trillion
b). .625
c). $13 trillion
d). .375
4. The value of demand for imports depends on
a). the real income of our trading partners
b). domestic real GDP
c). domestic real GDP and foreign real interest rates
d). the level of exports
5. Using the quantity theory of money, the bulk of changes in the rate of inflation is due to changes in the
a). growth rate of the velocity of money
b). growth rate of real GDP
c). growth rate of the money supply
d). growth rate of real wages
6. The change in consumption spending (ΔC) which occurs as a result of a change in government purchases (ΔG) is equal to
a). Cy X ΔG
b). - Cy X ΔG
c). –Cy X (1 – t) X ?Y
d). 0
7. Better technology leads to a higher level of
?a). the efficiency of labor
?b). the efficacy of labor
?c). the utilization of labor
?d). the hiring of labor
8. The parameter α of the Cobb-Douglas production function is always a number
?a). between -1 and 0
?b). between 0 and 2
?c). between 0 and 1
?d). greater than 1
9. The parameter α of the Cobb-Douglas production function
a). governs how fast diminishing returns to savings sets in
b). governs how fast diminishing returns to investment sets in
c). governs how fast diminishing returns to labor sets in
d). governs how fast diminishing returns to technology sets in
e). b and c
10. The law of one price:
a). outlaws price discrimination
b). refers to output produced by a monopolist
c). states that in the absence of a price floor, a market achieves an equilibrium price
d). indicates how the prices of many goods are aggregated into a single composite price index for measuring inflation
e). assumes that goods cost nothing to distribute
Essay problems
problem 1
Does an increase in the money supply increase or lower the short-term rate of interest? Does it increase or decrease the long-run rate of interest? describe your answers.
problem 2
Assume that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar?
problem 3
Suppose that 30% of a country’s population is institutionalized in schools, hospitals, or prisons; 10% are full-time homemakers; another 10% are retired; 45% of the population is employed either full-time or part-time; and 5% of the population is unemployed and seeking work. What is the unemployment rate? Is it: 5%; 10%; 15%; 25%; 55%, or none of these?
problem 4
describe a complete business cycle (trough, expansion, peak, recession), focusing on what happens to output, employment, and investment in each phase.