Chapter 17 PDF

Preview

Summary

Economy...

Description

CHAPTER 17 REVISION QUESTIONS Theory/Discussion questions 1) Explain what the marginal propensity to consume means. 2) Define the multiplier and explain how it works. 3) What is meant by the consumption function? Explain the three main characteristics of the consumption function. 4) Explain the relationship between investment and the interest rate?

Calculation questions Question 1 Consider the following numerical example of the simple Keynesian model with no government spending, taxes or a foreign sector (all figures in R millions): C = 100 + 0,9Y I = 50 Answer the following questions: (a) What is the value of the marginal propensity to consume (MPC) in this model? (b) Use a graph to illustrate the equilibrium level of output. (c) Calculate the equilibrium level of output. (d) In equilibrium, what is the value of consumption spending? Use this number to verify that the sum of C and I in equilibrium equals the value for equilibrium output you obtained above. (e) What is the value of the multiplier in this economy? (f) Suppose the level of output that creates full employment in the economy is 1 800. Using the multiplier, determine the level of investment spending that would create full employment in this economy. Question 2 Calculate the equilibrium level of income if: C = R100 million + 0,8Y and Ī = R125 million. Question 3 The following economic data is provided for the South African economy: C = 1050 + 0,90Y

I = 685 (a) Calculate the equilibrium income (Y) for the country. (b) Calculate household consumer savings.

Multiple Choice Questions 1). According to the Keynesian model, the most important determinant of a household’s consumption is: A. its disposable income. B. its total wealth. C. the number of persons in the household. D. its net wealth. E. the ratio of wage to non-wage income the household earns. 2). The MPC measures the relationship between: A. a change in consumption and a change in income. B. change in consumption and savings. C. changes in consumption and changes in savings. D. the proportion of income to consumption at any given level of income. E. the total level of consumption and the total level of saving. 3). If a household’s income falls from R20 000 to R17 000 and its consumption falls from R18 000 to R15 000, then its: A. B. C. D. E.

marginal propensity to consume is –0,67. marginal propensity to consume is 0,88. marginal propensity to consume is 0,20. marginal propensity to save is zero. marginal propensity to save is 0,12.

4). If you examine the national accounts, you will see that saving always equals investment. This is because: A. households can invest only what they save. B. investment by firms is restricted by the amount of saving. C. saving always equals investment ex post (in an accounting sense). D. saving includes unplanned changes in inventories. E. the economy rapidly adjusts the level of investment to saving. 5). If aggregate expenditure is greater than total income: A. investment will decrease because such a high level cannot be sustained. B. planned saving will decrease in line with investment. C. output will increase to replenish depleted inventories.

D. investment will decrease to run down excessive inventories. E. there is an error, since the two are the same by definition. 6). The multiplier in the Keynesian model equals: A. B. C. D. E.

the equilibrium level of income for a given level of aggregate expenditure. the increase in autonomous expenditure brought about by a change in income. the equilibrium level of income divided by autonomous expenditure. the increase in equilibrium income when autonomous expenditure increases. the level of equilibrium output corresponding to a given level of aggregate spending.

7). In macroeconomic theory, total or aggregate spending is denoted by A and total or aggregate production of income by Y. Which one of the following statements is incorrect? A. When A is greater than Y, there is disequilibrium and Y will tend to increase. B. When A is equal to Y, there is equilibrium and Y will remain unchanged. C. When A is less than Y, there is disequilibrium and Y will decrease. D. When A is greater than Y, there is disequilibrium and A will decrease. When A is less than Y, producers will have an incentive to cut back on their production 8). Which one of the following statements about the consumption function is incorrect? A. B. C. D.

Consumption spending consists of autonomous consumption and induced consumption. Autonomous consumption consists largely of spending on durable consumer goods. Autonomous consumption is independent of the level of income. As income increases, the level of induced consumption increases.

9). The 45-degree line: A. B.

illustrates the level of autonomous consumption. illustrates the level of induced consumption.

C. D. E.

illustrates the level of investment spending. illustrates the combined level of consumption and investment spending. illustrates all the possible equilibrium points, where the level of aggregate spending equals the level of total income in the economy.

10). Which one of the following is not required to calculate the equilibrium level of income in a simple Keynesian model? A. The marginal propensity to consume. B. C. D. E.

The level of autonomous consumption. The size of the money stock. The level of investment spending. The equilibrium condition....