Multiple Choice Questions 5 PDF

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Multiple Choice Questions 5 The 45 Degree Model

Problem 1 – The 45 Degree Model i. What is the paradox of thrift? (a) An increase in autonomous savings leads to a decrease in total savings. (b) An decrease in autonomous savings leads to a decrease in total savings. (c) An increase in government expenditure leads to an increase in private savings. (d) A decrease in government expenditure leads to a decrease in private savings. ii. What is the difference between private economy and the hunting-gathering economy? (a) Private savings and investment. (b) Imports and exports. (c) Government expenditure and taxes. (d) All of the above. iii. Consider an private economy with the following consumption function C = 30 + 0.7Y What is the marginal propensity to save? (a) 30 (b) 0.7 (c) 0.3 (d) 21 iv. How does an increase in autonomous imports change the aggregate expenditure curve? (a) It shifts the aggregate expenditure curve upwards. (b) It shifts the aggregate expenditure curve downwards. (c) It increases the slope of the aggregate expenditure curve. (d) (a) and (c) are both right. v. An economy has an income of 1500, planned investments of 400 and planned aggregate expenditures of 1700. What can you say about unplanned investment? (a) Unplanned investments are –200. (b) Unplanned investments are 200. (c) Unplanned investments are 1100. (d) We cannot calculate unplanned investments without knowing the other expenditures.

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vi. How will income change if we have positive unplanned investments. (a) Income will increase. (b) Income will decrease. (c) Income will not be affected. (d) We cannot say without knowing the Keynesian multiplier. vii. Consider a private economy defined by C = 100 + 0.5Y I = 400 What is the effect of an increase of investment by 100? (a) Income will increase by 200. (b) Income will decrease by 200. (c) Income will increase by 150. (d) Income will decrease by 150.

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Solutions Problem 1 i. ii. iii. iv. v. vi. v.

(a) (a) (c) (b) (a) (b) (a)

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