Econ 302 Fall Don t forget to download a copy of the Homework Cover Sheet. Mark the location where you handed in your work.

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1 Econ 302 Fall 2005 Don t forget to download a copy of the Homework Cover Sheet. Mark the location where you handed in your work. Homework #3; Chapter 9. This homework has three parts (A, B, C). Each part will be separately graded. Part A, HW #3, Ch #9. Go to technical problems, page 237. Do the following problems. Show your work. 1. a 2. a 3. a 1. b 2. b 3. b 1. c 2. c 3. c 1. d 2. d 3. d 1. e 3. e 1. f Part B, HW#3, Ch #9. Go to empirical problems, page 238. Do the following problems. Show your work. 1. a 1. b 1. c (optional) Part C, HW#3, CH#9. MC Quiz, 25 questions, use red score sheet handed out in class or available outside Heady 281 or Heady 167. We will use the following grading scale. A = 20+ B = 19, 18, 17 C = 16, 15, 14 D = 13, 12, 11 F = < 11

2 Name: Date: 1. The consumption function C = C o + cyd has a positive vertical intercept indicating that A) some consumption is unaffected by changes in disposable income B) the multiplier is always positive C) the apc will always increase as disposable income increases D) some consumption will occur no matter what the price level E) a positive fraction of disposable income is always saved 2. Total autonomous spending A) is dependent on the level of output B) is only determined by the equation for the consumption function C) is not part of aggregate demand D) is independent of the level of income E) increases when disposable income increases 3. The marginal propensity to consume (mpc) A) shows the fraction of income that is used for consumption B) added to the marginal propensity to save (mps) always equals zero C) is the relationship between a change in consumer purchases and the change in disposable income that allows consumption to change D) declines as disposable income declines, eventually becoming zero as disposable income reaches zero E) decreases as autonomous saving increases 4. In a simple model with no government or foreign sector, the amount of involuntary inventory accumulation at equilibrium is A) dependent upon the amount of consumption B) equal to output minus consumption C) zero D) always positive E) usually negative 5. If there is no government or foreign sector and planned investment equals planned saving, then A) actual output is equal to planned spending on consumption and investment B) consumption plus planned investment equals income C) the quantity of output produced is equal to aggregate demand D) there are no unplanned inventory changes E) all of the above 6. Assume a model with no government, where consumption is the only component of aggregate demand. If consumption is C = (0.9)Y, what is the equilibrium level of consumption? A) 400 B) 760 C) 1,600 D) 3,600 E) 4,000

3 7. In a model with no government or foreign sector, if saving is defined as S = (0.1)Y and investment is I o = 200, what is the equilibrium level of consumption? A) 3,800 B) 3,600 C) 1,800 D) 2,000 E) 1, If autonomous investment increases by 100 and government purchases decrease by 100, which of the following is true? A) income will increase by 100 B) income will increase by 200 C) income will increase by the multiplier times 100 D) income will decrease by the multiplier times 100 E) income will not change 9 The expenditure multiplier is used to calculate the change in A) spending caused by a change in income B) income caused by a change in autonomous spending C) intended spending caused by a change in consumption D) disposable income caused by a change in saving E) government expenditures caused by a change in income 10. When calculating the multiplier for government purchases (G), we A) must know the marginal propensity to save (mps) B) must know the income tax rate (t) C) must know the average propensity to consume (apc) D) can ignore the size of the marginal propensity to consume (mpc) E) both A) and B) 11. The fluctuations in the income level that result from changes in investment spending A) tend to be larger with a larger mpc B) tend to be larger if the income tax rate (t) is larger C) tend to be larger with a larger mps D) tend to be smaller if the apc is smaller E) depend only on the magnitude of the changes in investment spending but not on the size of the mpc 12. The size of the expenditure multiplier depends on A) the marginal propensity to consume B) the marginal propensity to import C) the marginal income tax rate D) all of the above E) only A) and B)

4 13. If total autonomous spending is A o = 800, the marginal propensity to save is mps = 0.2, and the marginal tax rate is t = 0.25, what is the level of equilibrium income? A) 800 B) 1,000 C) 2,000 D) 3,200 E) 4, Assume an economy with no foreign sector, a marginal propensity to save of mps = 0.1, and a marginal income tax rate oft = 1/3. If autonomous saving decreases by 300, which of the following is true? A) total consumption will increase by 300 B) national income will increase by 500 C) disposable income will increase by 750 D) the budget surplus will increase by 250 E) the budget surplus will be unaffected 15. Assume the consumption function is of the form C = (0.75)YD and the income tax rate is t = 0.2. What would be the effect of an increase in government transfers of ATR = 200? A) an increase in income of 800 B) an increase in income of 500 C) an increase in income of 375 D) an increase in income of 300 E) an increase in income of Assume a model with a marginal propensity to save of mps = 0.20 and an income tax rate oft = What could cause the level of equilibrium income to decrease by 1,000? A) a decrease in autonomous net exports of 400 B) a decrease in autonomous saving of 200 C) a decrease in government purchases of 250 D) a decrease in government transfer payments of 500 E) an increase in autonomous investment of Assume a model of the expenditure sector. The marginal propensity to save is 0.2, the marginal propensity to import is 0.1 and the marginal tax rate is What is the size of the multiplier? A) 10 B) 5 C) 4 D) 2.5 E) 2

5 18. Assume a model with income taxes in which imports increase proportionally to income. Which of the following is FALSE? A) the expenditure multiplier will increase with an increase in the marginal propensity to import B) the expenditure multiplier will increase with a decrease in the marginal propensity to save C) the expenditure multiplier will decrease with an increase in the marginal propensity to save D) the expenditure multiplier will decrease with an increase in the marginal income tax rate E) the expenditure multiplier will decrease with an increase in the marginal propensity to import 19. In a model with income taxes, an increase in autonomous imports will A) increase the budget deficit B) increase aggregate demand C) not affect saving D) increase consumption E) decrease the trade deficit 20. In a model with income taxes, a decrease in autonomous investment will A) decrease saving B) increase the budget deficit C) decrease tax revenues D) decrease consumption E) all of the above 21. Assume the savings function is defined as S = (0.25)YD and the marginal income tax rate is t = 0.5. If autonomous investment increased by 50, then the fullemployment budget surplus would A) not be affected B) increase by 10 C) increase by 40 D) increase by 80 E) increase by A decrease in the income tax rate (t) will A) increase the full-employment budget surplus B) increase the size of the expenditure multiplier C) increase disposable income and autonomous spending D) increase consumption but decrease saving E) none of the above 23. In a model with income taxes, if there is a decrease in autonomous net exports, which of the following is FALSE? A) the budget deficit will not be affected B) the budget deficit will increase C) disposable income will decrease D) saving will decrease E) income will decrease by more than net exports

6 24. In a model with income taxes, assume that autonomous investment decreases. Which of the following will be TRUE? A) the full-employment budget surplus will decrease B) the actual budget surplus will decrease C) the cyclical component of the budget surplus will decrease D) the actual budget surplus will not be affected E) both B) and C) 25. A decrease in the full-employment budget surplus will A) increase national income B) increase saving C) increase consumption D) all of the above E) none of the above

ECON 120 -ESSENTIALS OF ECONOMICS

Name ECON 120 -ESSENTIALS OF ECONOMICS CH 24 THE GOVERNMENT AND FISCAL POLICY MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Fiscal policy refers