QUESTIONS 1-13:


Use the data from the STUDY GUIDE page 124 #3:

For a given nation, suppose the table shows the relationship between real consumption and real disposable income (real GDP):

1. What is the value of the average propensity to consume at $200 real GDP?
2. What is the value of the average propensity to consume at $400 real GDP?
3. What is the value of the average propensity to save at $200 real GDP?
4. What is the value of the average propensity to save at $400 real GDP?
5. What is the value of the marginal propensity to consume?
6. What is the value of the marginal propensity to save?
7. If this nation consumes $50 more at each level of real GDP than shown in the table, is this a SHIFT in the consumption function or a MOVEMENT ALONG the consumption function?
8. If the nation’s level of real GDP decreases from $440 to $280, is this a SHIFT in the consumption function or a MOVEMENT ALONG the consumption function?
9. Compute the value of the Keynesian spending multiplier.
10. Give the amount of the change in the equilibrium level of Real GDP due to a $6 increase in investment expenditures.
11. Give the amount of the change in the equilibrium level of Real GDP due to a $4 decrease in consumption expenditures.
12. Give the amount of the change in the equilibrium level of Real GDP due to a $6 increase in investment expenditures.
13. Give the amount of the change in the equilibrium level of Real GDP due to a $4 decrease in consumption expenditures and a $6 increase in investment expenditures at the same time.
14. Suppose the equilibrium level of Real GDP decreases by $20. What was the amount of the change in autonomous expenditures which caused this to happen?
15. McConnell text p. 252, #9a
16. McConnell text p. 252, #10
17. Use shifts of the AD and AS curves to explain the cost-push inflation of the 1970s.
18. What is the mathematical term to describe the relationship between real consumption and real GDP?
19. What is the mathematical term to describe the relationship between real saving and real GDP?
20. What happens to the value of the APC as real GDP decreases?
21. What happens to the value of the APS as real GDP decreases?
22. APC + APS = MPC + MPS: TRUE OR FALSE?
23. Briefly summarize Say’s Law.
24. Briefly summarize the Classical view of how the economy works.
25. What historical event caused a change in thinking about the way the economy works?
26. Briefly summarize the Keynesian view of how the economy works.
27. What is the difference between the investment demand curve for a business and the investment schedule for an economy?
28. What is the difference between the equilibrium level of real GDP and the full-employment level of real GDP in the Keynesian model?

Questions 29 – 31: For each of the following, describe the change in CONSUMPTION (Write DECREASE or INCREASE.) that would result from each of the following changes in determinants. Assume that nothing else is changing besides the identified determinant.

1. A decrease in the value of the financial assets owned by consumers.
2. An increase in taxes paid by households.
3. A decrease in the level of real interest rates.

Questions 32 – 34: For each of the following, describe the change in INVESTMENT (Write DECREASE or INCREASE.) that would result from each of the following changes in determinants. Assume that nothing else is changing besides the identified determinant.

1. An expectation of a recession.
2. An increase in labor costs.
3. A new technology used to produce goods is developed.

Questions 35 – 39: For each of the following, give the way in which each of the following determinants would have to change (Write DECREASE or INCREASE.) if it was causing a DECREASE in AGGREGATE DEMAND. Assume that nothing else is changing besides the identified determinant.

1. consumer wealth
2. real interest rates
3. national income in countries abroad
4. government spending
5. business taxes

Questions 40 – 43: For each of the following, describe the change in aggregate supply (Write DECREASE or INCREASE.) that would result from each of the following changes in determinants. Assume that nothing else is changing besides the identified determinant.

1. A rise in the average price of inputs
2. An increase in worker productivity
3. Government antipollution regulations become less strict
4. A new subsidy program is enacted for new business investment in productive equipment

Questions 44-46: Explain each of the following outcomes as the result of a shift in AGGREGATE DEMAND or AGGREGATE SUPPLY. (IT CAN BE ONLY ONE!) Also, GIVE the direction of the shift (Write DECREASE or INCREASE).

1. A recession deepens while the rate of inflation increases
2. The price level rises sharply while real output and employment increase
3. Real output rises, unemployment rate falls, and the price level rise

1. Explain “cost-push” inflation using aggregate demand-aggregate supply analysis.
2. Explain “demand-pull” inflation using aggregate demand-aggregate supply analysis.

Questions 49 – 50: For each of the following, assume the economy is currently at the equilibrium level of real GDP. Suppose you are asked to provide a solution for the American President to the following problems:

1. The economy is currently producing $100 BELOW where she would like the level of Real GDP to be. What type of expenditure gap is present? Assume the MPC for everyone in the economy is .80 and propose a Keynesian spending solution by the federal government (give dollar amount and direction).
2. The economy is currently producing $60 ABOVE where she would like the level of Real GDP to be. What type of expenditure gap is present? Assume the MPC for everyone in the economy is .75 and propose a Keynesian spending solution by the federal government (give dollar amount and direction).