Q: Suppose the marginal propensity to consume ($$c_1) is 0.8. If $$investment ($$I) $$increases by $$\100$ million, what is the total change in equilibrium output ($$\Delta Y$)?

$$\Delta Y = \frac{\100$$\text{ million}}{1-0.8} = \$$500\text{ million}$$

Question 1

Which of the following best describes the value-added approach to calculating Gross Domestic Product (GDP)?

Accepted Answer

Summing the value of all final goods and services produced in the economy and subtracting the value of all intermediate goods used in production.

Question 2

Suppose the government increases its spending by $$\Delta G. $$According to the Keynesian multiplier, what is the total change in equilibrium output ($$\Delta Y) if $$the marginal propensity to consume ($$c_1) is 0.6$$?

Accepted Answer

$$\Delta Y = \frac{\Delta G}{1-c_1$} = \frac{\Delta G}{0.4}$$

Question 3

Which of the following is NOT included in the calculation of GDP using the expenditure approach?

Accepted Answer

Spending on intermediate goods and services.

Question 4

If the unemployment rate ($$u) is $$defined as $$u = \frac{U}{L}$$, where $$U is $$the number of unemployed and $$L is $$the labor force, what happens to the unemployment rate if discouraged workers stop looking for work?

Accepted Answer

The unemployment rate decreases because the labor force shrinks.

Question 5

Which of the following best explains why the choice of base year matters when calculating real GDP?

Accepted Answer

Relative prices of goods change over time, affecting the calculation of real GDP depending on the base year chosen.

Question 6

In the goods market equilibrium model, what happens if aggregate expenditure ($$Z) $$exceeds output ($$Y$$)?

Accepted Answer

Inventories deplete, and firms are likely to increase production.

Question 7

Given the consumption function $$C = c_0$ + c_1$ (Y - T)$$, what does $$c_1$$ represent?

Accepted Answer

The marginal propensity to consume (MPC), or the fraction of disposable income consumed by households.

Question 8

If the government increases taxes by $$\Delta T$$, what is the effect on equilibrium output ($$\Delta Y) $$according to the multiplier model?

Accepted Answer

$$\Delta Y = -\frac{c_1$}{1-c_1$} \Delta T$$

Question 9

Which of the following statements about the GDP deflator and the Consumer Price Index (CPI) is correct?

Accepted Answer

The GDP deflator measures the price of goods produced within the U.S., while the CPI measures the price of goods consumed within the U.S.

Question 10

Suppose the marginal propensity to consume ($$c_1) is 0.8. If $$investment ($$I) $$increases by $$\100$ million, what is the total change in equilibrium output ($$\Delta Y$)?

Accepted Answer

$$\Delta Y = \frac{\100$$	ext{ million}}{1-0.8} = \$$500	ext{ million}$$

Question 11

In the context of the goods market model, which of the following variables is considered exogenous?

Accepted Answer

Government spending ($$G)$$

Question 12

If the participation rate is defined as $$\frac{	ext{Labor Force}}{	ext{Total Working Age Population}}$$, what happens to the participation rate if a large number of people retire and leave the labor force?

Accepted Answer

The participation rate decreases.

Question 13

Which of the following best describes the chain-weighted method for calculating real GDP?

Accepted Answer

It uses a geometric average of growth rates between consecutive years to chain together real GDP over time.

Question 14

In the goods market equilibrium, what is the relationship between investment ($$I) $$and savings in a closed economy?

Accepted Answer

$$I = S_{	ext{private}} + S_{	ext{public}}$$

Question 15

If output ($$Y) is $$below equilibrium in the goods market graph, as shown in the second image, what is the likely short-run response by firms?

Accepted Answer

Firms will increase production to meet excess expenditure.

Question 16

Which of the following is a correct interpretation of the consumption function $$C = c_0$ + c_1$ (Y - T)$$?

Accepted Answer

$$c_0$$ represents autonomous consumption, which occurs even if disposable income is zero.

Question 17

If the price of imported goods rises sharply, which inflation measure is likely to increase faster?

Accepted Answer

The Consumer Price Index (CPI)

Question 18

Suppose the government increases spending from $$G_0 to$$ $$G_1$$, as shown in the third image. What is the immediate effect on the ZZ curve in the goods market graph?

Accepted Answer

The ZZ curve shifts upward.

Question 19

Which of the following is true about private and public saving in the goods market equilibrium?

Accepted Answer

Private saving is defined as $$S_{	ext{private}} = Y - T - C$$ and public saving as $$S_{	ext{public}} = T - G.$$

Macroeconomic Measurement and the Goods Market: Study Notes

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