Question 1

Which of the following best describes the difference between the GDP deflator and the Consumer Price Index (CPI)?

Accepted Answer

The GDP deflator includes all types of goods produced domestically with changing weights, while the CPI includes only consumer goods (including imports) with fixed weights.

Question 2

Suppose nominal GDP in year t is $$500 billion and real GDP in year t is 400 $$billion. What is the GDP deflator for year t?

Accepted Answer

$$ \frac{500}{400} = 1.25 $$

Question 3

If the CPI in year t is 120 and the CPI in year t+1 is 132, what is the inflation rate $$ \pi $$ between year t and t+1?

Accepted Answer

$$ \pi = \frac{132 - 120}{120} = 0.1  or 10$$%

Question 4

According to the Keynesian consumption function, if the fixed component of consumption is $$ c_0$ $$ and the marginal propensity to consume is $$ c $$, what is the formula for total consumption $$ C $$ given disposable income $$ Y $$?

Accepted Answer

$$ C = c_0$ + cY $$

Question 5

Which statement best describes the prediction of the Fisher theory of consumption regarding a temporary increase in current income?

Accepted Answer

Consumption will increase moderately, as the household will spread the increase over both current and future periods (consumption smoothing).

Question 6

In the Life Cycle Theory, what is the main reason an individual consumes less than their income when young?

Accepted Answer

To save for retirement when they will have no income.

Question 7

According to Friedman's Permanent Income Theory, how does a one-time lottery win (transitory income) affect consumption?

Accepted Answer

It leads to a small increase in consumption spread over the agent's lifetime.

Question 8

Which formula represents the average propensity to consume in the Keynesian model?

Accepted Answer

$$ \frac{c_0$ + cY}{Y} $$

Question 9

Which of the following is NOT a component of aggregate demand (GDE)?

Accepted Answer

Government spending

Question 10

A firm is considering a project with net revenues $$ R_t  at $$time $$ t $$ and start-up cost $$ C_0$ . $$According to the Keynesian theory, the project should be undertaken if:

Accepted Answer

The internal rate of return $$ r  is $$greater than or equal to the market interest rate $$ i .$$

Question 11

According to Tobin's q theory, when will a firm increase its capital stock?

Accepted Answer

When the value of capital in the stock market exceeds its replacement cost (Tobin's q \u003e 1).

Question 12

Which of the following is a reason firms hold inventories, according to the study materials?

Accepted Answer

To smooth production and avoid stock depletion.

Question 13

According to the theory of the accelerator, what is the desired relationship between inventories and output?

Accepted Answer

Firms want the ratio of inventories to output to remain constant.

Question 14

Which of the following best describes Hall's Random Walk Theory of consumption?

Accepted Answer

Consumption changes only as a result of unexpected changes in transitory income and is therefore unpredictable.

Question 15

If a household expects to live for $$ T $$ periods, retire after $$ R $$ periods, and has wealth $$ W $$ and yearly income $$ Y $$, what is the main implication of the Life Cycle Theory for their consumption pattern?

Accepted Answer

They will consume less than their income when young, save for retirement, and maintain constant consumption throughout life.

Question 16

Which of the following is NOT a prediction of Friedman's Permanent Income Theory?

Accepted Answer

Consumption is determined only by current income.

Question 17

In the Fisher two-period model, the household maximizes $$ U(C_1$) + \beta U(C_2$) $$ subject to a budget constraint. What does $$ \beta $$ represent?

Accepted Answer

The discount factor reflecting the household's preference for future consumption.

Question 18

Which of the following is true about the marginal propensity to consume (MPC) in the Keynesian theory?

Accepted Answer

It is assumed to be the same for all households in the basic model.

Question 19

Which of the following is a correct statement about the volatility of investment compared to consumption?

Accepted Answer

Investment is a smaller but much more volatile component of aggregate demand than consumption.

Macroeconomic Measurement and Theories of Consumption

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