Question

1. Suppose the consumption equation is represented by the following: C = 250 + .75YD.

If no other variables depend on Y, then the Keynesian Cross expenditure multiplier in this economy is

A) .25.

B) .75.

C) 1.

D) 4.

E) 5.

2. Use the following information to answer this question. If nominal GDP rises from $100 trillion to $120 trillion, while the GDP deflator rises from 2.0 to 2.2, the percentage change in real GDP is approximately equal to
A) -10%.
B) 0%.
C) 10%.
D) 20%.
E) 30%.

3. Suppose the consumption equation is represented by the following: C = 250 + .8YD. If no other variables depend on Y, then the expenditure multiplier for the above economy equals
A) 2.
B) 3.
C) 4.
D) 5.
E) none of the above

4. Suppose the consumption equation is represented by the following: C = 250 + .75YD. Now assume government spending increases by 100 for the above economy, and assume no other variables depend on Y. Given the above information, we know that equilibrium output will increase by
A) 200.
B) 400.
C) 800.
D) 1000.
E) none of the above

5. 36) If C = 2000 + .9YD, what increase in government spending must occur for equilibrium output to increase by 1000, assuming no other variables depend on Y?
A) 100
B) 200
C) 250
D) 500
E) 1000.

Answer 1

1.

D.4

Working note:

Multiplier = 1/(1-MPC) = 1/(1-.75) = 4

2.

C.10%

Working note:

Real GDP = Nominal GDP/Deflator

When nominal GDP = $100 trillion

Real GDP = 100/2 = $50 trillion

When nominal GDP = $120 trillion

Real GDP = 120/2.2 = 54.55 trillion

Growth in real GDP = (54.55-50)/50 = 9.1%

3.

D.5

Working note:

Expenditure multiplier = 1/(1-.8) = 1/.2 = 5

4.

B.400

Multiplier = 1/(1-.75) = 4

So, actual increase in aggregate output = 100*4 = $400

5.

A.100

Working note:

Multiplier = 1/(1-.9) = 10

Increase in output = increase in government spending * Multiplier

Increase in government spending = Increase in output/multiplier = 1000/10 = $100