Question

A6. The marginal propensity to consume
(I) is the increase in disposable income from a $1 increase in consumer spending.
(II) is the increase in consumer spending from a $1 increase in disposable income.
(III) is usually a number between zero and one, but occasionally is a number greater than one.
(IV) can be written as the change in consumer spending divided by the change in disposable income.
(A) Statements I, III, and IV are all correct.
(B) Statements II, III, and IV are all correct.
(C) Statements I and III are correct.
(D) Statements II and IV are correct

A8. Nominal wages
(A) are often determined by contracts that were signed at some previous point in time.
(B) are slow to decrease in times of high unemployment, since employers may be reluctant to alter wages as a response to economic conditions.
(C) are fully flexible in both the short run and the long run.
(D) Answers (A) and (B) are both correct.

A11. Suppose Funland is initially in long-run macroeconomic equilibrium. Then, there is a supply shock due to a severe increase in commodity prices. If Funland’s policy-makers use active stabilization policy to offset this supply shock,
(A) they can effectively eliminate the economic effects of the supply shock.
(B) they can either increase the aggregate price level to its initial equilibrium level, or they can decrease aggregate output to its initial level.
(C) they can either reduce the aggregate price level down to its initial equilibrium level, or they can increase aggregate output to its initial level.
(D) this will greatly reduce the economic fluctuations Funland experiences from this supply shock.

A14. Suppose that short-run equilibrium real ??? for an economy is currently greater than potential output. This implies that
(A) nominal wages will need to adjust upward as the economy moves from the short run to the long run.
(B) the level of unemployment is very low for this economy.
(C) jobs are plentiful in this economy.
(D) Answers (A), (B), and (C) are all correct.

Answer 1

A6. Marginal propensity to consume is the change in consumption due to a change in income. When income increases consumption also increase. Value of MPC lies between 0 and 1. Hence the correct statements are II and IV. Therefore correct answer is option (d).

A8. Nominal wages are wages expressed in monetary form and does not take into account inflation. Nominal wages are often determined by contracts. Nominal wages are sticky. Hence the correct answer is option (d)