Problem Set 5

Problem Set 5
Econ 201 (03,04) Spring 2002
(Dr. Tin-Chun Lin)
1. Macroeconomic equilibrium occurs when the
(A) Economy is at full employment.
(B) Economy is producing at its physical limit.
(C) Aggregate demand curve intersects the short-run aggregate supply curve along its
vertical portion.
(D) Quantity of real GDP demanded equals the quantity of real GDP supplied.
(Answer: (D))
2. If real GDP is greater than long-run aggregate supply, then the economy is
(A) Not in macroeconomic equilibrium.
(B) In a full-employment equilibrium.
(C) In an above full-employment equilibrium.
(D) In an unemployment equilibrium.
(Answer: ( C ))
3. We observe an increase in the price level and an increase in real GDP. Which of the
following is a possible explanation?
(A) The expectation of future profits has increased.
(B) The money supply has decreased.
(C) The price of raw materials has increased.
(D) The stock of capital has increased.
(Answer: (A))
4. Which of the following statements is true regarding the relationship among the
average propensity to consume (APC), the average propensity to save (APS), the
marginal propensity to consume (MPC), and the marginal propensity to save?
(A) If the MPC increases, then the MPS must also increase.
(B) MPC + APC = 1.
(C) MPC + MPS = APC + APS.
(D) MPC + MPS > APC + APS.
(Answer: ( C ) )
5. The slope of the consumption function is equal to the
(A) MPC.
(B) APS.
(C) APC.
(D) MPS. (Answer: (A))
6. The net export function for the U.S. shows the relationship between net exports and
(A) The level of GDP in the rest of the world.
(B) The level of U.S. real GDP.
(C) The foreign exchange rate.
(D) Disposable income.
(Answer: (B))
7. If real GDP is less than aggregate planned expenditure, then
(A) Aggregate planned expenditure will decrease.
(B) Real GDP will increase.
(C) The price level must fall to restore equilibrium.
(D) Imports must be too large.
(Answer: (B))
8. You are given the following information about the Batman family:
Disposable Income (dollars per year)
Consumption Expenditure (dollars per year)
a. Calculate the Batman family’s marginal propensity to consume. (Answer: MPC =
b. Calculate the average propensity to consume at each level of disposable of
disposable income. (Answer: --; 1; 0.75; 0.67; 0.63)
c. Calculate how much the Batman family saves at each level of disposable income.
(Answer: -$5000; $0; $5000; $10000; $15000)
d. Calculate their marginal propensity to save. (Answer: MPS = 0.5)
e. Calculate their average propensity to save at each level of disposable income.
(Answer: --; 0; 0.25; 0.33; 0.37)
f. Draw a diagram of the consumption function. Calculate its slope. (Answer: you
can do it by yourself)
g. Over what range of income does the Batman family dissave? (Answer: The
Batman family dissave when disposable income is less than $10000.)