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BSP2001 - Macro and International Economics Sem 1 2013/2014

Topic 2

Practice Multiple Choice Questions

1) Classical Economists believe that _______.
A) prices are flexible.
B) full employment can never be achieved.
C) demand is necessary to create supply.
D) price mechanism fails as evident in the Great Depression.


2) Disposable income is _______.
A) income plus indirect taxes.
B) income minus both saving and taxes.
C) consumption minus taxes.
D) income after adding transfer payments and subtracting taxes.


3) In the consumption equation C = + cYD, the marginal propensity to consume
_______.
A) is zero if autonomous consumption is zero.
B) is equal to the difference between 1 and the marginal propensity to save.
C) is larger than autonomous consumption.
D) increases if the marginal propensity to save increases.


4) The expenditure multiplier measures _______.
A) the change in autonomous spending caused by a change in income.
B) the change in autonomous consumption caused by a change in disposable income.
C) the change in consumption caused by a change in disposable income.
D) the change in income caused by a change in autonomous spending.


5) The size of the expenditure multiplier depends on the _______.
A) marginal propensity to consume.
B) government purchases.
C) lump-sum tax.
D) All of the above.






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6) In the Keynesian Expenditure model, what happens to the AD line if transfer
payments fall?
A) AD line will shift parallel upward.
B) AD line will shift parallel downward.
C) AD line will rotate downward to become less steep.
D) AD line will rotate upward to become steeper.


7) Assume that there is no government and no foreign sector. If autonomous
consumption is c = 80, investment is I = 70, and the marginal propensity to save is
MPS = 0.25, the equilibrium income is
A) 150
B) 200
C) 225
D) 600


8) If an increase in disposable income of $100 causes consumption to increase by $75,
ceteris paribus, we may conclude that _______.
A) $25 is autonomous consumption.
B) $25 is induced consumption.
C) marginal propensity to save is 0.25.
D) marginal propensity to save is 0.75.


9) Which of the following is NOT an automatic stabilizer?
A) Interest payments on the national debt
B) Unemployment benefits.
C) Income tax.
D) (B) and (C).


10) The level of investment spending is affected by changes in the interest rate, since
higher interest rates _______.
A) will make it more profitable to invest in the stock market.
B) imply that firms should increase investment spending to enjoy a higher rate of return.
C) will increase the cost of borrowing and thus lower the incentive to purchase capital
equipment.
D) will decrease the cost of borrowing and thus increase the incentive to purchase capital
equipment.






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Solution:

1) A
2) D
3) B
4) D
5) A
6) B
7) D
8) C
9) A
10) C