Midterm 1 Review Questions

1) Are the following statements true or false?

a. A country’s PPF would shift outward due to an improvement in technology.
b. As a country produces more of a good, the opportunity costs of production will
decrease due to efficiencies.
c. The inflation rate will always be 0% during the base year.
d. Natural unemployment includes both structural and frictional unemployment.
e. Nominal GDP is the best approach for comparing a country’s well-being over
times.
f. Autonomous consumption is a fraction between 0 and 1.
g. The mpc will increase with positive expectations of the future.
h. Autonomous consumption represents the amount of money an individual will
spend when their income is $0.
i. If an individual loses their job, we would move downwards along the
consumption function.
j. A positive change in expectations shifts the savings function upwards.
k. Income and savings are directly related.
l. The mpc is directly related to the multiplier.

2) If the total population is 35 million people, the labour force is 20 million people
and the unemployment rate is 5%, what will happen if another 500,000 workers
are laid off from their jobs?
3) Give an example of an unemployed worker that would be considered structurally
unemployed.
4) If a country has 5% natural unemployment, 2% frictional unemployment, and 3%
cyclical unemployment, what is their total unemployment rate?
5) When is a country at full employment?
6) For someone with an mpc of 0.8, by how much will their savings change if their
income decreases from $2000 to $1500?
7) With a consumption function of C = 200 + 0.9Y, draw a savings function and
calculate the break-even point.
8) An individual spends $400 when their income is $400. When their income
increases to $1200, their consumption increases to $1000. What is their
consumption function?
9) Draw a consumption function for an individual where S = -250 + 0.3Y. Show the
change that would result from an increase in income.
10)What could cause a saving function to shift downwards?
11)Calculate the equilibrium point (Y*) if C = 150 + 0.8Y and I=400.
12)Calculate the multiplier if C = 250 + 0.6Y.
13)By how much will Y* increase, if an increase in consumer confidence causes the
consumption function to change from C = 100 + 0.9Y to C = 175 + 0.9Y.
14)If the mpc=0.6, how large would an increase in Investment need to be for
equilibrium income to increase by $1000?
15)Draw an AE-Y graph for a country with C = 80 + 0.6Y and I = 120. Demonstrate
the change the would occur if Investment increased.