ECONOMICS (GROUP E)

PROBLEM SET 2: MACROECONOMICS

1. In an economy described by the goods market model with fixed taxes, a fall in
production is observed, with no change in the budget balance of the public sector or in
private savings. Indicate which of the following disturbances could have generated these
effects: (indicate the correct answer)

a) A decrease in autonomous investment.

b) An increase in taxes.
c) A decrease in public consumption accompanied by an equivalent increase in taxes.
d) A reduction in the marginal propensity to consume.

2. In an economy described by the goods market model with fixed taxes, if the
government decides to raise taxes to keep the public deficit unchanged in the face of an
increase in public consumption, indicate the correct answer:

a) Output increases and consumption and savings remain constant.

b) Production, consumption and savings increase.
c) Production, consumption and savings remain constant.
d) Saving increases and consumption remains constant.

3. Compare two identical goods market models that differ only in:
Model A: Taxes are fixed: T = T
Model B: Taxes are proportional to the level of income: T = tY (with 𝑡 = 0.25)
In both the marginal propensity to consume is: 𝑐1 = 0.8. Point out the correct answer.

a) the multiplier is 1.25 in A and 2.5 in B.

b) the multiplier is 5 in A and 2.5 in B.
c) the multiplier is 1.25 in A and 2 in B.
d) the multiplier is 5 in A and 2 in B.

4. In the goods market model with taxes proportional to the level of income, point out the
correct statement:

a) An increase in investment will lead to an increase in private saving of the same amount.
b) If, in the face of a fall in autonomous consumption, tax collection is reduced, private
saving will increase by the same amount as tax collection.
c) A reduction in the tax rate will lead to higher tax revenue as income increases.
d) A lowering of the tax rate will cause an increase in income and an increase in
consumption (of lesser amount than the increase in income).
5. During the Great Financial Crisis that started in 2008, many governments reacted by
increasing public consumption. In the model of the goods market with taxes proportional
to the level of income compare the effectiveness of this measure in two economies (X and
Z) that only differ in their tax rate, being 0.1 in economy X and 0.5 in economy Z (point
out the correct answer):

a) The measure of raising G is more effective in economy X.

b) The measure of raising G is more effective in economy Z
c) The measure of raising G is equally effective in both economies
d) It is not possible to know in which economy raising G is more efficient if the size of
the marginal propensity to consume c1 is unknown.

6. Let there be an economy characterized by the goods market model, with taxes
proportional to the level of income (T = 0.2Y), fixed investment and consumption
function C = C0 + 0.4(Y-T), whose public budget is balanced. How much does the GDP
of that economy vary in percentage terms if autonomous consumption falls by 10% of
GDP (ΔC0 = -0.1Y)? (point out the correct answer).

a) 10.055%
b) 5.375%
c) -11.465%
d) -14.705%

7. Continuing with test 7 above, calculate the budget deficit or surplus as a percentage of
initial GDP generated by this 10% drop in autonomous consumption of GDP (indicate
the correct answer):

a) 1.251%
b) 3.351%
c) -2.941%
d) -5.25%

8. Continuing with tests 7 and 8 above, suppose that the government modifies G so that
the public budget remains balanced. Calculate what will now be the percentage change in
GDP if autonomous consumption falls 10% of GDP (point out the correct answer):

a) -20.83%
b) 8.56%
c) -25.33%
d) 1.55%

9. In the goods market model, the consumption function is: C = 100 + 0.6YD. In addition,
I0 = 80, G = 150, T = 0.25Y. Household saving in equilibrium is (point out the correct
answer):

a) 60
b) 70
c) 80
d) 90

10. The economy of a country is described by the goods market model with taxes
proportional to the level of income. The marginal propensity to consume is 0.5 and the
tax rate is 1/3. During this year, the economy is in equilibrium with a GDP of 1,000 and
a government deficit of 10% of GDP. Calculate government consumption (G) and tax
revenue (T). Point out the correct answer.

a) G = 433.3; T = 333.3;
b) G = 355.5; T = 255.5;
c) G = 544.4; T = 444.4;
d) G = 222.2; T = 122.2;

11. Continuing with test 12 above, calculate the sum of autonomous consumption and
autonomous investment, C0 + I0. Point out the correct answer.

a) 233.3
b) 333.3
c) 433.3
d) 533.3

12. Following on from tests 12 and 13 above, suppose that the government's creditors
decide not to finance any more deficits for it, so that next year it will be forced to achieve
an immediate government budget balance. By what percentage will next year's
equilibrium GDP vary from this year's GDP? Point out the correct answer.

a) 20%
b) 0%
c) -15%
d) -30%

13. Continuing with test 14 above, by what percentage will T vary next year from its value
this year? Point out the correct answer.

a) 35%
b) 15%
c) -30%
d) -45%.

14. In the context of the income-expenditure model with exogenous taxes, assume an
economy where the marginal propensity to consume (c1) is 0.5. If the government wishes
to increase income by 100 units, but without altering national saving, it should (point out
the correct answer):
a) Reduce public spending and taxes by 100 units.
b) Increase public spending by 55 units and taxes by 10 units.
c) Increase public spending and taxes by 100 units.
d) Increase public spending by 50 units and reduce taxes by 20 units.

15. In an economy defined by the income-expenditure model with exogenous taxes and a
marginal propensity to consume (c1) equal to 0.8, there is an equilibrium increase in the
budget by 100 units. At the same time autonomous investment also decreases by 100 units
(point out the correct answer):

a) Equilibrium income will increase by 100 units.

b) Equilibrium income will remain constant because the fall in investment cancels out the
positive effect of the balanced budget.
c) The equilibrium income will decrease by 400 units.
d) Equilibrium income will decrease by 100 units.

16. Suppose an economy operating according to the income-expenditure model with

endogenous taxes. If households decide to reduce their autonomous consumption in order
to save more (point out the correct answer):

a) Private saving will remain constant, since income falls by the same magnitude as
autonomous consumption.
b) Private savings will fall, due to the paradox of savings.
c) They will achieve their goal of saving more.
d) Private saving will remain undetermined.

17. In the context of the goods market (income-expenditure) model with fixed taxes, the
comparison of the effect of a fall in taxes with that of an increase in public expenditure
of equal magnitude, will show that in the new equilibrium (point out the correct answer):

a) Output increases by equal magnitude in both cases.

b) Private saving increases by the same magnitude in both cases.
c) Private consumption increases more when public spending increases.
d) Private saving increases more when public spending increases.

18. Consider an economy described by the goods-market (income-expenditure) model

with endogenous taxes (T = 0.25Y) and a marginal propensity to consume of 0.5. If the
government reduces government spending by 100 units, point out the correct answer:

a) Output falls by 200 units.

b) The government surplus increases by 100 units.
c) The government surplus increases by 60 units.
d) Production increases by 100 units.

19. In the goods market (income-expenditure) model with taxes proportional to income
(T = tY), we know that the tax rate on income is 20% and the marginal propensity to
consume is 0.5. After observing that the last expansionary fiscal policy of increasing
public spending has had a very small impact on GDP, the Minister of Finance considers
changing the tax rate. If the desired objective is that an increase in public spending of 10
units should result in an increase in GDP of 18 units, the tax rate should (mark the correct
answer):

a) Remain as it is at present, because the objective is already achieved.

b) Increase to 25%.
c) Be reduced to 11%.
d) It should be changed to a system of exogenous taxes.