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  • Practice Set PDF

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    Manya Pant Tiwari
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    This document contains 9 practice questions from an economics instructor. The questions cover topics such as consumption functions, equilibrium income and consumption, tax impacts, national savings and investment calculations, the balance budget multiplier concept, using the marginal propensity to consume to calculate the change in government spending needed to reach potential output, calculating a consumer price index and inflation rate, identifying examples of investment and saving, calculating a real interest rate, and identifying whether economic statements are true or false regarding long run aggregate supply curves and aggregate demand curves. The final question asks about a specific statistic that would need to be checked before celebrating if nominal GDP doubled overnight.

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    This document contains 9 practice questions from an economics instructor. The questions cover topics such as consumption functions, equilibrium income and consumption, tax impacts, national savings and investment calculations, the balance budget multiplier concept, using the marginal propensity to consume to calculate the change in government spending needed to reach potential output, calculating a consumer price index and inflation rate, identifying examples of investment and saving, calculating a real interest rate, and identifying whether economic statements are true or false regarding long run aggregate supply curves and aggregate demand curves. The final question asks about a specific statistic that would need to be checked before celebrating if nominal GDP doubled overnight.

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    © All Rights Reserved
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    44 views2 pages

    Practice Set PDF

    Uploaded by

    Manya Pant Tiwari
    This document contains 9 practice questions from an economics instructor. The questions cover topics such as consumption functions, equilibrium income and consumption, tax impacts, national savings and investment calculations, the balance budget multiplier concept, using the marginal propensity to consume to calculate the change in government spending needed to reach potential output, calculating a consumer price index and inflation rate, identifying examples of investment and saving, calculating a real interest rate, and identifying whether economic statements are true or false regarding long run aggregate supply curves and aggregate demand curves. The final question asks about a specific statistic that would need to be checked before celebrating if nominal GDP doubled overnight.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 2

    Practice set-1

    Instructor: Dr. Rashmi Ahuja

    Q1. Consider the consumption function:


    C = 600 + .9YD
    where C represents consumption and YD represents disposable income (i.e., Y – T). To begin,
    assume there is no government, investment, or foreign spending. Further, assume taxes are
    originally set to zero so YD and Y are equal.
    a. Write a mathematical equation expressing Savings as a function of income.
    b. What is the equilibrium level of income and consumption in this economy?
    c. How much savings occurs in this equilibrium?
    d. Imagine that the citizens of this country impose an income tax of 10% on themselves. In
    other words, for each dollar of income earned, the citizens must pay 10 cents of it to the
    government before they can spend the remainder of their money. After imposing this tax, what
    is the new value of income and consumption in this economy?

    Q2. Suppose GDP is $600 billion, taxes are $100 billion, private saving is $50 billion and
    public saving is $20 billion. Assuming that this economy is closed, calculate consumption,
    government purchases and national savings and investment.

    Q3. [Concept of Balance Budget Multiplier]


    The following data characterizes the macroeconomic conditions of a hypothetical economy:

    C = 50 + 0.8 yd
    I = 100
    G = T = 75
    where C, I, and Yd are consumption, investment and disposable income respectively.
    Calculate equilibrium income of the economy. What is the value of multiplier?

    Q4. Assume that the marginal propensity to consume is 0.8, and potential output is $800 billion. If
    current GDP is $850 billion, a policy(increasing/decreasing) government spending by ____ would bring
    the economy to potential output.

    Q5. Suppose the residents of an economy spend all of their income on cauliflower, broccoli and
    carrots. In 2003 they buy 100 heads of cauliflowers for Rs. 200; 50 bunch of broccoli for Rs. 75 and
    500 carrots for Rs. 50. In 2004 they buy 75 heads of cauliflower for Rs. 225; 80 bunches of broccoli
    for Rs. 120 and 500 carrots for Rs. 100. If the base year is 2003, what is the CPI in both the years?
    What is the inflation rate in 2004?

    Q6. Which of the following situations represent investment or saving? Explain:


    a) You use your Rs 20000 pay check to buy stocks in Reliance
    b) You borrow Rs. 100000 from a bank to buy a car to use in your company
    c) Your roommate earns Rs.1000 and deposits it in her bank account.

    Q7. Suppose in an economy velocity of money is constant. Output grows by 5 percent per year, the
    money stock grows by 14 percent per year & the nominal interest rate is 11 percent. What is the real
    interest rate?
    Q8. Explain whether the following statements are true or false:
    a) The long run aggregate supply curve is vertical because economic forces do not affect long run
    aggregate supply.
    b) The aggregate demand curve slopes downward because it is the horizontal sum of the demand
    curves for individual goods.
    c) Whenever the economy enters a recession its long run aggregate supply curve shifts to the left.

    Q9. Suppose one day you found that nominal GDP has doubled overnight, would it be good news for
    you to celebrate or you need to check one statistic before you celebrate? What that statistic would
    be?

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