Macroeconomics Questions and Answers

Answer: B

According to Keynes the short run aggregate supply curve is horizontal up to full employment, because with unemployed resources firms can increase output without raising the price. The key gives horizontal, option B. The classical view is a vertical supply curve and the usual short run view is upward sloping. At that level of output, firms can supply more without raising the price, because there are unused resources.

At full employment the aggregate supply curve becomes vertical, and a rise in demand then raises only prices.

Answer: C

The marginal propensity to consume is the change in consumption divided by the change in income. In the two sector model income equals consumption plus investment, so the rise in income is the sum of the rise in consumption and the rise in investment.

\[ \Delta Y = 300 + 100 = 400 \]

\[ MPC = \frac{\Delta C}{\Delta Y} \] \[ \frac{300}{400} = \frac{3}{4} \]

The value 1/4 would be the MPS, and 1/3 and 1/5 do not result from the data. The answer is 3/4, option C.

Answer: A

The average propensity to save is the ratio of saving to disposable income. An APS of 0.25 means that the economy saves 25 per cent of its disposable income, and the rest, 75 per cent, is consumed (the average propensity to consume is 0.75). The options that say it consumes 25 per cent or saves 75 per cent reverse these figures, and saving and consumption are of course related through income. The answer is option A. The remaining 75 per cent of disposable income goes to consumption, so the average propensity to consume is 0.75.

Answer: C

Excess demand arises when aggregate demand is more than the output at full employment. It is caused by higher investment spending, by a larger money supply from deficit financing and by a rise in disposable income, since all of these raise demand. An increase in imports is a leakage that reduces the demand for domestic output, so it is not a reason for excess demand. The answer is increase in import demand, option C. Imports are a leakage, since spending on them goes abroad rather than adding to the demand for domestic output.

Answer: B

GNP and NNP differ by the capital consumption allowance (depreciation): NNP = GNP minus depreciation. So the two are equal if the capital consumption allowance is zero. Indirect taxes and subsidies make the difference between market price and factor cost, and do not separate GNP from NNP. The answer is option B.

Answer: B

Private income is the income that private individuals and firms receive from all sources, so it includes the retained earnings of firms and the corporate tax paid by them in addition to the income that reaches households. So personal income plus corporate tax plus retained earnings gives private income. The answer is option B.

Answer: D

Keynes's theory of employment is based on the principle of effective demand, the level of aggregate demand at which it is equal to aggregate supply, which determines the level of output and employment in the economy. The propensity to consume and save are only elements that go into it. The answer is effective demand, option D.

Answer: C

The aggregate demand curve slopes down because of the interest rate effect, the wealth effect (the real value of money balances rises when prices fall) and the exchange rate (net export) effect. A utility effect is not one of them. The answer is option C.

These three effects are known as the Keynes, Pigou and Mundell-Fleming effects, and utility is a concept of consumer demand and not a reason for the aggregate curve's slope.

Answer: B

When the short run equilibrium is below the full employment output, there is unemployment, and the short run aggregate supply curve can be to the right of the full employment output (if the economy has resources unused, supply can exceed that level at some price). The other options are statements about adjustment in the long run, which need not follow at once. The key gives option B. At such a point there are unemployed resources, so output can increase without a strong rise in prices.

Answer: A

In a four sector economy (households, firms, government and the foreign sector) national income is the sum of consumption, investment, government spending and net exports, Y = C + I + G + X - M. The options with T, with minus exports or other forms are not the national income identity. The answer is option A.