Assignment Solution
ECON112 Macroeconomics Problem Set 1 *Solution* By Yao Amber Li Fall 2010 (Instructor: Li, Yao; TA: Fok Pik Lin, Astor)
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40 marks total
Part I: True/False/Uncertain Please justify your answer with a short argument. (10 marks, 2 marks each) One mark is for correct judgment. One mark is for correct argument. 1. GDP is the value of all goods and services produced in the economy during a given period. False.
GDP = Value of * FINAL* goods & services produced in the economy during a given period.
2. When disposable income equals zero, consumption equals zero. False. When disposable income equals zero, consumption is still positive due to autonomous consumption/consumer confidence/c0.
3. The multiplier is greater than 1 if T = 0 and G = 0. True.
If the marginal propensity to consume is less than 1, it means that people consume less than 100% of their disposable income. It also implies that the multiplier is greater 1 (you can also write down the formula of the multiplier and indicate c1 is less than 1). The fact that T = 0 and G = 0 is irrelevant.
1
4. Paradox of saving occurs when the attempts by people to save more lead to a decline in output and an increase in saving in the short run. False. … leads to a decline in output and unchanged saving. (you should understand the mechanism behind).
5. When MPC (marginal propensity to consume) increases and investment decreases, goods market equilibrium output increases. Uncertain.
2
Part II: NATIONAL ACCOUNTS (Chapter 2) (14 marks)
For Part II, consider an artificial economy and assume the following: (1) HKUST is an autonomous economy. (2) The only good/service produced at HKUST is undergrad (freshmen) education.
1. Fill in the following table: (2 marks) year # of HKUST freshmen Price (tuition: HK$) 1990 2000 2001 2002 300 900 1,000 1,100 2,000 20,000
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40 marks total
Part I: True/False/Uncertain Please justify your answer with a short argument. (10 marks, 2 marks each) One mark is for correct judgment. One mark is for correct argument. 1. GDP is the value of all goods and services produced in the economy during a given period. False.
GDP = Value of * FINAL* goods & services produced in the economy during a given period.
2. When disposable income equals zero, consumption equals zero. False. When disposable income equals zero, consumption is still positive due to autonomous consumption/consumer confidence/c0.
3. The multiplier is greater than 1 if T = 0 and G = 0. True.
If the marginal propensity to consume is less than 1, it means that people consume less than 100% of their disposable income. It also implies that the multiplier is greater 1 (you can also write down the formula of the multiplier and indicate c1 is less than 1). The fact that T = 0 and G = 0 is irrelevant.
1
4. Paradox of saving occurs when the attempts by people to save more lead to a decline in output and an increase in saving in the short run. False. … leads to a decline in output and unchanged saving. (you should understand the mechanism behind).
5. When MPC (marginal propensity to consume) increases and investment decreases, goods market equilibrium output increases. Uncertain.
2
Part II: NATIONAL ACCOUNTS (Chapter 2) (14 marks)
For Part II, consider an artificial economy and assume the following: (1) HKUST is an autonomous economy. (2) The only good/service produced at HKUST is undergrad (freshmen) education.
1. Fill in the following table: (2 marks) year # of HKUST freshmen Price (tuition: HK$) 1990 2000 2001 2002 300 900 1,000 1,100 2,000 20,000