Review Questions For Chapter 23 2011 I

Review Questions for Chapter 23, BECO 101, Dr. Qiao Zhuo, FBA, University of Macau, Oct. 9, 2011

Review Questions for Chapter 23

1. Assuming there is no government or foreign sector, refer to the information provided in figure below to answer the questions.

1) The MPS for this household is ________ and the MPC is ________.
A) 0.4; 0.6 B) 0.5; 0.5 C) 0.2; 0.8 D) 0.3; 0.7
2) This household's consumption function is
A) C = 300 + 0.7Y.
C) C = 200 + 0.2Y.

B) C = 200 + 0.8Y.
D) C = 1,000 + 0.8Y.

3) This household saves -$50 at an income level of
A) $750.

B) $833.3. C) $1000. D) $890.3.

2. Assume consumption is represented by the following: C = 200 + .75Y. Also assume that planned investment (I) equals 300.
(a) Given the information, calculate the equilibrium level of income.
Y=AE=C+I=200 + .75Y+300 Y*=2000
(b) Calculate the multiplier
Multiplier=1/ (1-MPC)=4

(c) Given the information, calculate the level of consumption and saving that occurs at the equilibrium level of income.
C*=200+0.75*2000=1700
S*=Y*-C*=300
1

Review Questions for Chapter 23, BECO 101, Dr. Qiao Zhuo, FBA, University of Macau, Oct. 9, 2011

Textbook, page 507

4.

(a)

Aggregate
Output/Income
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500

Consumption
2,100
2,500
2,900
3,300
3,700
4,100
4,500
4,900

Planned
Investment
300
300
300
300
300
300
300
300

Saving
–100
0
+100
+200
+300
+400
+500
+600

Unplanned
Inventory
–400
–300
–200
–100
0
+100
+200
+300

Equilibrium Output Y* = 4,000. When Y < 4,000, inventories are lower than desired
(unplanned investment is negative). Firms will increase production to increase their inventories, causing aggregate output/income to rise. When Y > 4,000, the opposite will happen, causing output/income to fall.
(b) Over all ranges MPC = 400 / 500 = .80 and MPS = 100 / 500 = .20. The multiplier is 1/MPS =
1/.20 = 5.
(c)
Aggregate
Output/Income
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500

Consumption
2,100
2,500
2,900
3,300
3,700
4,100
4,500
4,900

Planned