Q: Suppose the following data for a country: Labor force = 200 million, Employed = 180 million. What is the unemployment rate?

$$\frac{20}{200} \times 100 = 10\%$$

Q: Suppose the government increases its expenditures ($$G) by$$ $$100$$ and the marginal propensity to consume ($$MPC) is$$ $$0.75. $$What is the total change in equilibrium output ($$\Delta Y) in $$the simple Keynesian model?

$$\Delta Y = \frac{1}{1 - 0.75} \times 100 = 400$$

Q: If the Consumer Price Index (CPI) was 120 last year and is 126 this year, what is the annual inflation rate?

$$\frac{126 - 120}{120} \times 100 = 5\%$$

Question 1

Which of the following is NOT a limitation of using Gross Domestic Product (GDP) as a measure of economic well-being?

Accepted Answer

GDP accurately reflects changes in environmental quality and leisure time.

Question 2

Suppose the following data for a country: Labor force = 200 million, Employed = 180 million. What is the unemployment rate?

Accepted Answer

$$\frac{20}{200} 	imes 100 = 10\%$$

Question 3

Which of the following best describes the difference between cyclical and structural unemployment?

Accepted Answer

Cyclical unemployment is caused by economic downturns, while structural unemployment results from changes in the structure of the economy.

Question 4

The Consumer Price Index (CPI) is used to measure inflation. Which of the following is a reason why the CPI may OVERSTATE the true rate of inflation?

Accepted Answer

It does not account for substitution bias when consumers switch to cheaper goods.

Question 5

If the Marginal Propensity to Consume (MPC) is 0.8, what is the value of the Marginal Propensity to Save (MPS)?

Accepted Answer

$$1 - 0.8 = 0.2$$

Question 6

Why must the Marginal Propensity to Consume (MPC) always be between 0 and 1?

Accepted Answer

Because consumers can only spend a portion of each additional dollar of income, not more or less than the total.

Question 7

Which of the following equations correctly represents the relationship between Real Income ($$Y) $$and Disposable Income ($$Y_d$$)?

Accepted Answer

$$Y_d = Y - T + TR$$

Question 8

In the context of Keynesian equilibrium, why is the distinction between Planned Investment and Unplanned Investment important?

Accepted Answer

Because unplanned investment indicates that actual output differs from planned spending, signaling disequilibrium.

Question 9

Suppose the government increases its expenditures ($$G) by$$ $$100$$ and the marginal propensity to consume ($$MPC) is$$ $$0.75. $$What is the total change in equilibrium output ($$\Delta Y) in $$the simple Keynesian model?

Accepted Answer

$$\Delta Y = \frac{1}{1 - 0.75} 	imes 100 = 400$$

Question 10

Which of the following best describes a counter-cyclical fiscal policy?

Accepted Answer

A policy that increases government spending or decreases taxes during a recession.

Question 11

Which of the following is an example of a government transfer (TR) rather than a government expenditure (G)?

Accepted Answer

Unemployment insurance payments to individuals.

Question 12

If the Consumer Price Index (CPI) was 120 last year and is 126 this year, what is the annual inflation rate?

Accepted Answer

$$\frac{126 - 120}{120} 	imes 100 = 5\%$$

Question 13

Which of the following best describes a structural budget deficit?

Accepted Answer

A deficit that would exist even if the economy were at full employment.

Question 14

In a two-sector Keynesian model, which equation represents equilibrium output ($$Y$$)?

Accepted Answer

$$Y = C + I$$

Question 15

Suppose the government wants to increase equilibrium output by $$500$$ and the marginal propensity to consume ($$MPC) is$$ $$0.6. By $$how much should government spending ($$G) $$increase?

Accepted Answer

$$\Delta G = \frac{500}{1 / (1 - 0.6)} = 200$$

Question 16

Which of the following scenarios would most likely result in unplanned inventory accumulation for firms?

Accepted Answer

Actual output exceeds aggregate planned expenditure.

Question 17

If the marginal propensity to consume ($$MPC) is$$ $$0.9$$, what is the value of the simple spending multiplier?

Accepted Answer

$$\frac{1}{1 - 0.9} = 10$$

Question 18

Which of the following is a reason why the Consumer Price Index (CPI) may UNDERSTATE the true rate of inflation?

Accepted Answer

It does not fully account for quality improvements in goods and services.

Question 19

Which of the following best describes pro-cyclical fiscal policy?

Accepted Answer

A policy that increases government spending during booms and decreases it during recessions.

Question 20

A country’s nominal GDP increased from $$1,000$$ billion to $$1,100$$ billion, while the GDP deflator increased from $$100 to$$ $$110. $$What is the real GDP growth rate?

Accepted Answer

$$\frac{1,100 / 110}{1,000 / 100} - 1 = 0$$

Macroeconomics Exam 1 Study Guidance – Key Concepts and Problem-Solving Steps

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