Q: Suppose the price of a basket of goods in the base year is $$200, and in the current year it is 250. $$What is the Consumer Price Index (CPI) for the current year?

$$CPI = \frac{250}{200} \times 100 = 125$$

Q: If the government increases its spending by $$50 million and the marginal propensity to spend (z$) is 0.6, what is the total change in national income ($$\Delta Y$)?

$$\Delta Y = \frac{1}{1 - 0.6} \times 50 = 125$$ million

Q: Suppose the marginal propensity to consume (MPC) is 0.75. If a household’s income increases by $400, how much will consumption increase?

$$\Delta C = 0.75 \times 400 = 300$$

Question 1

Suppose the price of a basket of goods in the base year is $$200, and in the current year it is 250. $$What is the Consumer Price Index (CPI) for the current year?

Accepted Answer

$$CPI = \frac{250}{200} 	imes 100 = 125$$

Question 2

Which of the following is NOT included in the calculation of GDP using the expenditure approach?

Accepted Answer

The value of household work performed by family members

Question 3

If the marginal propensity to consume (MPC) is 0.8, the marginal tax rate (t) is 0.25, and the marginal propensity to import (m) is 0.1, what is the slope ($$z) of $$the aggregate expenditure (AE) function?

Accepted Answer

$$z = 0.8(1 - 0.25) - 0.1 = 0.5$$

Question 4

A country’s nominal GDP increased from $$1 trillion to 1.1 $$trillion, while its real GDP increased from $$1 trillion to 1.05 $$trillion. What does this suggest about the country’s price level?

Accepted Answer

The price level increased, indicating inflation.

Question 5

If the government increases its spending by $$50 million and the marginal propensity to spend (z$) is 0.6, what is the total change in national income ($$\Delta Y$)?

Accepted Answer

$$\Delta Y = \frac{1}{1 - 0.6} 	imes 50 = 125$$ million

Question 6

Which of the following would cause the short-run aggregate supply (SRAS) curve to shift to the left?

Accepted Answer

A sudden increase in oil prices due to a supply shock

Question 7

If actual GDP is less than potential GDP, which of the following fiscal policies would help close the recessionary gap?

Accepted Answer

Increase government spending

Question 8

Suppose the marginal propensity to consume (MPC) is 0.75. If a household’s income increases by $400, how much will consumption increase?

Accepted Answer

$$\Delta C = 0.75 	imes 400 = 300$$

Question 9

Which of the following best explains why the aggregate demand (AD) curve slopes downward?

Accepted Answer

Because higher prices reduce real wealth, increase interest rates, and make domestic goods less competitive internationally

Question 10

If the Canadian dollar appreciates relative to other currencies, what is the most likely effect on Canada’s net exports (NX)?

Accepted Answer

Net exports will decrease because exports fall and imports rise

Question 11

A country’s government runs a budget deficit. Which of the following equations correctly represents this situation?

Accepted Answer

$$G \u003e T$$

Question 12

Which of the following is an example of an automatic stabilizer in the economy?

Accepted Answer

Unemployment insurance payments that increase during a recession

Question 13

If the cost of the basket in the base year is $$100 and in the current year is 120$$, what is the inflation rate?

Accepted Answer

$$	ext{Inflation} = \frac{120 - 100}{100} 	imes 100 = 20\%$$

Question 14

Which of the following would NOT shift the long-run aggregate supply (LRAS) curve to the right?

Accepted Answer

A temporary increase in government spending

Question 15

If investment ($$I) $$exceeds national saving ($$NS$$), what is the likely effect on interest rates in the loanable funds market?

Accepted Answer

Interest rates will rise

Question 16

A restaurant purchases new kitchen equipment made in the United States. How is this transaction recorded in Canada’s GDP using the expenditure approach?

Accepted Answer

As an import (IM), which reduces net exports (NX)

Question 17

Which of the following best describes the relationship shown by the Phillips Curve?

Accepted Answer

The relationship between unemployment and the rate of change of wages

Question 18

If the marginal propensity to consume (MPC) is 0.6, what is the value of the simple multiplier?

Accepted Answer

$$	ext{Multiplier} = \frac{1}{1 - 0.6} = 2.5$$

Question 19

Which of the following is a reason why GDP may not accurately reflect a country’s standard of living?

Accepted Answer

It does not account for environmental damage

Question 20

If autonomous consumption, investment, government spending, and exports all increase by $$10 million each, and the marginal propensity to spend (z$) is 0.5, what is the total change in equilibrium income ($$\Delta Y$)?

Accepted Answer

$$\Delta Y = \frac{1}{1 - 0.5} 	imes (10 + 10 + 10 + 10) = 80$$ million

Macroeconomics Midterm Study Guide: GDP, CPI, Inflation, and Core Models

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