Q: Suppose the marginal propensity to consume (MPC) in an economy is 0.8. If the government increases spending by $100 million, what is the total change in equilibrium GDP according to the simple expenditure multiplier formula?

$$\frac{1}{1-0.8} = 5$$, so the total change is $$5 \times 100$$ million = $$500$$ million.

Q: Suppose the Consumer Price Index (CPI) was 120 last year and is 126 this year. What is the annual inflation rate?

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

Q: A country has a population of 200 million, a labor force of 120 million, and 108 million people employed. What is the unemployment rate?

$$\frac{120 - 108}{120} \times 100 = 10\%$$

Question 1

Suppose the marginal propensity to consume (MPC) in an economy is 0.8. If the government increases spending by $100 million, what is the total change in equilibrium GDP according to the simple expenditure multiplier formula?

Accepted Answer

$$\frac{1}{1-0.8} = 5$$, so the total change is $$5 	imes 100$$ million = $$500$$ million.

Question 2

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

Accepted Answer

Purchases of used cars by consumers

Question 3

If the labor force participation rate increases while the population remains constant, what is the likely effect on the unemployment rate, assuming the number of employed people does not change?

Accepted Answer

The unemployment rate will increase.

Question 4

Which of the following best describes the concept of 'diminishing returns to labor' in the context of the production function?

Accepted Answer

As more units of labor are added, holding other inputs constant, the additional output produced by each additional worker decreases.

Question 5

Suppose 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 6

Which of the following is a problem with using nominal GDP as a measure of economic growth over time?

Accepted Answer

Nominal GDP does not account for changes in the price level (inflation).

Question 7

If the short-run aggregate supply (SRAS) curve shifts to the left, which of the following is the most likely cause?

Accepted Answer

An increase in the price of oil (an important input)

Question 8

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

Accepted Answer

As the price level falls, the real value of money increases, leading to higher consumption and investment.

Question 9

A country has a population of 200 million, a labor force of 120 million, and 108 million people employed. What is the unemployment rate?

Accepted Answer

$$\frac{120 - 108}{120} 	imes 100 = 10\%$$

Question 10

Which of the following is an example of structural unemployment?

Accepted Answer

A factory worker loses their job because their skills are no longer needed due to automation.

Question 11

If the government wants to close a recessionary gap using fiscal policy, which of the following actions would be most appropriate?

Accepted Answer

Increase government spending or decrease taxes.

Question 12

Which of the following best describes the difference between real GDP and nominal GDP?

Accepted Answer

Real GDP is adjusted for changes in the price level, while nominal GDP is not.

Question 13

Suppose the economy is operating at a point inside its production possibilities frontier (PPF). Which of the following statements is true?

Accepted Answer

The economy is not using all of its resources efficiently.

Question 14

Which of the following would cause a rightward shift in the long-run aggregate supply (LRAS) curve?

Accepted Answer

An increase in the stock of physical capital

Question 15

If the marginal propensity to save (MPS) is 0.25, what is the value of the simple spending multiplier?

Accepted Answer

$$\frac{1}{0.25} = 4$$

Question 16

Which of the following is a limitation of using GDP per capita as a measure of economic well-being?

Accepted Answer

It does not account for income distribution within a country.

Question 17

During which phase of the business cycle is unemployment typically at its lowest?

Accepted Answer

Peak

Question 18

Which of the following would be considered an injection in the circular flow of income and expenditure?

Accepted Answer

Government spending on public goods

Question 19

If the real wage rate increases, what is the likely effect on the quantity of labor supplied?

Accepted Answer

The quantity of labor supplied will increase.

Question 20

Which of the following best describes the relationship between saving and investment in the circular flow model?

Accepted Answer

Saving provides the funds necessary for investment.

Macroeconomics Study Notes: Key Concepts and Chapters Overview

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