Q: If government purchases (G) increase by $100 million and the marginal propensity to consume is 0.75, what is the total change in GDP, assuming no crowding out?

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

Question 1

Which of the following is NOT included in the calculation of a country's Gross Domestic Product (GDP)?

Accepted Answer

The value of goods and services produced by the underground economy

Question 2

Suppose a country produces 100 units of a product, each sold at $5. Households buy 60 units, firms buy 20, government buys 10, foreign buyers purchase 5, and 5 units remain as inventory. What is the total GDP using the expenditure approach?

Accepted Answer

$300

Question 3

Which equation correctly represents the national income identity in an open economy?

Accepted Answer

$$Y = C + I + G + NX$$

Question 4

If a country has a trade deficit, which of the following must be true?

Accepted Answer

National saving is less than domestic investment

Question 5

Which of the following best describes the circular flow of income in a simple economy?

Accepted Answer

Firms produce goods and services, households supply factors of production, and income flows from firms to households

Question 6

Which of the following is a disadvantage of using GDP as a measure of economic performance?

Accepted Answer

GDP ignores the distribution of income and environmental costs

Question 7

If the marginal propensity to consume (MPC) is 0.8, what is the value of the spending multiplier?

Accepted Answer

$$\frac{1}{1-0.8} = 5$$

Question 8

Which of the following would increase a country's net exports (NX)?

Accepted Answer

A depreciation of the domestic currency, making exports cheaper and imports more expensive

Question 9

If government purchases (G) increase by $100 million and the marginal propensity to consume is 0.75, what is the total change in GDP, assuming no crowding out?

Accepted Answer

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

Question 10

Which of the following best explains why investment (I) is considered volatile in GDP composition?

Accepted Answer

Investment is sensitive to business cycles and interest rates, causing it to fluctuate more than other components

Question 11

A country has the following data: Consumption = $$500, Investment = 200$$, Government Purchases = $$150, Exports = 100$$, Imports = $120. What is the country's GDP?

Accepted Answer

$$500 + 200$$ + $$150 + (100$$ - $$120) = 830$

Question 12

Which of the following statements about the relationship between national saving, investment, and net exports is correct?

Accepted Answer

$$S = I + NX$$, so if S \u003e I, the country runs a trade surplus

Question 13

Which of the following would NOT be considered a leakage in the circular flow of income?

Accepted Answer

Government purchases of goods and services

Question 14

If the GDP deflator increases from 120 to 126 while nominal GDP rises from $$600 billion to 660 $$billion, what is the percentage change in real GDP?

Accepted Answer

0%

Question 15

Which of the following is an example of autonomous consumption?

Accepted Answer

Spending on basic necessities that occurs even when disposable income is zero

Question 16

If a country increases its savings rate, what is the most likely long-term effect according to the study materials?

Accepted Answer

Higher investment and potentially higher economic growth

Question 17

Which of the following best describes the effect of a higher real interest rate on investment?

Accepted Answer

It raises the cost of borrowing and reduces investment

Question 18

Which of the following is a key reason why GDP should not be equated with national welfare?

Accepted Answer

GDP does not account for environmental degradation or income inequality

Question 19

If the proportional tax rate increases, what is the likely effect on the circular flow of income?

Accepted Answer

It reduces disposable income and decreases spending flows

Question 20

Which of the following is a correct interpretation of the relationship between individual choices and national prosperity, as highlighted in the study materials?

Accepted Answer

Individual choices aggregate to collective outcomes, which in turn determine national prosperity

Measuring the Economy: National Income Accounting and the Expenditure Approach

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