ECS2602 TEST BANK Question 1 Which of the following statements is/are correct? a) In this module we only study the demand side of the economy which includes the goods market and the financial market. The labour market form part of the supply side analysis and are therefore excluded from this module. b) The two most important accounts of the balance of payments are the current account and the financial account. c) If total output decreases with 2% during a specific year and the general price level increases with 4% the real GDP will decrease and the nominal GDP will increase. 1) a, b and c 2) Only a and b 3) Only a and c 4) Only b and c. (Correct option is 4.) 5) None of the options 1 t o 4 Explanation declines while the nominal production (GDP) increases. Question 2 Consider the consumption functions of country A and country B. Country A: C = 2 000 + 0.7Y D Country B: C = 1 000 + 0.9Y D Which of the follow ing state ments is/are correct? a) In country A autonomous consumption is higher than in country B. b) In country B induced consumption is definitely higher than in country A. c) In country B total consumption is definitely higher than in country A. 1) Not a, b or c 2) Only a. (Correct option is 2.) 3) Only b 4) Only c 5) None of the options 1 t o 4 Explanation In country A autonomous consumption is 2 000 while in country B it is 1 000. It is therefore higher in country A. Induced consumption is that part of consumption that depends on income. To know what the induced consumption is we need not only to know what the marginal propensity to consume is but also what the income is. We can therefore not conclude that it is definitely higher in country B. What total consumption is, depends on what the level of income is. Since we do not know what the level of income is, we do not know what the total consumption is. Question 3 Which of the following statements with regards to the following consumption function? C = c0 + cYD If the rise in the general price level is more that the rise in nominal production then the real production (GDP) The two important accounts of the balance of payments are the current account and the financial account. 4 studymafuia is/are correct? a. A change in the marginal propensity to consume will result in a change in income. b. If autonomous consumption should be zero consumption will be equal to cYD. c. A change in autonomous consumption will cause a change in marginal propensity to consume. 1) a, b and c 2) Only a and b 3) Only a and c 4) Only b and c 5) None of the options 1 to 4 (correct option is 5.) Explanation A change in the marginal propensity to consume implies that a higher proportion of income is spent and this will then result in a change in consumption spending and not in income. If autonomous consumption is zero the part that is left is cYD. A change in autonomous consumption does not cause a change in the marginal propensity to consume. Question 4 In the goods market model a decrease in taxes will result in … a) an increase in autonomous consumption. b) an increase in disposable income. c) an increase in income. d) a decrease in induced consumption. 1) a, b and c 2) a, b and d 3) b, c and d 4) a, c and d 5) None of the options 1 to 4 (correct option is 5.) Explanation A decrease in taxes increases disposable income and consequently induced consumption spending increases. As consumption spending increases producers increase production and consequently income increases. The multiplier effect is in operation. A decrease in taxes does not impact on autonomous consumption. Only alternatives b and c are correct and therefore the correct option is 5. Question 5 Which of the following are correct in terms of the goods market model? a) G↑ → Z↑ → Y↑ → YD↑ → C↑ b) I↑ → Z↑ → Y↑ → YD↑ → C↑ c) T↓ → Z↑ → Y↑ → YD↑ → C↑ d) c0↑ → Z↑ → Y↑ → YD↑ → C↑ 1) Only a, b and c 2) Only a, b and d (The correct option is therefore 2.) 3) Only b, c and d 4) Only a, c and d 5) a, b, c and d