1. Given the MPC is positive and less than one, an increase in disposable income

Question

1. Given the MPC is positive and less than one, an increase in disposable income will _____. increase both consumption and saving increase consumption and decrease saving decrease both consumption and saving decrease consumption but increase saving increase saving, but we cannot predict what will happen to consumption 2. Which of the following is true of government purchases? They are positively related to current income. They are negatively related to current income. They include transfer payments. They are decided by public officials. They depend on the market rate of interest. 3. Government outlays equal: the difference between government expenditures and government revenues. the sum of government expenditures and government revenues. the sum of government purchases and transfer payments. the difference between government purchases and transfer payments. the ratio of government purchases to transfer payments. 4. Identify the correct statement about net exports. The value of net exports increases as real domestic income increases. The value of net exports increases as real domestic income decreases. The value of net exports is dependent on the amount of government purchases. The value of net exports is always positive. The value of net exports is always negative. 5. The aggregate expenditure line is drawn on a graph that measures: real GDP on the horizontal axis and aggregate expenditure on the vertical axis. aggregate expenditure on the horizontal axis and real GDP on the vertical axis. consumption on the horizontal axis and aggregate expenditure on the vertical axis. aggregate expenditure on the horizontal axis and consumption on the vertical axis. investment on the horizontal axis and aggregate expenditure on the vertical axis. 6. An increase in autonomous investment in an economy will _____. shift the aggregate expenditure line upward shift the aggregate expenditure line downward result in an upward movement along the aggregate expenditure line result in a downward movement along the aggregate expenditure line increase aggregate expenditures only at high levels of income 7. An increase in the price level in an economy will _____. shift the aggregate expenditure line upward shift the aggregate expenditure line downward cause an upward movement along the aggregate expenditure line cause a downward movement along the aggregate expenditure line shift the aggregate demand curve downward 8. The nominal wage is: always equal to the legal minimum wage. the same as the efficiency wage. measured in terms of the amount of goods and services it can purchase. measured in current dollars rather than in constant dollars. measured in constant dollars rather than in current dollars. 9. The real wage is equal to the: wage measured in terms of the quantity of goods and services it buys. wage measured in terms of the dollar value of the goods and services it buys. nominal wage net of taxes paid on wages. non-wage benefits received by workers. product of the nominal wage and the price level. 10. When an economy produces its potential output, _____ is zero. frictional unemployment cyclical unemployment seasonal unemployment structural unemployment disguised unemployment 16.

Explanation / Answer

Question 1. MPC is the marginal propensity to consume. If the value of MPC is less than 1, it means that an increase in income will increase consumption but by a lesser amount because there will be increase in saving also.

Question 2. Usually according to the national income accounting equation government purchases are positively correlated with income where fiscal expansion is usually expected to increase the GDP of the nation

Question 3. Outlays means expenditure so government outlays means government expenditure which includes its purchases as well as the transfer payments it makes.

Question 4. Net exports are usually associated negatively with income because with higher income people usually buy more imports and hence net exports fall

Question 5. The correct option is the first option because the aggregate expenditure line is drawn for real GDP measured on a horizontal axis and expenditures measured on vertical axis.

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