Indicate the answer choice that best completes the statement or answers the question.
1. (4 Points) In a simple, closed economy (no government or foreign sector), disposable income decreases
from $6,000 to $4,000. If consumption decreases from $4,500 to $3,000, the multiplier is:
a) 0.25
b) 4
c) 1.125
d) 4
e) -1.125
2. (4 Points) Suppose that the consumption function is C = $500 + 0.8YD, where YD is disposable
income. If disposable income is $1,000, savings is:
a) $500
b) $1,300
c) $300
d) $300
e) $1,500
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ECON-1020H Assignment 2 February 28, 2022
3. (4 Points) Economists use as a model to explain how savers and borrowers come together to
determine the equilibrium rate of interest
a) the money market
b) the market for loanable funds
c) aggregate demand and aggregate supply
d) multiplier
e) central bank
4. (4 Points) The marginal propensity to save is the increase in household savings when increase(s)
by $1
a) investment spending
b) taxes
c) consumption
d) disposable income
e) saving
5. (4 Points) If the marginal propensity to save is 0.5, the multiplier is:
a) 5
b) 2
c) 1
d) 0.5
e) 0.1
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ECON-1020H Assignment 2 February 28, 2022
6. (4 Points) In an economy with no taxes or imports, if the marginal propensity to consume increases,
the marginal propensity to save will
a) decrease
b) increase by 1
2
c) increase by the same factor as the marginal propensity to consume
d) not change
e) none of the above
7. (4 Points) Consider the simple economy of Behr, whose government does not tax its citizens. The
consumption function of Behr is given by C = 500 + 0.80Y, where Y is income. Autonomous
consumer spending in this economy is:
a) 1000
b) 800
c) 500
d) 300
e) not possible to calculate
8. (4 Points) Suppose the aggregate consumption function is given by C = 1,000 + 0.75YD, where C
is consumption, and YD is disposable income. If disposable income increases by $100, aggregate
consumption will increase by , and autonomous consumption will
a) $1,000; remain at $75
b) $75; increase by $100
c) $100; remain at $1,000
d) $75; remain at $1,000
e) $75; decrease by $75
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ECON-1020H Assignment 2 February 28, 2022
9. (4 Points) Assume a closed economy in which GDP is $110 billion. If government spending is $30
billion, consumption is $70 billion, taxes are $20 billion, and investment spending is $10 billion,
then:
a) private savings is $10 billion
b) the government’s budget balance is a surplus of $10 billion
c) there are no net savings
d) private savings is $20 billion
e) all of the above
10. (4 Points) Other things being equal, if the interest rate falls below 6%, quantity of loanable
funds will be demanded.
a) the same
b) a larger
c) a smaller
d) at rst a smaller and then a larger
e) at rst a larger and then a smaller
11. (4 Points) The marginal propensity to save plus the marginal propensity to consume must equal:
a) zero
b) one
c) 0.5
d) income
e) savings
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ECON-1020H Assignment 2 February 28, 2022
12. (4 Points) Use Table: National Income Accounts. The value of national savings is:
Table 1: National Income Accounts
$ Trillions
GDP 20.00
Consumption 14
Government Spending 3
Budget Balance -1.2
a) $14 trillion
b) $3 trillion
c) $3.5 trillion
d) $0.2 trillion
e) $3.2 trillion.
13. (4 Points) The budget balance is zero when:
a) taxes minus government spending equals zero
b) government transfers minus government spending equals zero
c) taxes plus government spending equals zero
d) savings plus taxes equals zero
e) government transfers minus government spending is greater than zero
ECON-1020H Assignment 2 5 / 10
ECON-1020H Assignment 2 February 28, 2022
Use the following graph for Q14-Q15:
14. (4 Points) An economy’s consumption function would shift from curve C to curve C” when there is
a(n):
a) decrease in wealth
b) decrease in the price level
c) increase in the price level
d) increase in expected disposable income
e) none of the above
15. (4 Points) An economy’s consumption function would shift from curve C to curve C’ when there is
a(n):
a) decrease in wealth
b) decrease in the price level
c) increase in the price level
d) increase in expected disposable income
e) none of the above
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ECON-1020H Assignment 2 February 28, 2022
16. (4 Points) In a simple, closed economy (no government or foreign sector), if disposable income
increases by $1,000, and consumption increases by $600, the marginal propensity to consume is:
a) $600
b) $400
c) 1.67
d) 0.60
e) -0.5
17. (4 Points) The interest rate is 5% in the market for loanable funds. Investors wish to borrow $100
million, and savers wish to save $125 million at this interest rate. We would expect the interest rate
to , as there is a of loanable funds
a) fall; shortage
b) rise; surplus
c) rise; shortage
d) fall; surplus
e) none of the above
18. (4 Points) An increase in a budget surplus is
a) a decrease in public saving
b) an increase in public saving
c) a decrease in private saving
d) an increase in private saving
e) all of the above
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ECON-1020H Assignment 2 February 28, 2022
19. (4 Points) The demand for loanable funds curve is sloping because respond to lower
interest rates by their quantity demanded of loanable funds.
a) downward; investors; increasing
b) downward; savers; increasing
c) upward; investors; decreasing
d) upward; savers; decreasing
20. (4 Points) Crowding out is a phenomenon in which:
a) an increase in the government’s budget surplus decreases overall investment spending
b) overproduction in the goods market leads to a sharp drop in the aggregate price level
c) an increase in the government’s budget de cit reduces overall investment spending
d) an increase in imports reduces overall domestic production
Short Answer Questions
21. (10 Points) Suppose that the marginal propensity to consume is 0.80, and the government spends
$10 million to repair a bridge. Assuming no taxes and no international trade, explain how the $10
million of government spending will increase GDP by $50 million.
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ECON-1020H Assignment 2 February 28, 2022
22. (10 Points) Develop a linear equation of the consumption function. Use this consumption function
to forecast the amount of consumer spending that would occur if disposable income were $500.
Disposable Income ($) Consumer Spending ($)
0 10
50 50
100 90
150 130
200 170
23. (10 Points) Utilizing the national income identities, if government purchases were to rise, and if
output, taxes, and consumption were to remain unchanged, what would happen to national saving
and investment?