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PRACTICE TEST 2
1.
When John earned $42,500 in disposable income last year, his consumption spending was $35,500.
This year his disposable income increased to $50,700 and his consumption increased to $40,600.
What is
John's marginal propensity to consume?
a.
less than 60%
*b.
60% to less than 65%
c.
65% to less than 70%
d.
70% to less than 75%
e.
75% or higher
ANSWER:
MPC = change in C/change in income
Change in C = 40,600 – 35,500 = 5,100
Change in income = 50,700 – 42,500 = 8,200
MPC = 5,100/8,200 = .622
2.
Suppose the consumption function is C = 2500 + .70 Yd, where Yd is disposable income.
Suppose
Yd = 32,600.
Saving is equal to
a.
less than $5,000
b.
between $5,000 and $5,999
c.
between $6,000 and $6,999
*d.
between $7,000 and $7,999
e.
$8,000 or higher
ANSWER:
S = Yd – C
C = 2500 + .70 x 32,600 = 25,320
S = 32,600 – 25,320 = 7,280
3.
Assume there are no taxes in an economy.
If the MPC is .68, then the multiplier is
a.
less than 2.00
b.
between 2.00 and 2.99
*c.
between 3.00 and 3.99
d.
between 4.00 and 4.99
e.
5.00 or higher
ANSWER:
Multiplier = 1/(1 – mpc) = 1/(1  .68) = 3.125
4.
Suppose the CPI in Year 0 was 164.4.
In Year 1, it rose to 171.2.
The inflation rate during the year
was:
a.
Less than 3.00 percent
b.
between 3.00% and 3.99%
*c.
between 4.00% and 4.99%
d.
between 5.00% and 5.99%
e.
6.00% or higher
ANSWER:
100% X (171.2 – 164.4) = 4.136%
5.
Bob has disposable income of $25,000 and consumption of $27,000. Suppose his disposable
income increases to $40,700.
Suppose his mpc is .8.
His new consumption spending will be:
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 Spring '08
 Kenkel

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