Econ Test 2

# Econ Test 2 - PRACTICE TEST 2 1 When John earned \$42,500 in...

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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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Econ Test 2 - PRACTICE TEST 2 1 When John earned \$42,500 in...

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