2002PRELIM1_ANS - 1. Answer: e because...

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Unformatted text preview: 1. Answer: e because the MPC is 0.6 2-3. GRAPHS CANNOT BE SEEN 4. A 5. C 6. D 7. (Answer: decrease, decrease) 8. crowding-out effect 9. A 10. C 11. C 12. C 13. A 14. B 15. D 16. GRAPH CANNOT BE SEEN 17. D 18. D? 19. C 20. E PART II 1. If you held these loans, you would be happier the higher is the inflation rate. If you have a nominal level of loans, the higher rate of inflation would decrease the real value of your debt while the government is responsible for the interest payments. When it comes time to start repaying your loans, you will have a smaller debt load in real terms. 2. The planned AE curve would have a higher slope than if we assumed a constant level of planned investment. The value of the multiplier would also increase, as an additional increase in investment would lead to a higher level of income, which increases investment even further. 3. This would be a case of structural unemployment, as the company you worked for was unable to adapt to changes in the economy. Whether or not you were to take a job offer would depend on whether your skills were well suited for the job being offered, or if you think you can hold out for a better job in the near future. Both frictional and structural unemployment are natural occurrences, so one would expect that we would never be able to get unemployment down to zero percent. 4. The marginal propensity to consume describes the proportion of extra income that consumers are willing to spend on consumption goods or services ("C/"Y). It doesn t change with the changes of disposable income. 5. A. Because if we use nominal gdp to measure growth, we can be misled into thinking that production has grown when all that has happened is a rise in the price level. Real gdp is a better measure of production. B. Institutional changes can change gdp although there is no change in real production. Gdp ignores most social ills, such as pollution. gdp tells us nothing about what kinds of goods are being produced or about the income distribution. Gdp also ignores the underground economy. ESSAY#1 1. Answer: r ! ! I ! ! AE ! ! Y ! 2. Answer: See the Figure 9.3 in textbook page 177. The equilibrium level of output (Y) increases as government spending increases. ESSAY#2 Answer: 1. A recession is two or more consecutive quarters of zero or minus changes in GDP figures. 2. Consumer spending is closely linked with confidence as people relate to certain factors that influence their expenditure. The increased risk of unemployment, redundancy or short time might cause some consumers to cut their expenditure plans. Arise in interest rates or the fear of an increase might also cause a fall in consumer confidence. They will reduce credit card transactions. Other factors that might influence consumer confidence are political instability, the threat of war or the talk of recession. All tend to cause people to cut back on spending, which might impact on aggregate demand and eventually employment. One might consider that it is almost a self-fulfilling prophecy - hence we are really being told that a recession will not take place, whilst the experts are telling us its already begun! 3. A government can try to reduce the impact of a recession by: o reducing taxes o reducing interest rates o offering grants, subsidies and tax holidays. changing rules and laws o increasing spending ...
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