ECON - Chapter 10

If the inflation rate is 2 percent and the real interest rate is 10 percent, the nominal interest rate is (a) 12 percent. (b) 8 percent. (c) 2 percent. (d) 0 percent.

a

If a $200 billion increase in investment spending creates $200 billion of new income in the first round of the multiplier process and $120 billion in the second round, the multiplier in the economy is (a) 10. (b) 2.5. (c) 6. (d) 5.

b

(Advanced analysis) Assume the following consumption schedule: C = 20 + 0.9 Y, where C is consumption and Y is disposable income. At a(n) $1,200 level of disposable income, the level of saving is (a) $1,100. (b) $18. (c) $100. (d) $180.

c

Assume a machine that has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,800. The expected rate of return on this machine is (a) 80 percent. (b) 7 percent. (c) 30 percent. (d) 40 percent.

d

If the MPC is 0.8 and investment increases by $5 billion, the equilibrium GDP will (a) increase by $4 billion. (b) decrease by $6.25 billion. (c) increase by $6.25 billion. (d) increase by $25 billion.

d

If the marginal propensity to consume is 0.75 then the marginal propensity to save must be (a) 0.75. (b) 1. (c) 1.25. (d) 0.25.

d

If the marginal propensity to save is 0.1 in an economy, a $20 billion rise in investment spending will increase consumption by (a) 200. (b) 20. (c) 2. (d) 180.

d

If the nominal interest rate is 10 percent and the real interest rate is 7 percent, the inflation rate is (a) 7 percent. (b) 10 percent. (c) 17 percent. (d) 3 percent.

d

Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $104,000. The expected rate of return on this tool is (a) 70 percent. (b) 24 percent. (c) 40 percent. (d) 30 percent.

d