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Assignment 1

The document contains 10 multiple choice questions related to macroeconomic concepts like GDP, consumption functions, and the goods market model. Question 5 defines expenditure on GDP as spending on goods and services produced within a country, including exports and excluding imports. Question 10 indicates that an increase in the marginal propensity to consume results in a steeper slope of the demand for goods curve, as households will spend a larger proportion of each additional rand on consumption. Question 11 analyzes the different autonomous and induced consumption in the consumption functions of two countries.

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wycliff branc
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74 views

Assignment 1

The document contains 10 multiple choice questions related to macroeconomic concepts like GDP, consumption functions, and the goods market model. Question 5 defines expenditure on GDP as spending on goods and services produced within a country, including exports and excluding imports. Question 10 indicates that an increase in the marginal propensity to consume results in a steeper slope of the demand for goods curve, as households will spend a larger proportion of each additional rand on consumption. Question 11 analyzes the different autonomous and induced consumption in the consumption functions of two countries.

Uploaded by

wycliff branc
Copyright
© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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1. Which one of the following statements is not a macroeconomic issue?

1. The unemployment rate in South Africa, according to the strict definition, was 26,6%
in 2016.
2. The drought experienced in 2015/16 reduced many crop harvests and caused food
price inflation in South Africa.
3. The annual inflation rate in South Africa rose from 2015 to 2016.
4. Because of high inflation, it is expected that the interest rate will increase.
5. The drought experienced in 2015/16 reduced the total maize crop harvested and caused the
price of maize in South Africa to rise.

Macroeconomics deals with unemployment and inflation whereas microeconomics is the study
of production and prices in specific markets. In this case number 5 with is focused on the price
of maize.

2. Which of the following would be included in the calculation of gross domestic product
(GDP) of South Africa?

a. A citizen from Zimbabwe (foreign country) earns a wage at a gold mine in South
Africa.
b. A farmer from Gauteng (South Africa) buys his neighbour's tractor.
c. Ford Motor Company of America builds an assembly plant in the Eastern Cape (South
Africa).
d. Exports of agricultural products to Britain.
e. Imports of motorcars from Japan to South Africa.
1. a, b, c, d and e
2. Only a, c and d
3. Only b, c and e
4. Only a and c
5. Only b and e

The GDP is the total value of all final goods and services produced within the boundaries of a
country during a particular period (usually one year). GDP is an official measure of how much
output was produced in a country or region during a specified time period. It is also the
broadest, best-known and most frequently used measure of economic activity. Only final goods
and services are included. Final goods and services refer to those goods and services that are
consumed by households and firms. Final goods are things such as television sets, clothes,
chairs, bookcases, hats, and so on, while services are things such as the services provided by
lawyers, doctors, teachers, plumbers, beauticians, and so forth. In the production of the final
goods and services, intermediate goods are used.

3. Which of the following are endogenous variables in the goods market model?

1. The level of output and income and investment spending.


2. Marginal propensity to consume and the level of output and income.
3. The level of output and income.
4. Investment spending.

The endogenous variable in the consumption function is that part of consumption spending
which changes if the level of output and income changes. It is represented as a movement along
the consumption function.

4. The difference between expenditure on the gross domestic product (GDP) and gross
domestic expenditure (GDE) is that …

1. expenditure on the GDP includes both imports and exports, while GDE includes
exports and excludes imports.
2. expenditure on the GDP includes exports and excludes imports, while GDE includes
both imports and exports.
3. expenditure on the GDP includes exports and excludes imports, while GDE includes
imports and excludes exports.
4. expenditure on the GDP includes imports and excludes exports, while GDE includes exports
and excludes imports

Expenditure on the gross domestic product is spending on goods and services produced inside
the borders of a country, including exports and excluding imports [C + I + G + (X – IM)]. This
differs from gross domestic expenditure (GDE), which is the total value of spending within the
borders of a country (C + I + G), including imports but excluding exports, since spending on
exports takes place outside the borders of the country.

5. Expenditure on the gross domestic product is …

a. spending on goods and services produced inside the borders of a country, including
imports and excluding exports.
b. spending on goods and services produced inside the borders of a country, excluding
imports and including exports.
c. the same as the demand for domestic goods.
d. the same as the domestic demand for goods.
1. a and c
2. a and d
3. b and c
4. b and d

Expenditure on the gross domestic product is spending on goods and services produced inside
the borders of a country, including exports and excluding imports [C + I + G + (X – IM)]. The
difference is between the demand for domestic goods and the domestic demand for goods is
that the demand for domestic goods (demand for goods produced in South Africa) excludes
imports and includes exports while the domestic demand for goods (goods consumed in South
Africa – they can be produced in South Africa or in any other country) includes imports and
excludes exports.
6. In our goods market model an increase in the demand for goods implies …

a. an increase in output
b. an increase in income
c. an increase in the level of employment
d. a decrease in unemployment
e. a decrease in savings
1. a, b, c and d
2. a, b, c and e
3. a, b, d and e
4. a, c, d and e
5. Not option 1, 2, 3 or 4

An increase in investment (I) causes an increase in the demand for goods (Z), because I is a
component of Z. This leads to an increase in output and income (Y) (since firms respond to the
increased demand for goods by producing more). As the level of output and income increases,
the level of employment increases. The increase in the level of employment causes a decrease
in the unemployment rate.

7. Which of the following are correct in terms of the goods market model?

a. G↑ → Z↑ → Y↑ → YD↑ → C↑
b. I↑ → Z↑ → Y↑ → YD↑ → C↑
c. T↓ → Z↑ → Y↑ → YD↑ → C↑
d. c0↑ → Z↑ → Y↑ → YD↑ → C↑
1. Only a, b and c
2. Only a, b and d
3. Only b, c and d
4. Only a, c and d
5. a, b, c and d
All the chain of events except c is correct. For c to be correct is should have been as follows:
T↓ → YD↑ → C↑ → Z↑ → Y↑

8. Which of the following statements is/are correct in terms of the following consumption
function C = c0 +cYD?

a. Men and woman will consume more if their income increases.


b. Y↓ → C↓.
c. There is a positive relationship between income and consumption.
d. A change in the marginal propensity to consume will cause a change in consumption
spending.
1. a, b, c and d
2. Only a, b and c
3. Only b and c
4. Only b, c and d
5. Not option 1, 2, 3 or 4
A change in the marginal propensity to consume will change the proportion of income that is
spend on consumption.
Md = RYL(i)
+ –
The positive sign under income Y indicates that a positive relationship exists between the demand
for money and the level of output and income. The negative sign under the interest rate i indicates
that a negative relationship exists between the quantity of money demanded and the interest rate.

Question 9 is based on the following diagram.

9. Which of the following statements are correct?

a. Induced consumption is equal to R100 if income is R400.


b. The multiplier is equal to 4.
c. If government spending increases with R50, the equilibrium output and income level
will increase by 50 times the multiplier.
d. If there is a change in the marginal propensity to consume, the Z curve will shift
upwards and the equilibrium level of output and income will increase.
e. Any change in consumer confidence will have no effect on the above goods market
model.
1. a, b and c
2. b, c and d
3. a, c and e
4. b, d and e
5. Only b and c
10. Given that an economy is at equilibrium at an income level less than full
employment, an increase in the marginal propensity to consume will results in …

1. upward shift of the demand for goods curve.


2. downward shift of the demand for goods curve.
3. flatter slope of the demand for goods curve.
4. steeper slope of the demand for goods curve.
5. higher vertical intercept of the demand for goods curve

An increase in the marginal propensity to consume implies that households spend a larger
proportion of every additional rand on consumption. The term c in our consumption equation is
therefore larger and the slope of the consumption curve steeper. Since the slope of the demand
for goods curve is determined by the slope of the consumption curve, the slope of the demand
for goods curve is steeper

11. Consider the consumption functions of country A and country B.


Country A: C = 2 000 + 0.7YD
Country B: C = 1 000 + 0.9YD

Which of the following statements is/are correct?

a. In country A autonomous consumption is higher than in country B.


b. In country B induced consumption is definitely higher than in country A.
c. In country B total consumption is definitely higher than in country A.
d. Graphically presented, the slope of consumption curve for country A will be steeper
than the slope of the consumption curve for country B.
e. If the level of disposable income is R5 000 in both countries then consumption
spending in country B is higher.

1. Only a and d
2. a, b, d and e
3. Only a
4. Only a, c and e
5. Not option 1, 2, 3 or 4

In country A autonomous consumption is 2 000 while in country B it is 1 000. It is therefore


higher in country A. Induced consumption is that part of consumption that depends on income.
To know what the induced consumption is we need not only to know what the marginal
propensity to consume is but also what the income is. We can therefore not conclude that it is
definitely higher in country B. What total consumption is, depends on what the level of income
is. Since we do not know what the level of income is, we do not know what the total
consumption is. The slope of the consumption curve is determined by the marginal propensity
to consume (c) and it determines how much consumption spending increases for a change in
income. An increase in the marginal propensity to consume implies that at each level of
disposable income households spend a larger proportion of that disposable income on
consumption and that the consumption curve is steeper.

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