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esc26o2 exam pack
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1ECS2602 TEST BANK
Question 1
Which of the following statements is/are correct?
a) In this module we only study the demand side of the economy which includes the goods market and the
financial market. The labour market form part of the supply side analysis and are therefore excluded from this
module.
b) The two most important accounts of the balance of payments are the current account and the financial account.
c) If total output decreases with 2% during a specific year and the general price level increases with 4% the real
GDP will decrease and the nominal GDP will increase.
1) a, b and c
2) Only a and b
3) Only a and c
4) Only b and c. (Correct option is 4.)
5) None of the options 1 t o 4
Explanation
The two important accounts of the balance of payments are the current account and the financial account.
If the rise in the general price level is more that the rise in nominal production then the real production (GDP)
declines while the nominal production (GDP) increases.
Question 2
Consider the consumption functions of country A and country B.
Country A: C = 2 000 + 0.7Y D
Country B: C = 1 000 + 0.9Y D
Which of the follow ing state ments 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.
1) Not a, b or c
2) Only a. (Correct option is 2.)
3) Only b
4) Only c
5) None of the options 1 t o 4
Explanation
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.
Question 3
Which of the following statements with regards to the following consumption function? C = c0 + cYD
is/are correct?
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a. A change in the marginal propensity to consume will result in a change in income.
b. If autonomous consumption should be zero consumption will be equal to cYD.
c. A change in autonomous consumption will cause a change in marginal propensity to consume.
1) a, b and c
2) Only a and b
3) Only a and c
4) Only b and c
5) None of the options 1 to 4 (correct option is 5.)
Explanation
A change in the marginal propensity to consume implies that a higher proportion of income is spent and this will
then result in a change in consumption spending and not in income.
If autonomous consumption is zero the part that is left is cYD.
A change in autonomous consumption does not cause a change in the marginal propensity to consume.
Question 4
In the goods market model a decrease in taxes will result in …
a) an increase in autonomous consumption.
b) an increase in disposable income.
c) an increase in income.
d) a decrease in induced consumption.
1) a, b and c
2) a, b and d
3) b, c and d
4) a, c and d
5) None of the options 1 to 4 (correct option is 5.)
Explanation
A decrease in taxes increases disposable income and consequently induced consumption spending
increases. As consumption spending increases producers increase production and consequently income
increases. The multiplier effect is in operation.
A decrease in taxes does not impact on autonomous consumption.
Only alternatives b and c are correct and therefore the correct option is 5.
Question 5
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 (The correct option is therefore 2.)
3) Only b, c and d
4) Only a, c and d
5) a, b, c and d
Explanation
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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↑
Question 6
Which of the following is/are correct in terms of the goods market model?
a) Autonomous consumption is represented by c0 + Ī + G – cT.
b) Induced consumption is presented by cYD.
c) The demand for goods determines the amount of goods that producers produce and they will only change
their production if the demand for goods changes.
d) Equilibrium is presented by Y = c0 + c(Y−T) + Ī + G.
1) a, b, c and d
2) Only a, b and d
3) Only a, c and d
4) Only a, b and c
5) Only b, c and d (The correct option is therefore 5.)
Explanation
All the statements except statement a is correct. Autonomous consumption is only c0.
Questions 7 to 13 are based on the following data for the country PORTHOS for 2011.
Marginal propensity to consume = 0.5
Autonomous consumption = R600 million
Investment = R40 million
Government spending = R280 million
Taxes = R30 0 million
Question 7
Which of the following statements is/are correct?
a) The value of the multiplier is equal to 2.
b) The budget surplus is R20 million.
c) The equilibrium level of output and income is R1 540 million.
d) Total consumption is R1 220 million.
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 (correct option is 5.)
Explanation
To answer this question correctly you must do the following:
Calculate the multiplier. The formula for the multiplier is 1/1-c. Given a marginal propensity to consume of 0.5 the
value of the multiplier is 2.
Calculate the equilibrium level of output and income. The formula for the equilibrium level of output and income is
( ̅ )
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Given the information in the question the equilibrium level of income is 2 x (600 million + 40 million + 280 million –
0.5(300 million)) = 2 x R770 million = R1 540 million. Note that you must subtract cT.
Calculate the budget balance. The budget of government is the difference between tax revenue and government
spending (T – G) or (G – T). In this case there is a budget surplus of R20 million since T = R300 million and G = R280
million.
Calculate consumption spending at the equilibrium level of output and income. The consumption spending in this
model is C = co + cYD. Given a value of R600 million for c0 and YD
= Y – T = (R1540 million – R300 million) = R1 240 million, consumption spending at the equilibrium level of income =
600 + 0.5(1 240) = R600 million + R620 million = R1 220 million.
All the statements are correct and therefore the correct option is 5.
Question 8
An economist Dr B right Spa k calculated that the gap between the current level of output and income and the full
employment level of income is R110 million.
Which of the following will en sure that full employment is re ached?
a) An increase in government spending of R8 0 million which will result in a budget deficit of R10 million.
b) A decrease i n taxation of R160 million which will result in a bud get deficit of R90 million.
c) An increase in government spending of R4 0 million and a decrease in taxation of R80 million which will
result in a budget deficit o R50 million.
1) a, b and c
2) Only a and b
3) Only a and c
4) Only b and c
5) None of the options 1 t o 4 (correct option is 5.)
Explanation
The following diagram shows the economy of PORTHOS.
The vertical intercept is 770: c0 + Ī + G – cT = 600 + 40 + 280 – 0.5(300) = R920 million – R150 million = R770 million.
The equilibrium level of income is R1 540 million and the level of full employment R1 650 million, that is R1540
million + R110 million (the output and income gap).
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