ECON 202 Drexel University Assignment 3

Professor: Mara Pa Olivero

NAME: _______________________________________________

MULTIPLE CHOICE SECTION (30 points, 3 points each)

1) GDP is 1,000, consumption is 800, investment is 250, and exports are 150. Then, imports are: a) 200 b) 1200 c) 100 d) 400 2) GDP is 1,300, consumption is 1100, investment is 50, exports are 50 and imports are 100. Government spending is: a) 75 b) 625 c) 215 d) 200 3) Which of the following is not considered investment (I)? a) A purchase of new computer software and hardware by Drexel University b) Construction of a residential housing scheme c) Purchase of $100 worth of US government bonds in Wall Street d) Purchase of a new piece of equipment by Joe Addys contractors 4) Which of the following is not considered consumption (C)? a) Purchase of a new imported Japanese car by John b) Purchase of medical services by Mary c) Purchase of a new building by Drexel d) Purchase of a newly built home by the Smiths e) Both c and d

5) The MPC can be defined as: a) The absolute change in consumption for a $1 change in disposable income b) The increase in consumption for a $1 change in disposable income c) The absolute change in consumption for a 1% change in disposable income d) The amount of consumption that takes place regardless of income 6) The following event will have a positive impact on the AS curve: a) A hurricane destroys 30% of the economys capital stock. b) Labor productivity rises as a result of important investment in human capital. c) The cost of imported inputs increases significantly d) Both b and c. 7) I) A common assumption in Economics is that a countrys exports are not significantly affected by that countrys GDP. II) An increase in corporate taxes lowers investment. a) I and II are true. b) I and II are false. c) I is true, II is false. d) I is false, II is true. 8) I) An economy can always self-adjust instantaneously out of a recessionary gap. II) Contractionary policies help an economy get rid of inflationary pressures. a) I and II are true. b) I and II are false. c) I is true, II is false. d) I is false, II is true. 9) Stagflation occurs when: a) AD is falling. b) AS is falling. c) Both AD and AS are falling. d) AD is rising. 10) The intercept of the consumption function reflects: a) Borrowing b) Lending c) The amount of consumption in an economy where national income is below the standards for developed countries d) The amount of consumption in an economy that is operating at an inflationary gap

SHORT ANSWER SECTION (70 points) Question 1: (20 points, 5 each)

Explain what will happen to AD and GDP as a result of the following events. Why? (i.e. how does each component of AD behave in each case?) a. The Fed raises the supply of money. b. Canada is experiencing a boom in economic activity. Canada is one of the US main trading partners. How will this increase in Canadian GDP affect AD in the US? c. The citizens of country ABC expect their future income to rise next year when significant tax cuts will be implemented. How is AD affected in country ABC today? d. US relative prices fall relative to Japanese prices.

Question 2: (10 points)

Explain what happens to a countrys trade balance when the countrys exchange rate falls.

Question 3: (20 points, 10 each)

a) Discuss the price effect argument why AD falls when the general price level (P) rises. b) Discuss the interest rate effect argument why AD falls when the general price level (P) rises.

Question 4: (10 points)

1) Draw the market for loanable funds (or market for savings and investment). Label the axes and both curves correctly for full credit. (5 pts) 2) What happens in this market as corporations start investing more? Explain what happens to the supply and the demand curve and how are the equilibrium quantity and price affected as a result. (5 pts)

Question 5: (10 points)

Explain how an economy self-adjusts to get rid of a recessionary gap. Describe the process both verbally and graphically using an AD-AS graph.