ECS2602-TESTS-BANK

ECS2602-TESTS-BANK. 100% CORRECT questions, answers, workings and explanations. 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.