What is most likely to happen to the price level and real GDP if Congress substa

Question

What is most likely to happen to the price level and real GDP if Congress substantially increased spending on highways construction and education?

Select one:

a. Price level and real GDP will both increase

b. Price level and real GDP will both decrease

c. Price level will increase, but real GDP will decrease

d. Price level will decrease, but real GDP will increase

e. Government policy has no effect on price level and real GDP

Question 2

Alexandra's Marginal Propensity to Consume is 0.92. When her income increases, she raises her savings by $50. By how much did her disposable income increase?

Select one:

a. By $500

b. By $525

c. By $588

d. By $625

e. By $692

Question 3

Which one of these assets is the LEAST liquid one?

Select one:

a. A money market mutual fund

b. A corporate stock

c. A government bond

d. A time deposit

e. A checking account

Students in Macroeconomics can receive bills that they can turn in for bonus points at the end of the semester. What form of money are these bills?

Select one:

a. Commodity Money

b. Token Money

c. Representative Money

d. Electronic Money

e. Fiat Money

Explanation / Answer

1.

A.

Government spending stimulates the demand and more money starts chasing few goods. Further, demand pull inflation takes place in the economy. As a result, the price level also rises.

2.

D

Working note:

MPC = .92

MPS = 1-.92 = .08

If increase in savings are $50,

Then, increase in disposable income = 50/MPS = 50/.08

Increase in disposable income = $625

3.

B

A corporate stock is the least liquid among all these assets mentioned in the alternatives.

4.

B

The bills act as token money so that they are converted into the credit points.

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