CHAPTER 18

REVISION QUESTIONS

Theory discussion questions

1) Use a diagram to illustrate the impact of government spending on the equilibrium level of
income in the economy.

2) Explain the difference between income and disposable income.

3) Explain how fiscal policy can be used to stimulate production and income in the economy.

4) What determines the size of the multiplier in a Keynesian model that includes both a
government and a foreign sector?

5) By how much will the introduction of autonomous spending of R800 million raise the equilibrium
level of income if (a) c = 0,833, (b) c = 0,8 (t = 0 in both cases)?

6) Calculate the equilibrium level of income if C = R50 million, Ī = R300 million, Ḡ = R300 million, c =
0,75, t = 0.

Calculation questions
Question 1
Suppose the following information describes the economy of Estonia:

C = 45 + 0.4Yd

T = 0.2Y

I = 555

G = 600

X = 150

Z = 50 + 0.3Y

1.1) Use the information provided above and calculate Estonia’s equilibrium income and equilibrium
spending. Show all equations and calculations.

1.2) Graphically illustrate your answer in question 1.1 above.

1.3) Calculate the multiplier for Estonia.

1.4) How much does the South African government collect in taxes when the economy in
equilibrium at question 1.1?

1.5) What is the government’s budget deficit or surplus?

Question 3
Assume the following for a given economy:

C = 63 + 0.75Y

Ye = 3000

3.1) Calculate the savings function and the level of savings at equilibrium

Multiple choice questions

1) According to the Keynesian model, the most important determinant of a household’s
consumption is
a. its disposable income.
b. its total wealth.
c. the number of persons in the household.
d. its net wealth.
e. the ratio of wage to non-wage income the household earns.

2) If a household’s income falls from R20 000 to R17 000 and its consumption falls from R18 000 to
R15 000, then its:
a. Mpc is –0,67.
b. Mpc is 0,88.
c. Mpc is 0,20.
d. Mps is zero.
e. Mps is 0,12.

3) Which of the following statements is/are true?

i. The level of autonomous consumption is determined in part by the level of wealth.
ii. The level of induced consumption is determined by the level of wealth.
iii. The level of induced consumption is determined by the level of income
iv. The level of consumption is determined only by the level of induced consumption.

Answer

a. i
b. ii
c. i en ii
d. i en iii
e. i, iii en iv

4) The multiplier in the Keynesian model equals

a. the equilibrium level of income for a given level of aggregate expenditure
b. the increase in autonomous expenditure brought about by a change in income.
c. the equilibrium level of income divided by autonomous expenditure.
d. the increase in equilibrium income when autonomous expenditure increases.
 e. the level of equilibrium output corresponding to a given level of aggregate spending.

Consider the diagram below. Use this information to answer Questions 6 & 7

A A=Y
(Rm)
A1 = C + I
40

A=C
28

16
10
4
Y
0 10 40 (Rm)

5) Autonomous consumption equals:

a. R0.
b. R4 million
c. R10 million.
d. R16 million.
e. R40 million.

6) Investment equals
a. R4 million.
b. R10 million.
c. R12 million.
d. R16 million.
e. R40 million.

7) You are given the following information about a model closed economy (without a foreign
sector). The autonomous part of consumption is R100 billion. The marginal propensity to
consume is equal to 0,8. Investment is R460 billion. Government purchases of goods and
services are R400 billion. The tax rate is equal to 0,25. The equilibrium level of consumption is
________, and the equilibrium level of income is ________.

a. R100 billion; R960 billion

b. R1 540 billion; R2 400 billion
c. R100 billion; R1 600 billion
d. R1 060 billion; R1 600 billion
e. 3 940 billion; R4 800 billion

8) If the government increases its expenditure, but keeps the tax rate in the economy constant, we
will find that consumption expenditure __________, total tax revenue _________, and
investment spending __________.
a. stays the same; stays the same; stays the same
b. increases; stays the same; stays the same
c. increases; increases; stays the same
d. increases; increases; increases
e. None of the above