ECO 102: PRINCIPLES OF ECONOMICS II TUTORIAL QUESTIONS 1. Explain the difference between investment as the term is used by most people and investment as defined by an economist. 
 2. What would the circular flow diagram look like in an economy with no government? Draw one for yourself. 
 3. The marginal propensity to consume (MPC) for the United States as a whole is roughly 0.90. Explain in words what this means. What is your personal MPC at this stage in your life? How might that change by the time you are your parents’ age? 
 4. What is a consumption function, and why is it a useful device for government economists planning a tax cut? 
 5. Explain why permanent tax cuts are likely to lead to bigger increases in consumer spending than temporary tax cuts do. 6. Consider an economy in which the consumption function takes the following simple algebraic form: 
 C = 300 + 0.75Yd and in which investment (I) is always GHS900 and Government purchases are fixed at GHS1,300, and taxes are fixed at GHS1,200. Find the equilibrium level of GDP and determine the size of the multiplier. 7. An economy has the following consumption function: C = 200 + 0.8Yd The government budget is balanced, with government purchases and taxes both fixed at GHS1,000. Investment is GHS600. Find equilibrium GDP. What is the multiplier for this economy? If G rises by GHS100, what happens to Y? What happens to Y if both G and T rise by GHS100 at the same time? 8. What is a multiplier? How does the multiplier effect occur? 9. Why do booms and recessions tend to be transmitted across national borders? 10. Explain the terms recessionary gap and inflationary gap. Why do they occur? 11. Differentiate between an induced increase in consumption and an autonomous increase in consumption. How are they represented on a graph? 12. Describe the role of business inventory change in determining the equilibrium level of GDP and changes in the level of GDP.

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13. Suppose the economy is suffering in a recessionary period. Firms are facing increasing inventories and individual consumers are increasing their saving to prepare for hard times ahead. What is likely to happen to the economy and can it correct itself and grow toward full employment in the short run? 14. Where does equilibrium occur in an income expenditure diagram? What would be the effect if production is at either on the left or right side of the equilibrium point? 15. Carefully explain the following terms and explain their importance in the study of macroeconomics: a. expenditure schedule b. saving schedule c. equilibrium GDP d. leakages schedule e. injections schedule 16. Consider an economy in which households always spend 90% of their disposable income, and government tax revenue always account for 20% of national income. a. What is the marginal propensity to consume (mpc) out of disposable income? b. What is the mpc out of national income? c. What is the marginal propensity to save out of national income? d. What is the value of the multiplier? e. What is the national income if private investment expenditure (I) is GHS130 and government expenditure (G) is GHS150 f. What is the marginal propensity to tax? g. What happens to equilibrium national income if government expenditure rises to GHS290? h. Comment on the results obtained in g above. What type of policy is at play? Show how effective this policy is. 17. You have the following information on an economy. C = 0.8Yd I = GHS78 G = GHS70 TR = GHS40 T = 0.25Y a. Derive an expression for aggregate expenditure based on this model. b. Determine the steady state of national income. c. What is the size of the multiplier in this model? d. When national income is equal to GHS250 million, by how much do injections exceed withdrawals? e. Assume now that the government reduces the proportional tax rate to 20% of national income, determine i. The change in national income resulting from this move by government. ii. What will be the new level of steady state national income?

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iii.

Explain your answer with reference to the value for the steady state national income obtained in (b) above. iv. Determine the new multiplier in this economy. f. What will be the effect of an increase in investment in this economy? 18. Explain the term full employment budget. 19. Distinguish automatic stabilizers from automatic destabilizers. 20. What is a fiscal drag? 21. Distinguish between structural and cyclical deficits. 22. In a closed economy in equilibrium, consumption spending is at the rate of GHS75 billion per annum, and investment spending is GHS25 billion per annum. Consumption is a constant proportion of disposable income of whatever the level of national income. There is no government activity. a. i. What is the level of national income? ii. What is the value of the multiplier? b. Assume now that government activity is undertaken and taxation is levied at the rate of 1/5 of all national income, and government spending on goods and services is held at GHS25 billion. i. What is the new level of national income? ii. What is the budget surplus or deficit? 23. You have the following information on an economy: C = 0.80Yd I = GHS18 million TR = GHS40 million G = GHS70 million T = 0.25Y a. What is the equation for aggregate expenditure? b. Determine the equilibrium level of national income. c. What is the value of the expenditure multiplier? d. Determine the private saving, government saving and national savings. 24. Explain the relationship between consumption and saving. 
 25. Explain the difference between autonomous consumption and induced consumption. 
 26. Explain how the stock of consumer durables in the hands of consumers and credit availability each affect the level of consumption. 
 27. How little do Ghanaians save? Why do they save so little? 
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28. How is it possible for a nation’s consumption to sometimes exceed its disposable 
income? 
 29. The marginal propensity to consume (MPC) for a nation is 0.85. Explain what this means. 
 30. If you had the power to write laws, how would you provide incentives to encourage Americans to save more? 
 31. Suppose that consumption equals GHS500 billion when disposable income is GHS0 and that each increase of GHS100 billion in disposable income causes consumption to increase by GHS70 billion. Draw a graph of the saving function using this information. Real Disposable Consumption Savings (GHS billions) Income (GHS billions) Expenditures (GHS billions) 100 150 $200

200

$300

250

$400

300

a. Graph the consumption function, with consumption spending on the vertical axis and disposable income on the horizontal axis. 
 b. If the consumption function is a straight line, what is its slope? 
 c. Fill in the saving column at each level of income. If the saving function is a straight line, what is its slope? 
 32. If consumption increases by GHS12 billion when disposable income increases by GHS15 billion, what is the value of the MPC? What is the relationship between the MPC and the MPS? If the MPC increases, what must happen to the MPS? How is the MPC related to the consumption function? How is the MPS related to the saving function? 33. Explain why G has the same multiplier as I, but taxes have a different multiplier. 34. Calculate the change in real GDP that would result in each of the following cases, assuming there are no automatic stabilizers or destabilizers. Planned investment spending rises by GHS100 billion, and the MPC is 0.9. 
Autonomous consumption spending decreases by 
GHS50 billion, and the MPC is 0.7. 
Government purchases rise by GHS40 billion, while at the same time investment spending falls by GHS10 billion. The MPC is 0.6. 


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35. If disposable income is 90 percent of national income, and the marginal propensity to consume (out of disposable income) is 0.75. What will be the value of the simple multiplier? 36. If disposable income is 85 per cent of national income, the marginal propensity to consume (out of disposable income) is 0.75, then the simple multiplier is…. 37. What is the value of the multiplier if the marginal propensity to consume out of disposable income is 0.8, and the income tax rate is 0.2? 38. The value of the multiplier is 1.5; autonomous consumption is GHS200; investment is GHS500; and government spending is GHS400; What is the level of GDP? 39. 40. 41. 42.

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