Preliminary comments Aggregate expenditure (AE)=C+I+G+NX (for an open economy) ; AE=C+I+G (for a closed economy)=DA (domestic absorption) Aggregate

income (AY)=C+S+T At equilibrium, AE=AY (A) GDP=C+I+G+NX => GDP-C-G=I+NX C+G=final consumption (private and public consumption) => GDP-C-G= national saving (A) => GDP=C+I+G+NX=C+S+T GDP-T-C=S = private saving (B) T-G=public saving (C) (B)+ (C) = GDP-C-G=national saving The balance of payments reflects the transactions between the residents and non-residents of a country CURRENT ACCOUNT (CA)=NX+NFP+NT DA+NX=C+I+G+NX=GDP GDP+NFP=GNP GNP+NT=GNDI (Yd) = DA+ CA GNDI=C+I+G+CA GNDI-C-G=I+CA S-I=NX; if S-I>0, the extra is lent abroad, trade surplus; if S-I<0 the deficit is financed from abroad, trade deficit CONSUMPTION Yd=C+S C=C0+MPC*Yd, where C-consumption function; C0 autonomous consumption; MPC marginal propensity to consume; Yd disposable income MPC the slope of the consumption function=C/Yd= C/(C+S)<1 Consumption depends on: expected evolution of prices, employment, income; credit conditions, interest rate, structure of stock assets, traditions, psycho-social, historic, geographic, geopolitical conditions S= S0+MPS*Yd, where S-saving function; S0 autonomous saving; MPS marginal propensity to save; Yd disposable income MPS the slope of the saving function=S/Yd= S/(C+S)<1 MPC+MPS=1 Yd=C+S S= S0+MPS*Yd= -C0+(1-MPC)*Yd APC=average propensity to consume = C/Y=consumption rate APS=average propensity to save=S/Y=saving rate

Multipliers kI=1/MPS=1/(1-MPC) ; Y= kI* I kG=1/MPS=1/(1-MPC) ; Y= kG* G kT=-MPC/MPS=-MPC/(1-MPC) ; Y= kT* T kTr=MPC/MPS=MPC/(1-MPC) ; Y= kTr* Tr 1. A linear consumption function with a positive slope less than one means that if income increases, consumption will: a. fluctuate; b. stay constant; c. fall; d. increase; e. none of the above 2. If the MPC is 0.5, the investment multiplier is: a. ; b. 20; c. 2; d. 0.2; e. 5 3. A familys purchase of furniture belongs to the category of consumption expenditures: a. services; b. nondurable goods; c. durable goods; d. transfer payments; e. wages 4. Buying final goods and services by the population is known as: a. investment; b. public consumption; c. private consumption; d. net export; e. interest income 5. As a rule, when a familys income increases, expenses for food products: a. absolutely decrease in developed countries; b. absolutely decrease in poor countries; c. decrease their weight in total family expenses; d. always increase relatively; e. all of the above 6. If the consumption function is linear, MPC is: a. increasing; b. decreasing; c. constant; d. variable; e. equal to APC 7. When the disposable income doubles (it increases by 1000) and consumption rate increases from 60% to 70%, saving: a. stays constant; b. decreases by 1000; c. increases by 1000; d. increases by 200; e. decrease by 200 8. According to Keynes, the main determinant of consumption is: a. permanent income; b. current income; c. wealth; d. economic growth; e. interest rate 9. If the income increases: a. the weight of consumption in income diminishes; b. unemployment decreases; c. inflation cannot be computed; d. all of the above; e. none of the above 10. If the disposable income increases and 75% of this increase represents consumption increase, the MPS is: a. 4; b. 1.5; c. 0.25; d. cannot compute; e. none of the above 11. The consumption function expresses : a. the relation between taxes and investments; b. the relation between consumption and investments; c. the relation between consumption and disposable income; d. the relation between MPC and investments; e. none of the above 12. If MPC is 0.8, the investment multiplier is: a. 5; b. 1/8; c. 1/0.8; d. 0.2; e. 2 13. If autonomous consumption is zero, MPC is equal to: a. 1; b. a negative value; c. APC; d. zero; e. MPS

14. If consumption increases by 50% and the income increases by 60% and APC was 75% in the previous period, MPC, MPS and the investment multiplier are: a. 0.3, 0.8, 2.5; b. 1, 0.5, 2; c. 0.8, 0.2, 1.25; d. 0.4, 0.6, 1.33; e. 0.62, 0.38, 2.63 15. C=500+0.75Yd. The income level for zero savings (breakeven income) is: a. 500; b. 574; c. 2000; d. 1000; e. cannot compute 16. C=500+0.75Yd. What is the value of Yd if S=400: a. 1600; b. 1700; c. 3600; d. 5600; e. 1000 17. If autonomous consumption is 50 and k=5: a. C=50+0.2Y; S=50+0.8Y; b)C=-50+0.8Y; S=-50+0.2Y; c. C=50+0.8Y, S=-50+0.2Y; d) a or b; e) cannot say 18. If S=-10+0.2Yd a. investments increase by 1 and Y by 2; b. investments increase by 2 and Y by 8; c. investments increase by 3 and Y by 15; d. cannot say; e. none of the above 19. In t0, Yd=100, S=40. If Yd increases by 50% and MPC=0.8, S1 and k will be: a. 100 and 4; b. 40 and 5; c. 100 and 5; d. 40 and 4; e. 50 and 5 20. If the income increases by 200 and consumption increases by 50, MPS is: a. 0.25; b. 0.5; c. 0.75; d. 0.8; e. 1 21. MPC=0.75 and the increase in investment is 100. The increase in income is: a. 2500; b. 250; c. 400; d. 100; e. 120 22. If the income increases by 500 and MPC is 0.8, saving will increase by: a. 400; b. 480; c. 500; d. 100; e. none of the above 23. If MPC=0.6 and Y increases by 500, investment increase by: a. 50; b. 100; c. 200; d. 150; e. 1000 INVESTMENT Investment depends on: real interest rate (inverse relationship), availability of credits; firms expected profits; future expected state of the economy, expected technological changes, risk and uncertainty For an investment to be profitable (pay off): -A0+A1/(1-r)+ A2/(1-r)2+...+ AN/(1-r)N>0, A0 initial investment; A1-AN cash flows for the years to come, N-number of years; r-real interest rate 1. Investment spending is determined by: a. the nominal exchange rate and assessments of profitability; b. the real exchange rate and assessments of profitability; c. the nominal interest rate and assessments of profitability; d. the real interest rate and assessments of profitability made by business investment committees; e. none of the above 2. When the interest rate increases: a. consumption will increase; b. government expenditures will increase; c. investment decreases; d. investment increases; e. taxes will increase

3. Which of the following is part of the equipment category of investment: a. a shopping centre; b. a residential house; c. an unfinished machine; d. a delivery vehicle; e. an apartment 4. Which of the following is most likely to decrease the amount of business investment: a. a fall in taxation; b. a fall in interest rates; c. a rise in consumer demand; d. a fall in business confidence; e. all of the above 5. A fall in investment demand may be generated by: a. higher interest rates; b. lower expected future profits; c. more expensive capital goods; d. all of the above; e. none of the above 6. Investment evolves in the same way with: a. interest rate; b. inflation rate; c. unemployment rate; d. labour cost; e. profitability rate 7. Which of the following discourages investment: a. high saving rates; b. profits increase; c. high interest rates; d. low taxation; e. economic growth 8. If depreciation is 50 and I=200, net investment is: a. 250; b. 150; c. 50; d. cannot say; e. none of the above 9. At an inflation rate of 10% and a nominal interest rate of 20%, an investment of 10 million bringing a net revenue of 1.1 million is: a.justified; b. bad; c. cannot say; d. more data is needed; e. none of the above 10. An investment amounts to 175. In the first year, the revenue it brings is 50, in the second year it is 80, in the third year it is 90. The interest rate is 10% and the inflation rate is 7%. a. the investment is justified; b. the investment is not justified; c. the net economic value is negative; d. a and c; e. none of the above GOVERNMENT EXPENDITURE 1. The impact of higher government spending on equilibrium income is identical to the impact of: a. a decrease in taxation; b. a decrease in autonomous spending; c. an increase in marginal propensity to consume; d. an increase in investment; e. all of the above 2. The increase in government spending generates: a. the increase of aggregate supply; b. the reduction of aggregate supply; c. the increase of aggregate supply and the decrease of aggregate demand; d. the increase of aggregate demand; e. the reduction of aggregate demand TAXES 1. MPC=0.6. The effect on the national income of an increase in taxes by 100 is: a. increase by 250; b. increase by 260; c. decrease by 260; d. decrease by 150; e. no effect SAVING 1. When MPS increases: a. MPC increases; b. the investment multiplier decreases; c. the employment degree increases; d. inflation decreases; e. any of the above