# hypothetical economy

11. Assume that an increase in a household’s disposable income from \$40,000 to \$48,000 leads to an increase in consumption from \$35,000 to \$41,000, then the:
A) slope of the consumption schedule is .75.
B) average propensity to consume is .75.
C) marginal propensity to save is .20.
D) marginal propensity to consume is .6.

14. If the MPC in an economy is 0.8, government could eliminate a recessionary gap of \$100 billion by cutting taxes by:
A) \$80 billion.
B) \$100 billion.
C) \$125 billion.
D) \$200 billion.

1. If the CPI was 120 last year and is 130 this year, what is this year’s rate of inflation? Suppose also the economy’s nominal GDP is \$37,000 last year and \$45,000 this year, what is the rate of economic growth?

2. Assume that hypothetical economy with an MPS of 0.4 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by \$100 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand?

3. Assume that the following data characterize a hypothetical economy: money supply=\$200 billion; quantity of money demanded for transactions = \$150; quantity of money demanded as an asset = \$10 billion at 12 percent interest, increasing by \$10 billion for each 2-percentage-point fall in the interest rate. What is the equilibrium interest rate?

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