Homework Assignment #4 – Due Dec 4, 2015
Chapter 12
1. If Mary earns $30,000 a year she will spend $28,000.
a. What is her average propensity to consume (APC)?
b. What is her average propensity to consume(APS)?
c. If she gets a bonus that brings her income to $35,000 and her spending to $32,000, what is her
marginal propensity to consume (MPC)?
d. What is her marginal propensity to save (MPS)?
e. If Mary instead spent $40,000 (from part c), calculate her APC and MPC.
2. Why is it important for the government to consider the impact of the multiplier effect before changing
taxes or spending? (What is the significance of the multiplier?)
3. Assume that the MPC is .90. If autonomous investment increases by $35 billion, how much do we
expect real GDP to increase? What if the MPC was .50 instead?
4. When looking at savings and investment, planned versus actual, suppose that unplanned business
inventories increased.
a. What will happen to real GDP in the next period?
b. What will happen to unemployment?
c. Why do unplanned changes in inventories effect the economy?
Chapter 13
5. What are the goals of fiscal policy?
6. How effective is fiscal policy at fine-tuning the economy? What are the three time lags?
7. What are automatic stabilizers? How do they help the economy during a recession?
8. Explain what is meant by recessionary gap and inflationary gap. What type of fiscal policy would be
used to fix each of these gaps?
9. Fiscal policy changes can be either through changes in taxes or through changes in government
spending. Which one is more effective and why?
10. Explain crowding-out and why it can be a problem in the economy. What other types of offsets are
there?
Chapter 14
11. What is the difference between a debt and a deficit? In the United States, since 1940, were there
more years with budget deficits or budget surpluses?
12. How much was the federal public debt in 1960? What about in 2013? If we look at the debt as a
percentage of GDP, which year between 1940-2000 had the highest percentage? What is the percentage
for 2013?
13. Explain the burdens of the public debt? Can public debt ever be beneficial to the country?-why or
why not?
