University of the Philippines

SCHOOL OF ECONOMICS
Economics 11: Markets and the State
1st Semester, AY 2016-2017
Problem Set #7

Prof. Solita C. Monsod Ang, Gloria, Guido, Guzman

Instructions:
1. Write your name AND section on all yellow pad papers that you will use.
2. Answer all questions completely.
3. Due date is on November 3 before class ends.

1. Value added is measured as the:

A) difference between a firm's sales and its purchases of materials and services from other firms.
B) difference between net and gross investment.
C) additional output the economy produces when it is at full employment.
D) additional consumer goods produced when the economy moves from war-time to peace-time.
E) increase in corporate profits from one year to the next.

2. Net investment is derived from gross investment by:

A) subtracting inventory costs from gross investment.
B) adjusting gross investment for inflation.
C) subtracting profits retained by firms from gross investment.
D) reducing gross investment by the dollar value of business ventures that failed during a stated
period.
E) subtracting capital depreciation.

3. The amount of the government's budget differs from its contribution to GDP by:
A) the sum of all transfer payments made by the government.
B) the dollar amount of net exports.
C) the interest paid on the government debt.
D) the face value of all bills and coins produced during the year.
E) all of the above.

4. The sum of all expenditures for final goods and services is the equivalent of:
A) all income paid out as wages and salaries.
B) the amount of money in circulation.
C) disposable income.
D) the total of all "value added."
E) all of the above.

A, E, A, A
5. An example of an action which is NOT counted in net domestic product is:
A) production of an unsold car stereo.
B) outlays to repair hurricane damage.
C) purchase of a haircut.
D) construction of a nuclear-powered submarine.
E) purchase of a used car at its total market value.

6. The flow-of-product accounting of GDP must equal the income or earnings accounting of GDP
because:
A) depreciation is equal to the difference between gross revenues and net payments to factors.
B) transfer payments are excluded from GDP.
C) net foreign investment can be either positive or negative.
D) money prices change and either inflate or deflate earnings or income.
E) profit is a residual, which automatically adjusts to ensure equality.

7. Disposable income includes:

A) corporate taxes.
B) undistributed corporate profits.
C) depreciation.
D) dividend payments.
E) none of the above.

8. Disposable income is equal to:

A) national income minus tax payments.
B) national income plus transfer payment.
C) national income minus tax payments and plus net business saving and transfer payments
D) national income minus tax payments, net business savings and plus transfer payments.
E) none of the above.

9. Economic growth is always measured in real terms because:

A) output changes from year to year.
B) the flow-of-product approach does not always yield the same figure as the earnings or cost
approach.
C) the differences in nominal GDP from year to year are too large.
D) the price level changes from year to year.
E) all of the above.

E, E, D, D, D
For questions 10 and 11 , use the table below:

Disposable Income (DI) in Php Consumption Expenditure (C) in Php

500 1300

1000 1600

1500 1900

2000 2200

2500 2500

3000 2800

10. The marginal propensity to consume is equal to:

A) 0.6
B) 0.4
C) 0.2
D) 0.8
E) Cannot be determined

11. If the consumption expenditure is Php 1,000 when the disposable income is PhP 0, which
equation shows the consumption function that best fits all the data above?
A) C=900+0.8DI
B) C=500+1.6DI
C) C=1000+0.4DI
D) C=1000+0.6DI
E) Cannot be determined

12. At the break-even point, which of the following is true?

A) The disposable income is split equally between consumption and saving.
B) All of the disposable income is used for consumption.
C) There is neither saving nor dissaving.
D) All of the above
E) Both B and C

A, D, E
13. Suppose Richard is consuming at the break-even point where his disposable income is Php
20,000. If his disposable income increases to PhP 25, 000, and his consumption increases
to PhP 23,500, then his marginal propensity to consume is equal to ____.
A) 0.6
B) 0.7
C) 0.8
D) 0.3
E) 0.4

14. Which of the following characterizes a depression?

A) Its a recession but is smaller in scale.
B) Its a recession but with a larger scale and duration.
C) The interest rates are high.
D) It is a recurring period of decline in unemployment.
E) None of the above.

15. If the marginal propensity to consume is 0.6 and if investment (I) falls by 54 while
government expenditure (G) rises by 30 (other things remaining constant), by how much
will the equilibrium level of income rise/ fall?
A) It will fall by Php 40
B) It will rise by Php 40
C) It will fall by Php 60
D) It will rise by Php 60
E) None of the above.

16. Which of the following should be expected to shift the aggregate demand curve to the
right?
A) More public school teachers were hired.
B) The countrys imports increased while its exports remained the same.
C) There was a reduction in labor force participation.
D) There was an increase in taxes.
E) None of the above.

17. Which of the following statements is correct?

A) A decrease in taxes, holding investment and government purchases unchanged,
increases equilibrium level of national output.
B) A decrease in taxes, holding investment and government purchases unchanged,
decreases equilibrium level of national output.
C) The tax multiplier is smaller than the government expenditure multiplier.
D) The tax multiplier is larger than the government expenditure multiplier.
E) Both A and C

B, B, C, A, E
18. Suppose that the supply of money were fixed. An increase in the demand for money should
be expected to cause:
A) the equilibrium rate of interest to climb.
B) the equilibrium rate of interest to decrease.
C) the equilibrium quantity of money demanded to climb.
D) the equilibrium quantity of money demanded to decrease.
E) both answers A and C.

19. If money supply increases in the economy, then the general level of prices also increases.
A) Always
B) Sometimes
C) Never
D) Incomplete information
E) No relationship

20. If the central bank increases the supply of money:

A) interest rates should fall, investment spending should increase and GDP should
increase.
B) interest rates should increase, investment spending should increase and GDP should
increase.
C) interest rates should increase, investment spending should decrease and GDP should
decrease.
D) interest rates should fall, investment spending should increase, but GDP would remain
unchanged.
E) any of the above may occur, depending upon the current economic situation.

A, A, A