Quiz 1- Ecn 102 (105)

The value of the marginal propensity to consume (MPC) is given by the coefficient in front of the income variable in the consumption function. In this case, the consumption function is C = 1400 + 0.78Y, where Y represents income. Therefore, the value of MPC is 0.78, indicating that for every additional unit of income, 0.78 units will be consumed.

The average propensity to consume (APC) is calculated by dividing consumption (C) by disposable income (Yd). In this case, C is given as $800 and Yd is given as $1000. Therefore, the APC can be calculated as 800/1000 = 0.8.

The given answer, "long-run economic growth," is the most suitable explanation for the trend. This is because the trend refers to the overall increase in economic activity over an extended period of time. Long-run economic growth indicates sustained and continuous expansion in the economy, which can be attributed to factors such as technological advancements, increased productivity, and population growth. It signifies the ability of an economy to produce more goods and services over time, leading to higher standards of living and improved economic well-being.

An inflationary output gap occurs when actual GDP exceeds potential GDP. This means that the economy is producing more goods and services than it is capable of producing in the long run. This can lead to inflationary pressures as the increased demand for goods and services outpaces the economy's capacity to supply them.

A recessionary output gap is characterized by real GDP falling below potential output. This means that the actual output of goods and services in the economy is lower than what could be produced at full capacity. This situation is typically associated with a decline in economic activity, high unemployment rates, and underutilization of resources. It indicates that the economy is not operating at its full potential and suggests a contractionary phase in the business cycle.

The variable 'b' in the consumption function represents the marginal propensity to consume. This means that for every additional unit of income (Y), the individual or household will consume a portion of it. The marginal propensity to consume indicates the rate at which consumption increases as income increases. In other words, it measures the change in consumption in response to a change in income.

Labor productivity is calculated by dividing the GDP by the number of people employed. In this case, the GDP is $500 million and the number of people employed is 4 million. Dividing $500 million by 4 million gives us a labor productivity of $125.

The economy's output gap refers to the difference between the actual GDP and potential GDP. Potential GDP represents the maximum level of output that an economy can sustainably produce, while actual GDP represents the current level of output. The output gap indicates whether the economy is operating below or above its potential. If the actual GDP is lower than the potential GDP, it suggests that there is a negative output gap, indicating that there is unused capacity in the economy. Conversely, if the actual GDP is higher than the potential GDP, it suggests a positive output gap, indicating that the economy is operating above its capacity.

The business cycle refers to the fluctuations in economic activity over time. It is characterized by alternating periods of expansion and contraction in the economy. Short-run fluctuation refers to the temporary changes in economic activity that occur within the business cycle. These fluctuations can be caused by various factors such as changes in consumer spending, investment levels, or government policies. Therefore, short-run fluctuation is a correct answer as it accurately describes one of the key components of the business cycle.

The slope of the AE function represents how much additional spending occurs for each additional unit of income. The marginal propensity to spend specifically refers to the proportion of additional income that is spent rather than saved or used for imports. Therefore, the correct answer is the marginal propensity to spend.