Lec9 iC Questions Flashcards
Assume that potential GDP in Canada in 2025 is $3,000 billion per year, and the long-run unemployment rate is 6%
If a trade war reduces Canadian GDP by $250 billion per year, what would we expect the actual unemployment rate to be?
(Answer as a percentage to 1 decimal point)
Output Gap = ((Actual GDP loss)/(Potential GDP)) X 100
OG = (-250/3000)X100
OG = -8.33%
Cyclical Unemployment = -1/3 X Output Gap
CU = -1/3 X -8.33
CU = 2.78%
Actual Unemployment = Long-Run + Cyclical Unemployment
AU = 6 + 2.78
AU = 8.8%
Consider a consumer with a consumption function of $10,000 + 0.75*income
If their income is $60,000, what percentage of their income are they consuming
(Answer to 1 decimal point)
Separate Question - How does the consumption rate (average propensity to consume) change as income rises?
C = 10000 + 0.75Income
C = 10000 + 0.7560000
C = $55000
Average Propensity to Consume = (Consumption/Income) X 100
APC = (55000/60000) X 100
APC = 91.7%
As people earn higher income, they spend a smaller proportion of their income on consumption.
If people believe that the chances that they lose their job in the next year have increased, how are they likely to change their consumption today?
a) Increase
b) No change
c) Decrease
d) None of the above
c) Decrease
“On average, if people who are smoothing consumption think they might lose their job, they’re worried about having a period of lower income, they will lower consumption today and save money”
If people anticipate a recession in the next year, how are they likely to change their consumption today?
a) Increase
b) No change
c) Decrease
d) None of the above
c) Decrease
If the value of the stock market falls, we should expect that consumption would:
a) Increase
b) Not change
c) Decrease
d) None of the above
c) Decrease
If a person’s current income rises, but their expected future income falls, then we should expect that (compared to before the change):
a) Consumption rises, effect on savings is uncertain
b) Consumption falls, savings increases
c) Consumption rises, savings rises
d) Effect on consumption is uncertain, savings rises
e) None of the above
d) Effect on consumption is uncertain, savings rises
“The current income rise would cause me to consume more, and the future income fall will cause my current consumption to fall, so it depends how big those are”
Consider a consumer with a consumption function of $10,000 + 0.75*Income
If their income is $20,000, what percentage of their income are they saving?
(Answer to 1 decimal point)
C = 10000 + 0.75 X Income
C = 10000 + 0.75 X 20000
C = $25,000
Savings = Income - Consumption
S = 20000 - 25000
S = -5000
