Chapter 3, Problem 1QAP

a)

To determine

To find: Whether the given statement “consumption is the largest component of GDP” is true, false, or uncertain.

Answer to Problem 1QAP

The given statement is true.

Explanation of Solution

The statement is true because it contains goods and services that are produced in an economy and which is bought by the consumer. Almost 68.3% of the GDP is composed of this component (consumption).

b)

To determine

To find: Whether the given statement “government spending, including transfer was equal to 18.1% of GDP of the year 2014” is true, false or uncertain.

Answer to Problem 1QAP

The given statement is false.

Explanation of Solution

The statement is false because the government spending does not include transfers like Medicare transfer, payment related to social security, or interest payments on government debts. These are government expenditures but are not the purchases of goods and services.

Moreover, the given percentage of government spending in table 3.1 of the book is 18.1%, which is smaller than the total spending that includes transfers and interest payments.

When transfer and interest payment is including in government spending then the share will become 33% of GDP.

However, government spending is alone equal to 18.1% of GDP.

c)

To determine

To state: Whether the given statement that “the marginal propensity to consume must be positive and it can take any positive value” is true, false, or uncertain.

Answer to Problem 1QAP

The given statement is False.

Explanation of Solution

Marginal Propensity to Consume (MPC) is the additional amount of expenditure set aside for consumption purposes out of every extra dollar earned by the consumers.

The statement is false because the sum of Marginal Propensity to Save (MPS) and MPC is equal to 1.

Here, the statement says that the value of MPC can be any positive value.

d)

To determine

To find: whether the given statement “in the recession of 2009, one factor was a drop in the value of the parameter c₀” is true, false, or uncertain.

Answer to Problem 1QAP

The given statement is true.

Explanation of Solution

The statement is true because the recession of 2009 was the result of a fall in two components out of four components of autonomous spending. The worries about the future after Bankruptcy led consumers to cut their spending, thus the c_o declined sharply.

e)

To determine

To find: Whether the given statement that “the fiscal policy describes the choice of government spending and taxes and is treated as exogenous” is true, false, or uncertain.

Answer to Problem 1QAP

The given statement is true.

Explanation of Solution

The given statement is true because fiscal policy includes the choice of taxes (T) and spending by the government (G) to alter the level of Gross Domestic product (GDP) of a country.

However, to evaluate what would happen at given levels of G or T, it is necessary to take into consideration these choices (government spending and taxes). It is considered as exogenously given in the goods market model.

f)

To determine

To check the statement “consumption equals output in goods market” is true, false, or uncertain.

Answer to Problem 1QAP

The given statement is False.

Explanation of Solution

The statement is false because consumption is a part of GDP {GDP = C + I + G + (X − M)}. Thus, the equilibrium condition for the goods market is not that the consumption itself equals the output. Thus, the given statement is false.

g)

To determine

To find whether the given statement “a rise in one unit of government spending induces a rise of one unit in equilibrium output” is true, false, or uncertain.

Answer to Problem 1QAP

The given statement is False.

Explanation of Solution

The statement is false because an increase in one unit of government spending leads to an increase in a unit times the multiplier value. Thus, the statement is false.

h)

To determine

To find whether the given statement “the rise in the propensity to consume induce a decrease in output” is true or false.

Answer to Problem 1QAP

The given statement is False.

Explanation of Solution

The given statement is false because the relationship between MPC and output is positive. Thus, a high value of MPC leads to the high value of multiplier and it increases the output.