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Fundamentals of Business Economics

CHAPTER 4 – MACROECONOMICS I – THE DOMESTIC ECONOMY

4.1 B

Inflation increases production costs, thus reducing international
competitiveness.

4.2 B

The expenditure method of measuring national income measures economic
activity by summing the value of expenditure on final goods.

4.3 A

MPC = 1,500/6,000 = 0.25

Multiplier = 1/(1 – 0.25) = 1/0.75 = 1.33

4.4 B

The accelerator principle states that an increase in consumer demand leads to
a more than proportionate increase in the level of investment.

4.5 D

Increasing government expenditure changes demand not supply.

4.6 D

Aggregate demand is made up of consumption, investment, government
expenditure and net exports.

If prices fall, purchasing power is increased and consumption, investment, etc.
will tend to rise – increasing aggregate demand.

If prices rise, purchasing power is decreased and the opposite happens to
aggregate demand, which falls.
Hence consumption falls at higher price levels.

Exports will also fall at higher price levels as local products become more
expensive to foreign customers. The value of net exports will therefore fall,
reducing aggregate demand.

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