11/07/2025

UNIVERSITY OF GHANA BUSINESS SCHOOL

(UGBS 204: MACROCECONOMICS AND BUSINESS)
2ND SEMESTER 2024/2025

SUBMISSION DATE: (21st – 25th July, 2025) BEFORE CLASS

PROBLEM SET 4
PART A [130 Marks]
Problem 1 [30 Marks]
𝟏
a. Show that the multiplier of Ghana is 𝟏−𝒃+𝒃𝒕 for autonomous expenditures when:

where T is not only exogenous or a lump sum tax or a specific tax only but includes a tax rate (t)
of national income (Y), and all other variables are defined as discussed in class. [5 Marks]
b. What is the multiplier for autonomous tax? How different is it from the multiplier for
autonomous expenditures in part a? [2 Marks]
d. Suppose the government’s “BIG PUSH” seeks to spend on roads but can only do that by raising
the exact spending amount through autonomous taxes. What is the balanced budget multiplier and
total effect on Y? [3 Marks]
e. Given the following (all amounts in millions of cedis):
𝛼 = 50
𝐼0 = 70
𝐺0 = 80
𝑁𝑋0 = 0
b = 0.8,
𝑇0 = 30
t = 20%
i. Find the autonomous expenditure and tax multipliers. Interpret them. [3 Marks]
ii. Find the equilibrium Y. [2 Marks]
iii. If government increases the tax rate to 30%, find the new autonomous expenditure
and tax multipliers. [2 Marks]
iv. Find the new equilibrium Y. Explain why the change in values of equilibrium Y.
[2 Marks]
 v. Holding the tax rate at 20%, what is the value of the balanced budget multiplier and
total effect on Y if 𝐺0 and 𝑇0 increase by 50 million cedis in the “BIG PUSH”? Why
isn’t the total effect zero? [3 Marks]
f. In addition to the information provided in part e), suppose t = 0%.
i. Find the autonomous expenditure and tax multipliers. Interpret them. [3 Marks]
ii. Find the equilibrium Y. [2 Marks]
iii. Holding the tax rate at 20%, what is the value of the balanced budget multiplier and total
effect on Y if 𝐺0 and 𝑇0 increase by 50 million cedis in the “BIG PUSH”? Why isn’t the
total effect zero? [3 Marks]

Problem 2 [20 Marks]

Suppose:
C = 20 + 0.65 𝑌 𝑑
I = 15, G = 80, T = 20
where all other variables are defined as discussed in class
a. Solve for the equilibrium income. [3 Marks]
b. What is the autonomous expenditure multiplier? Interpret it. [2 Marks]
c. What is the autonomous tax multiplier? Interpret it. [2 Marks]
d. If autonomous consumption increases to 21, what will be the new equilibrium output?
[2 Marks]
e. If both autonomous consumption and investment increase by 1 and 5 respectively, what
will be the new equilibrium output? [3 Marks]
f. What if taxes reduce to 16? What will be the new equilibrium output? [2 Marks]
g. If both autonomous taxes and government expenditure increase by 1 cedi and 5 cedis
respectively, what will be the new equilibrium output? [3 Marks]
h. Suppose government wants to increase equilibrium output to 600, how much of
expenditure should it incur to achieve that? [3 Marks]
Problem 3 [20 Marks]
Consider that the Ghanaian economy is closed characterised by the following:
AE = C + I + G
C = 100 + 0.6Yd
Yd = disposal income
T= GHC 75
I = GHC 300
G = GHC 600
i. What are the percentages of additional income consumed and saved for this economy?
[2 Marks]
ii. Based on the above information, determine the economy equilibrium output or income
level? [3 Marks]
iii. At this equilibrium, what proportion of the income is consumed by households. What is
another name for this proportion? [2 Marks]
iv. Find the value of the autonomous expenditure and tax multipliers. [2 Marks]
v. Suppose the potential output level (potential GDP) for Ghana is GHC 2000, what type of
gap is the economy facing? [1 Mark]
vi. Present the gap in a well labelled diagram. [3 Marks]
vii. Provide a fiscal policy recommendation that could close the gap. [1 Mark]
viii. Using government expenditure, how much should the government spend to close the
gap? [2 Marks]
ix. Using taxes, what is the required change in taxes that could close the gap? [2 Marks]
x. Which of the policy direction in (vii) and (viii) above is easy to implement and why?
[2 Marks]
Problem 4 [20 Marks]
a. Distinguish between autonomous consumption and induced consumption. [2 Marks]
b. Assume the Ghanaian economy is closed (thus where there is no export and imports) with the
information below.
𝐶= 400 + 0.8Yd
Where Yd = (𝑌− 𝑇)
𝐼= 150
𝐺= 250
𝑇= 200
a. Explain the concepts of marginal propensity to consume (MPC) and marginal propensity to
save (MPS). [3 Marks]
b. What is the MPC and MPS for this economy? [2 Marks]
c. What is the autonomous spending multiplier for this economy? [2 Marks]
d. What is the tax multiplier for this economy? [2 Marks]
e. What is the equilibrium level of income for this economy? [3 Marks]
f. Suppose that the full employment level of output for this economy is 2000. What sort of output
gap is Ghana facing? [1 Mark]
g. Present the gap in a well labelled diagram. [3 Marks]
h. What kind of policy can the government use to close this kind of gap? Quantify the policy.
[2 Marks]
Problem 5 [15 Marks]
a. Distinguish between the following:
i. Autonomous spending and tax multipliers. [2 Marks]
ii. Average propensity to consume and save. [2 Marks]
iii. Contractionary and expansionary fiscal policies. [2 Marks]
b. You are the finance minister preparing to read the budget to parliament. As part of the policies
in your budget, you outline the following the policy measures in the table below. Fill in the table
to capture the policy measures, type of policy measure (expansionary or contractionary), and the
benefit or reason for such policy. [9 Marks]

Policy Measure Type Benefit/Reason

Abolition of E-Levy, Betting Tax

GH₵13.85 billion investment in
infrastructure (Big-Push)
Increased spending on health, education,
and agriculture

Reduction in overall government spending

Manufacturing subsidies or tax credits

Building schools, hospitals

Reducing deficit to 3.1% of GDP

Renegotiation and management of public
debt
Improving compliance and expanding the
tax base

Reducing pensions or welfare benefits

Problem 6 [25 Marks]

a. i. What are automatic stabilizers? Give an example. [3 Marks]

ii. Explain the term “crowding out”. [2 Marks]
iii. The percentage of income spent on savings is called……………? [1 Mark]

b. Assume that following relationships hold in the Ghanaian economy:

𝐶= 100 + 0.7(𝑌− 𝑇)
𝐼= 300
𝐺= ?
𝑇= 75
Ye = 3158.33
i. What is the MPC and MPS for this economy? [2 Marks]
ii. What are the autonomous spending and tax multipliers for this economy? Interpret
them. [3 Marks]

iii. How much should government spend in order to attain the equilibrium income above?
[3 Marks]
iv. Suppose that the full employment level of output for this economy is 2658.33. What
sort of output gap is Ghana facing? [1 Mark]
v. Provide two fiscal policy recommendation that could close the gap. [2 Marks]
vi. Given the government expenditure value in part (iii), and it wants to reach the full
employment level. By how much and in what direction should its spending change to
close the gap? [2 Marks]
vii. Suppose government wants to use taxes, then what should be the change in taxes to
close the gap? [2 Marks]
viii. Suppose government spending and taxes increases by 100, what would be the change in
equilibrium income? [3 Marks]
ix. Following from (vii) what is the new equilibrium income if the old one was still 3158.33
for this economy? [ 1 Mark]
 PART 2 [15 Marks]
Problem 1
In an economy with:
▪ Marginal Propensity to Consume (b) = 0.6
▪ Autonomous expenditures (A) = 200
▪ Autonomous taxes (T0) = 40
What is the equilibrium income (Y)?
A. 300
B. 400
C. 500
D. 600

Problem 2
Consider the equation: AE = C + I + G + XM. Which of the following statements correctly
describes this sum?
A) This summation tells us total desired expenditures on domestically produced output.
B) It is a summation of actual expenditures and is equivalent to GDP.
C) This summation of planned expenditures is equal to actual nominal GDP.
D) It is a summation of planned expenditures and is always equal to real GDP.
E) It is a summation of the desired expenditures of domestic households, firms and government.

Problem 3
In each of the four expenditure categories, national income accounts measure ________
expenditures, while the theoretical model of the economy deals with ________ expenditures.
A) actual; autonomous.
B) desired; actual.
C) induced; exogenous.
D) endogenous; exogenous.
E) actual; desired.
Problem 4
Undesired or unplanned inventory decumulation is likely to occur when
A) consumption exceeds investment.
B) investment exceeds consumption.
C) autonomous expenditure exceeds induced expenditure.
D) desired aggregate expenditure exceeds actual aggregate expenditure.
E) actual aggregate expenditure exceeds desired aggregate expenditure.

Problem 5
Undesired or unplanned inventory accumulation is likely to occur when
A) consumption exceeds investment.
B) investment exceeds consumption.
C) autonomous expenditure exceeds induced expenditure.
D) desired aggregate expenditure exceeds actual aggregate expenditure.
E) actual aggregate expenditure exceeds desired aggregate expenditure.

Problem 6
For firms or individual households, desired expenditure is
A) always greater than planned expenditure.
B) always greater than actual expenditure.
C) not relevant because human wants are unlimited.
D) what they plan on spending, given the resources at their command.
E) not a useful concept because it cannot be measured.

Problem 7
In the simple macroeconomic model, "autonomous expenditures" are
A) dependent on national income.
B) not dependent on national income.
C) induced expenditures.
D) those which are constant.
E) non-domestic expenditures.

Problem 8
With respect to consumption, investment, government purchases and net exports, the national-
income and product accounts measure
A) desired expenditures in each of the categories.
B) both actual and desired expenditures, since actual expenditure must equal desired expenditure
in each category.
C) the flow of saving at any income.
D) neither actual nor desired expenditures.
E) actual expenditures in each of the categories.

Problem 9
Consider the consumption function in a simple macro model with no taxes. At the level of
national income where APC = 1, the nation's households are
A) consuming all of their disposable income.
B) allocating their income equally between saving and consumption.
C) saving a portion of their income, but saving is less than consumption.
D) spending more than their current income.
E) saving all of their disposable income.

Problem 10
On a graph of an aggregate expenditure function, the 45-degree line represents:
A) combinations of desired aggregate expenditure and actual national income where
consumption expenditure equals saving.
B) the equilibrium condition that desired aggregate expenditure equals actual national income.
C) levels of actual national income where desired AE is equal to the sum of desired consumption
and desired investment.
D) levels of actual national income that occur when autonomous expenditure is increasing at a
constant (linear) rate.
E) levels of actual national income where desired saving is equal to zero.

Problem 11
Consider the simplest macro model with demand-determined output, where AE = C + I. Suppose
that actual national income is $900 billion and desired consumption plus desired investment is
$920 billion. We can expect that
A) firms will see an increase in inventories, and they will respond by decreasing output, thereby
decreasing actual national income.
B) firms will decrease autonomous investment by $20 billion until equilibrium national income
is reached at $900 billion.
C) firms will increase autonomous investment by $20 billion until equilibrium national income is
reached at $920 billion.
D) firms will see a decrease in inventories, and they will respond by increasing output, thereby
increasing actual national income.
E) actual national income will decrease until equilibrium national income is reached at $900
billion.

Problem 12
Suppose disposable income for an entire economy rises from $400 billion to $440 billion and
desired consumption rises from $350 billion to $380 billion. We can conclude that the marginal
propensity to consume for this economy is
A) 0.65.
B) 0.75.
C) 0.80.
D) 0.90.
E) 1.33.
Problem 13
Suppose disposable income for an entire economy rises from $400 billion to $440 billion and
desired saving rises from $50 billion to $60 billion. We can conclude that the marginal
propensity to save for this economy is
A) 0.10.
B) 0.20.
C) 0.25.
D) 0.75.
E) 1.0

Problem 14
Other things being equal, higher real interest rates tend to
A) increase every component of desired investment expenditure.
B) reduce every component of desired investment expenditure.
C) reduce every component of desired investment expenditure except residential housing.
D) reduce every component of desired investment expenditure except inventories.
E) reduce every component of desired investment expenditure except plant and equipment.

Problem 15
Consider the simplest macroeconomic model, with a closed economy and no government. If we
assume that desired investment is autonomous with respect to national income, then the investment
function (which graphs desired investment against actual national income) will be
A) negatively sloped.
B) positively sloped and relatively steep.
C) positively sloped and relatively flat.
D) vertical.
E) horizontal.