The change in output for each additional unit of income is known as the marginal product of labor. Hence, Option A is correct.
What is the meaning of marginal product?The marginal product or marginal physical efficiency of an input factor of production is the change in output that results from employing one more unit of a particular input.
For example, the change in output when a firm's labour is increased from five to six units, assuming that the quantities of other inputs are kept constant.
The slope of the total product curve, which represents the production function plotted against labor usage for a certain amount of capital input use, is the marginal product of labor.
The real wage and the marginal product of labor are identical in the neoclassical theory of competitive marketplaces. The marginal product of capital is equivalent to its rate of return in aggregate models of perfect competition, when one good is created and used as both a capital good and a consumer good.
Therefore, Option A is correct.
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Answer please I need help
Answer:
1st answer is 1,100
2nd answer is 1,050
Which points on the production possibilities curve show a level of production
that would be achievable only through further growth in the company?
A. Points B and C
B. Points A and C
C. Points B and D
O D. Points A and B
Answer:
Most likely d and b
Explanation:
d is the best production so it should be in one of the answers and it is only with b so therfor it should be with d and b
Answer:
points a and c
Explanation:
Assume you just deposited $1,000 into a bank CD account with one year until maturity. The interest rate on your deposit is 8% and inflation is expected to be 4% over the next year. a. How much money will you have in your bank account at the end of one year
Answer:
amount after 1 year = $1080
Explanation:
given data
deposited = $1,000
interest rate = 8% = 0.08
inflation rate = 4%
solution
we get here amount after one year with 8% of interest rate will become
amount after 1 year = deposited × [tex]( 1 + rate )^{time}[/tex] ................1
put here value
amount after 1 year = $1000 × ( 1 + 0.08)
amount after 1 year = $1080
Several years ago, Alcoa was effectively the sole seller of aluminum because the firm owned nearly all of the aluminum ore reserves in the world. This market was not perfectly competitive because this situation violated the:
Answer:
price-taking assumption.
free entry assumption.
Explanation:
A perfectly competitive market is one in which different firms compete for consumers of their products. The characteristics of the perfectly competitive market are:
- products are nearly identical
- all the firms are price takers. That is they are not able to determine price independently
- buyer knowledge of information about products is perfect and available to all
- free entry and exit to the market
- resources are perfectly mobile
In the given scenario above two of these rules are not obeyed.
Alcoa was effectively the sole seller of aluminum because the firm owned nearly all of the aluminum ore reserves in the world.
So they determine the price ( they are not price takers)
Also since they own nearly all the aluminium reserves there is no free entry for new firms
Consider the following account starting balances and transactions involving these accounts. Use T-accounts to record the starting balances and the offsetting entries for the transactions. The starting balance of Cash is $9,100 The starting balance of Inventory is $4,800 The starting balance of Retained Earnings is $24,700 1. Sell product for $30 in cash with historical cost of $24 2. Sell, deliver, and receive payment of $40 for service 3. Consume good or service and pay expense of $2 What is the final amount in Retained Earnings
Answer: $24,744
Explanation:
Final amount in retained earnings;
= Starting balance + Net income
Net income:
= Sales - Cost of good sold + Service revenue - Expense
= 30 - 24 + 40 - 2
= $44
Final amount in retained earnings:
= 24,700 + 44
= $24,744
Company A has 800 employees, and it decides to grant each of the employees 50 share options as part of its new rewards plan. The options are exercisable over 5 years and subject to a 3-year service condition. The fair value of each option at the grant date is $16. The company estimates that 80% of its employees will meet the service condition required for receiving the options. Calculate the total share-based payment expense for Company A assuming that 80% of the employees actually meet the service condition.
Review Later
$853,333
$170,667
$512,000
$341,333
Answer:
$512,000
Explanation:
Because the service condition is 3 years, the total share-based payment expense will be recognized over 3 years. The expense recognized in each year is calculated as:
Year 1 = 50 options x 800 employees x 80% x $16 x 1/3 years = $170,667
Year 2 = 50 options x 800 employees x 80% x $16 x 2/3 years - $170,667 = $170,667
Year 3 = 50 options x 800 employees x 80% x $16 x 3/3 years - $170,667 x 2 = $170,667
Total share-based payment expense = $170,667 + $170,667 + $170,667 = $512,000
In a job order costing system: Select one: A. Each department accumulates costs and then allocates them to all units produced. B. The processes involved in manufacturing products are essentially identical for all products. C. Production generally happens in a "continual flow". D. The end products are relatively homogenous. E. None of the above
Answer:
The correct answer is the option E: None of the above.
Explanation:
To begin with, in the field of business management and accounting the concept known as "Job Order Costing" refers specifically to the system that the managers of a company use in order to establish a better organization when it comes to terms of costing and due to the fact that they tend to be organizations that elaborate products that differ from each other regarding the materials they need to be produced properly. So therefore that this method focuses in the fact the company needs to calculate every cost the best possible for every different product that needs different tasks and jobs.
Hart Corporation owns machinery with a book value of $600,000. It is estimated that the machinery will generate future cash flows of $570,000. The machinery has a fair value of $420,000. Hart should recognize a loss on impairment of
Answer: $180,000
Explanation:
An asset is said to be impaired when the future cashflows that it will bring in are less than the book value and when the fair value of the asset is also less than the book value.
Impairment loss = Book value of asset - Fair value
= 600,000 - 420,000
= $180,000
One of the reasons why cash flow analysis is popular is because ________.
a) cash flows are more subjective than net income
b) cash flows are hard to understand
c) it is easy to manipulate, or spin the cash flows
d) it is difficult to manipulate, or spin the cash flows
e) none of these
Answer:
D
Explanation:
Cash flow is the flow of cash and cash equivalent in and and out of a business.
there are three types of cash flows:
1. Investing cash flow - It involves the use of long term cash. it is the cash flow generated from the purchase and sale of fixed asset e.g. Sale of plant assets.
2. operating cash flow - it shows the net amount of cash generated from a company's normal business operation
3. financing cash flow - it shows the net amount of funding a company receives over a given period e.g. issuance of common stock
Reasons why cash flow analysis is popular
Cash flows are less subject to manipulation when compared with net incomeCash flow in often positive when net income is negative or zeroRoanoke Company produces chocolate bars. The primary materials used in producing chocolate bars are cocoa, sugar, and milk. The standard costs for a batch of chocolate (1,827 bars) are as follows: Ingredient Quantity Price Cocoa 600 lbs. $0.40 per lb. Sugar 180 lbs. $0.60 per lb. Milk 150 gal. $1.70 per gal. Determine the standard direct materials cost per bar of chocolate. If required, round to the nearest cent.
Answer:
Roanoke Company
The standard direct materials cost per bar of chocolate is:
= $0.33.
Explanation:
a) Data and Calculations:
A batch of chocolate = 1,827 bars
Standard Costs for a batch:
Ingredient Quantity Price
Cocoa 600 lbs. $0.40 per lb.
Sugar 180 lbs. $0.60 per lb.
Milk 150 gal. $1.70 per gal.
Ingredient Quantity Price Total Cost
Cocoa 600 lbs. $0.40 per lb. $240.00 (600 * $0.40)
Sugar 180 lbs. $0.60 per lb. 108.00 (180 * $0.60)
Milk 150 gal. $1.70 per gal. 255.00 (150 * $1.70)
Total cost of batch of chocolate = $603.00
Cost per bar = $0.33 ($603.00/1,827)
TRUE OR FALSE ? WHY ? Plesae help me
1. The goods that the enterprise wants or intends to add to its capital stock are inventories.
2. In a simple economy, the gross national product is the same as the gross domestic product and the national income.
3. The central bank cannot go bankrupt because it is always able to repay depositors' withdrawals by printing new notes at a faster rate.
4. Inflation is a phenomenon of money, so just reducing the money supply will reduce inflation.
Answer:
1. True
2. False
3. True
4. True
Explanation:
1. in accounting the stock is treated as inventories
2. because the GNP considers the output of a country's citizens regardless of where that economic activity occurred. GNP expresses the total value of all goods (products and services) produced by the residents of a particular country, regardless of national borders, thus including their foreign assets. while GDP considers the activity within a national economy regardless of the residency of the producers.
3. Financing for central banks is completely different to that of commercial banks and private corporations because their commitments – banknotes and commercial banks’ overnight deposits held at central banks are the only authorized forms of payment in their jurisdiction. Central banks have a monopoly on creating money,
4. inflation is a monetary phenomenon means to control the supply of money
Given the following information, prepare an income statement for the Dental Drilling Company.
Selling and administrative expense $90,000
Depreciation expense 75,000
Sales 621,000
Interest expense 46,000
Cost of goods sold 231,000
Taxes 50,000
Answer:
Results are below.
Explanation:
Giving the following information:
Selling and administrative expense $90,000
Depreciation expense 75,000
Sales 621,000
Interest expense 46,000
Cost of goods sold 231,000
Taxes 50,000
With the information listed above, we need to make an income statement following the structure below:
Sales= 621,000
COGS= (231,000)
Gross profit= 390,000
Selling and administrative expense= (90,000)
Depreciation expense= (75,000)
Interest expense= (46,000)
Eearning before taxes (EBT)= 179,000
Taxes= (50,000)
Net operating income= 129,000
On November​ 1, Equipment had a beginning balance in the Office Supplies account of . During the​ month, purchased of office supplies. At November​ 30, Equipment had of office supplies on hand.
Required:
The Office Supplies​ T-account has been opened for you. Post the beginning balance and purchase of office supplies. ​
Answer:
T-account entry:
Office Supplies
Dr Cr
Nov. 1 Balance b/d $1,700
Nov. Purchases $2,000
Binford Corporation's contribution margin ratio is 58%, and its fixed monthly expenses are $94,000. Assume that the company's sales for May are expected to be $178,000.
Required:
Estimate the company's net operating income for May, assuming that the fixed monthly expenses do not change.
Answer:
$9,240
Explanation:
Calculation to Estimate the company's net operating income for May, assuming that the fixed monthly expenses do not change
Using this formula
Net operating income = (CM ratio × Sales) - Fixed expenses
Let plug in the formula
Net operating income= (0.58× $178,000) - $94,000
Net operating income= $103,240 - $94,000
Net operating income= $9,240
Therefore the company's net operating income for May, assuming that the fixed monthly expenses do not change is $9,240
Presented below are definitions of certain terms. Select the appropriate term from the dropdown list. Definitions 1. Quantity of input required if a production process is 100% efficient. 2. Managing by focusing on large differences from standard costs. 3. Record that accumulates standard cost information. 4. Preset cost for delivering a product or service under normal conditions. a. Standard cost card b. Management by exception c. Standard cost d. Ideal standard
Answer:
1. Ideal standard
2. Management by exception
3. Standard cost card
4. Standard cost
Explanation:
Costing is the measurement of the cost of production of goods and services by assessing the fixed costs and variable costs associated with each step of production.
In Financial accounting, a direct cost can be defined as any expense which can easily be connected to a specific cost object such as a department, project or product. Some examples of direct costs are cost of raw materials, machineries or equipments.
On the other hand, any cost associated with the running, operations and maintenance of a company refers to indirect costs. Some examples of indirect costs are utility bill, office accessories, diesel etc.
1. Ideal standard: quantity of input required if a production process is 100% efficient.
2. Management by exception: Managing by focusing on large differences from standard costs.
3. Standard cost card: record that accumulates standard cost information.
4. Standard cost: preset cost for delivering a product or service under normal conditions.
On December 31, Ott Co. had investments in equity securities as follows:
Cost Fair value Lower of cost or fair value
Mann Co. $10,000 $8,000 $8,000
Kemo, Inc. $9,000 $11,000 $9,000
Fenn Corp. $11,000 $9,000 $9,000
$30,000 $28,000 $26,000
The Mann investment is classified as held-to-maturity, while the remaining securities are classified as available-for-sale. Ott does not elect the fair value option for reporting financial assets. Ott's December 31, Year 1, balance sheet should report total marketable debt securities as:_____.
a. $29,000.
b. $26,000.
c. $30,000.
d. $28,000.
Answer:
c. $30,000.
Explanation:
The calculation of the total marketable debt securities reported in the balance sheet is given below;
= Mann Co cost + Kemo Co fair value + Fenn corp fair value
= $10,000 + $11,000 + $9,000
= $30,000
Hence, the total marketable debt securities reported in the balance sheet is $30,000
Therefore the option c is correct
The Northern Division of Southwest Clothing Inc. forecasts (has budgeted) the following income statement for the upcoming year: Sales $850,000 Variable Costs (520,000) Contribution Margin 330,000 Fixed Costs (480,000) Operating loss ($150,000) Unfortunately, every other division in the company is also expecting an operating loss for the coming year. The company's management is considering shutting down the Northern Division and has determined that $350,000 of the $480,000 Fixed Costs shown would be eliminated if that happens. If the Northern Division is shutdown, what is the change (impact) in Southwest's forecast operating results
Answer:
Operating loss will decrease by $20,000
Explanation:
Operating loss from normal business activities and if the division is not shut down = $150,000.
Operating loss if division is shut down by the management = $130,000 ($480,000 - $350,000) because the management has determined that $350,000 of the $480,000 Fixed Costs shown would be eliminated if that happens.
So, if the Northern Division is shutdown, the Operating loss will decrease by $20,000 (From $150,000 to $130,000)
Using the high-low method, the fixed cost is calculated ______. Multiple select question. by adding the total cost to the variable cost using either the high or low level of activity before the variable cost is calculated after the variable cost per unit is calculated
Answer:
is calculated after the variable cost per unit is calculated
Explanation:
Costing is the measurement of the cost of production of goods and services by assessing the fixed costs and variable costs associated with each step of production.
In Financial accounting, fixed cost can be defined as predetermined expenses in a business that remain constant for a specific period of time regardless of the quantity of production or level of outputs. Some examples of fixed costs in business are loan payments, employee salary, depreciation, rent, insurance, lease, utilities, etc.
On the other hand, variable costs can be defined as expenses that are not constant and as such usually change directly and are proportional to various changes in business activities. Some examples of variable costs are taxes, direct labor, sales commissions, raw materials, operational expenses, etc.
Using the high-low method, the fixed cost can only be calculated after the variable cost (VC) per unit is calculated through the application of either the low or high level of activity.
Using the high-low method, the fixed cost is calculated : After the variable cost per unit is calculated.
What is costing?Costing refers to the measurement of the cost of production of goods and services whereby, the fixed costs and variable costs associated with production are examined.
Fixed costs are costs that do not vary with the level of output, while variable cost are cost that varies with the activity level.
Using the high-low method, the fixed cost can only be calculated after the variable cost (VC) per unit is calculated through the application of either the low or high level of activity.
Hence, using the high-low method, the fixed cost is calculated after the variable cost per unit is calculated.
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The following standards for variable manufacturing overhead have been established for a company that makes only one product: The following data pertain to operations for the last month: What was the variable overhead efficiency/quantity variance for the month? Group of answer choices
Answer:
$17,871 U
Explanation:
Note The missing word have been attached as picture below
Variable overhead efficiency variance = (Standard hour - Actual hour) * Standard rate
Variable overhead efficiency variance = (1,480 hours - 2,775 hours) * $13.80
Variable overhead efficiency variance = 1,295 hours * $13.80
Variable overhead efficiency variance = $17,871 U
Kermit plans to open a boutique. The initial investment is $10,000. He has to spend $1,500 in annual operations and maintenance. The boutique generates $3,000 in revenues every year. Kermit uses a 10 year planning horizon and a MARR of 12%. The correctly calculated Rate of Return for this project is ________________%.
Answer:
8.14
Explanation:
The Rate of Return is 8.14 from my calculations which you can find in the attached file.
Now since the Rate of return is 8.14. Which is less than MARR of 12%, it shows that investment is not good.
Year Initial Annual Maintenance Annual Revenue Total Cash Flow
0 -$10,000 -$10,000
1 -$1,500 $3,000 $1,500
2 -$1,500 $3,000 $1,500
3 -$1,500 $3,000 $1,500
4 -$1,500 $3,000 $1,500
5 -$1,500 $3,000 $1,500
6 -$1,500 $3,000 $1,500
7 -$1,500 $3,000 $1,500
8 -$1,500 $3,000 $1,500
9 -$1,500 $3,000 $1,500
10 -$1,500 $3,000 $1,500
Internal Rate of Return 8.1442% [IRR() in excel]
The rate of return is 8.1442 which is less than MARR of 12% investment is not worth it
(Perpetuities) What is the present value of the following? a. A $ perpetuity discounted back to the present at percent b. A $ perpetuity discounted back to the present at percent c. A $ perpetuity discounted back to the present at percent d. A $ perpetuity discounted back to the present at percent
Answer:
The present value of a perpetuity is calculated as follows:
= Cashflow / Discount rate
a. Present value of $400 perpetuity discounted at 15%
= 400 / 0.15
= $2,666.67
b. Present value of $3,000 perpetuity discounted at 19%
= 3,000 / 0.19
= $15,789.47
c. Present value of $110 perpetuity discounted at 16%
= 110 / 16%
= $687.50
d. Present value of $60 perpetuity discounted at 12%
= 60 / 0.12
= $500
Green Corporation reported pretax book income of $1,040,000. During the current year, the net reserve for warranties increased by $52,000. In addition, tax depreciation exceeded book depreciation by $110,000. Finally, Green subtracted a dividends received deduction of $26,000 in computing its current-year taxable income. Green's cash tax rate is
Answer:
19.30%
Explanation:
Calculation to determine what Green's cash tax rate is
First step is to calculate the Taxes payable using this formula
Taxes payable = (Pretax book income + provision for warranties - depreciation in excess of books - dividends received deduction) x 21%
Let plug in the formula
Taxes payable= ($1,040,000 + $52,000 - $110,000 - $26,000) x 21%
Taxes payable=$956,000×21%
Taxes payable= $200,760
Now let determine the Cash tax rate using this formula
Cash tax rate = Taxes payable / Pretax book income
Let Plug in the formula
Cash tax rate = $200,760 / $1,040,000
Cash tax rate = .1930
Cash tax rate=19.30%
Therefore Green's cash tax rate is 19.30%
The lender charges you $9 per week for each $100 you borrow.
Assuming you borrow $300 for 2 weeks, what APR will you be paying?
Answer:
i believe 2,107.5711%
Explanation:
Bearington Enterprises uses an activity-based costing system to assign costs in its auto-parts division.
Activity Est. Indirect Activity Costs Allocation Base Cost Allocation Rate
Materials $60,000 Material moves $5.00/move
Assembling $175,000 Direct labor hours $5.00/dir. labor hour
Packaging $70,000 # of finished units $2.50/finished unit
The following units were produced in December with the following information:
Part # # Produced Materials Costs # Moves Dir. Labor Hrs.
Part 001 1,350 $2,500 100 500
Part 002 5,500 $5,000 400 200
Part 003 4,050 $7,000 2,800 1,550
Total manufacturing costs for Part 003 are : _______
Answer:
the Total manufacturing costs for Part 003 is $38,875
Explanation:
The computation of the Total manufacturing costs for Part 003 is given below:
= material cost + indirect cost
= $7000 + (2,800 × $5) + (1550 × $5) + (4,050 × $2.50)
= $7,000 + $14,000 + $7,750 + $10,125
= $38,875
Hence, the Total manufacturing costs for Part 003 is $38,875
The same should be considered and relevant
The January 1, Year 1 trial balance for the Tyrell Company is found on the trial balance tab. The beginning balances are assumed. Tyrell Co. entered into the following transactions involving short-term liabilities. (Use 360 days a year.) Year 1.
Apr. 20 Purchased $40,250 of merchandise on credit from Locust, terms n/30.
May 19 Replaced the April 20 account payable to Locust with a 90-day, 10%, $35,000 note payable along with paying $5,250 in cash.
July 8 Borrowed $80,000 cash from NBR Bank by signing a 120-day, 9%, $80,000 note payable.
Aug. 17 Paid the amount due on the note to Locust at the maturity date.
Nov. 5 Paid the amount due on the note to NBR Bank at the maturity date.
Nov. 28 Borrowed $42,000 cash from Fargo Bank by signing a 60-day, 8%, $42,000 note payable.
Dec. 31 Recorded an adjusting entry for accrued interest on the note to Fargo Bank. Year 2
Jan. 27 Paid the amount due on the note to Fargo Bank at the maturity date.
Required:
Prepare the 2016 journal entries related to the notes and accounts payable of Tyrell Co.
Answer:
Tyrell Company
Journal Entries:
2016
Apr. 20 Debit Inventory $40,250
Credit Accounts Payable (Locust) $40,250
To record the purchase of inventory on account, terms n/30.
May 19 Debit Accounts Payable (Locust) $40,250
Credit 10% Note Payable (Locust) $35,000
Credit Cash $5,250
To record the issuance of note payable for 90 days and cash payment.
July 8 Debit Cash $80,000
Credit 9% Note Payable (BR Bank) $80,000
To record the borrowing on note payable for a 120-day period.
Aug. 17 Debit 10% Note Payable (Locust) $35,000
Debit Interest Expense $875
Credit Cash $35,875
To record payment on account, including interest calculated as follows: ($35,000 + $35,000 * 10% * 90/360)
Nov. 5 Debit 9% Note Payable (BR Bank) $80,000
Debit Interest Expense $2,400
Credit Cash $82,400
To record payment on account, including interest calculated as follows:
($80,000 + $80,000 * 9% * 120/360)
Nov. 28 Debit Cash $42,000
Credit 8% Notes Payable (Fargo Bank) $42,000
To record the borrowing on note payable for a 60-day
Dec. 31 Debit Interest Expense $308
Credit Interest Payable $308
To accrue interest ($42,000 * 8% * 33/360).
Explanation:
a) Data and Analysis:
2016
Apr. 20 Inventory $40,250 Accounts Payable (Locust) $40,250 terms n/30.
May 19 Accounts Payable (Locust) $40,250 10% Note Payable (Locust) $35,000 Cash $5,250
July 8 Cash $80,000 9% Note Payable (BR Bank) $80,000 a 120-day
Aug. 17 10% Note Payable (Locust) $35,000 Interest Expense $875 Cash $35,875 ($35,000 + $35,000 * 10% * 90/360)
Nov. 5 9% Note Payable (BR Bank) $80,000 Interest Expense $2,400 Cash $82,400 ($80,000 + $80,000 * 9% * 120/360)
Nov. 28 Cash $42,000 8% Notes Payable (Fargo Bank) $42,000 a 60-day
Dec. 31 Interest Expense $308 ($42,000 * 8% * 33/360) Interest Payable $308
2017
Jan. 27 8% Notes Payable (Fargo Bank) $42,000 Interest Payable $308 Interest Expense $252 Cash $42,560
A company is trying to decide between two independent projects. Each project has a cost of capital of 12%. Project A has an IRR of 11.4%. Project B has an IRR of 11.1%. Which project should the company choose if the goal of the firm is to maximize shareholder wealth
Answer:
Neither project should be chosen
Explanation:
Given that
Each project cost of capital is 12%
The IRR of project A is 11.4%
And, the IRR of project B is 11.1%
As we can see that the cost of capital of each project with their internal rate of return so no project should be selected
Therefore the above statement represent an answer
The same should be relevant
If you want to increase your purchasing power by investing in a bond, then: _____________
a. you must purchase that bond at a discount.
b. the nominal rate of return on that bond must be less than the inflation rate.
c. you should purchase a premium bond.
d. the nominal rate of return must equal or exceed the rate of inflation.
e. you must earn a positive real rate of return on that bond.
Answer:
b. the nominal rate of return on that bond must be less than the inflation rate
Inventory balances for the Jameson Company in October 2018 are as follows:
October 1, 2018 October 31, 2018
Raw materials $27,000 $21,000
Work in process 48,000 37,200
Finished goods 108,000 90,000
During October, purchases of direct materials were $36,000. Direct labor and factory overhead costs were $60,000 and $84,000, respectively. What are the total manufacturing costs added to production in the period?
Answer:
Total manufacturing costs added to production $186,000
Explanation:
The computation of the total manufacturing cost to be added is given below:
Raw materials,beginning $27,000
Add: Purchases of direct materials $36,000
Less: Raw materials,ending -$21,000
Direct materials used $42,000
Direct labor $60,000
Factory overhead costs $84,000
Total manufacturing costs added to production $186,000
The US imposes a tariff on the import of a computer chip that is also produced at higher cost by a US firm. The US firm is an important supplier to the US Navy. The US is probably using the _____ argument for protectionism.
Answer: d. Strategic industry
Explanation:
Sometimes countries will introduce a tariff in order to reduce the importation of a good or service that might be ruled as important for the security of the country and so would need to be produced by a company in the country. Goods related to national defense are especially more likely to fall under such tariffs.
The industry is therefore said to be strategic. This is what happened in the scenario above because the chip is used by the U.S. Navy which makes it national defense related.
The Japanese economy has been experiencing slow growth. As a result the Prime Minister, who thinks John Maynard Keynes was the greatest economist ever, has decided to increase government spending. As head of the economic council the Prime Minister asks you to determine the size of the increase needed to bring the economy to full employment.
Assume there is a GDP gap of 1 billion yen and the marginal propensity to consume (MPC) is .60. What advise do you give the Prime Minister?
a. The recessionary gap is equal to 625 million yen.
b. The inflationary gap is equal to 1 billion yen divided by 2.5 or 0.4 billion yen.
c. The recessionary gap is equal to 1 billion yen divided by 2.5 or 0.4 billion yen.
d. The inflationary gap is equal to 1 billion yen divided by 1.66 or 0.625 billion yen.
Answer:
c. The recessionary gap is equal to 1 billion yen divided by 2.5 or 0.4 billion yen.
Explanation:
The computation is shown below:
The multiplier is
= 1 ÷ (1 - MPC)
= 1 ÷ (1 - 0.60)
= 2.5
Now the increase in government expenditure for closing out the recessionary gap should be
Change in income = change in government purchase × multiplier
100 = change in government purchase × 2.5
So, the change in government purchase should be
= 100 ÷2.5
= 40
Hence, the option c is correct
