Question 1

The multiplier effect indicates that:
A)a decline in the interest rate will cause a proportionately larger increase in investment.
B)a change in aggregate expenditures will change aggregate income by a larger amount.
C)a change in aggregate expenditures will increase aggregate income by the same amount.
D)a small increase in total income will generate a large change in aggregate expenditures.

Accepted Answer

The multiplier effect states that a change in aggregate expenditures (such as government spending or investment) will have a larger impact on aggregate income. Specifically, it suggests that a change in expenditures will increase income by a multiple of the initial change. For example, if the government increases spending by $100 million, this may lead to an increase in income of $300 million through the multiplier effect. Therefore, option B is the correct answer.

Question 2

The simple multiplier is defined as:
A)1 - MPS.
B)change in GDP $\times$ initial change in spending.
C)change in GDP/initial change in spending.
D)change in GDP - initial change in spending.

Accepted Answer

The simple multiplier is the ratio of the change in GDP to the initial change in spending. Option C correctly defines it as such. Option A is incorrect as it refers to MPC (marginal propensity to consume) rather than the multiplier. Option B is an incomplete formula that does not give the ratio of the change in GDP to the initial change in spending. Option D is incorrect as it subtracts the initial change in spending from the change in GDP, which is not the definition of the multiplier.

Question 3

Assume that for the entire business sector of the economy there is $0 worth of investment projects which will yield an expected rate of return of 25 percent or more.But there are $15 worth of investments which will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and similarly an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range.Refer to the above information.If the real interest rate is 15 percent, what amount of investment will be undertaken?
A)$15
B)$30
C)$45
D)$60

Accepted Answer

With a real interest rate of 15 percent, investors will choose to invest in projects with the highest expected rate of return, up to the point where the expected rate of return equals the real interest rate. Therefore, all investments with an expected rate of return of 15 percent or more will be undertaken. This includes the $15 worth of investment projects in the 20-25 percent range and the $15 worth of investment projects in the 15-20 percent range, for a total investment of $30. No investments in the lower rate of return ranges will be undertaken, as they do not meet the minimum required return of 15 percent.

Question 4

Assume that for the entire business sector of the economy there is $0 worth of investment projects which will yield an expected rate of return of 25 percent or more.But there are $15 worth of investments which will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and similarly an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range.Refer to the above information.The expected rate of return curve:
A)shows a direct relationship between the interest rate and investment.
B)is also the investment-demand curve.
C)is indeterminate.
D)cannot be calculated without knowing the level of saving.

Accepted Answer

The expected rate of return curve is also the investment-demand curve, as it shows the different levels of investment that businesses are willing and able to make at different expected rates of return.

Question 5

If a $50 billion decrease in investment spending causes income to decline by $50 billion in the first round of the multiplier process and by $25 in the second round, the multiplier in the economy is:
A)2
B)3.33.
C)5
D)10

Accepted Answer

The answer of If a $50 billion decrease in investment...

Question 6

The multiplier is useful in determining the:
A)full-employment unemployment rate.
B)level of unintended investment or disinvestment.
C)rate of inflation.
D)change in equilibrium GDP resulting from a change in spending.

Accepted Answer

The multiplier is a measure of the relationship between a change in aggregate expenditure and the resulting change in equilibrium GDP. It helps to determine the extent to which an initial change in spending will be magnified throughout the economy. Therefore, option D is the correct answer.

Question 7

If a $200 billion increase in investment spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the multiplier in the economy is:
A)4
B)5
C)3.33.
D)2.5.

Accepted Answer

The formula for the multiplier is 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, since the increase in investment spending creates an equal increase in income in the first round, MPC is 1. Therefore, the multiplier is 1/(1-1) = infinity. However, we know that the multiplier cannot actually be infinite, so we can use the information about the second round to estimate the actual value. Since $200 billion of new income in the first round leads to $160 billion of additional spending in the second round, MPC must be 0.8 (i.e. 80% of the additional income is spent). Therefore, the multiplier is 1/(1-0.8) = 5.

Question 8

The investment-demand curve will shift to the right as the result of:
A)the availability of excess productive capacity.
B)an increase in business taxes.
C)businesses becoming more optimistic with respect to future business conditions.
D)an increase in the real interest rate.

Accepted Answer

An increase in businesses' optimism about future business conditions will lead them to be more willing to invest, shifting the investment-demand curve to the right. Excess productive capacity (A) would likely decrease the demand for investment, an increase in business taxes (B) would decrease business profitability and investment, and an increase in the real interest rate (D) would increase the cost of borrowing for businesses and decrease investment demand.

Question 9

Which of the following is the primary explanation for most of the fluctuations in output and employment over the course of the business cycle?
A)changes in net exports
B)changes in the marginal propensity to consume
C)abrupt changes in stock market prices
D)changes in investment expenditures

Accepted Answer

Changes in investment expenditures are the primary explanation for most of the fluctuations in output and employment over the course of the business cycle. This is because changes in investment expenditures can lead to changes in the level of economic activity, which can in turn impact employment and output levels.

Question 10

In contrast to the investment schedule, the consumption schedule is:
A)relatively stable.
B)relatively unstable.
C)downward sloping.
D)horizontal.

Accepted Answer

The consumption schedule is relatively stable because it is based on the household's income and is not as affected by changes in interest rates or other economic conditions as the investment schedule. In general, people tend to have stable patterns of consumption based on their income levels.

Question 11

If a $100 billion decrease in investment spending causes income to decline by $100 billion in the first round of the multiplier process and by $75 billion in the second round, income will eventually decline by:
A)$400 billion.
B)$300 billion.
C)$200 billion.
D)$500 billion.

Accepted Answer

The multiplier effect explains how an initial change in spending will set off a spending chain that is magnified in the economy. In this case, a $100 billion decrease leads to further rounds of spending decreases (e.g., $75 billion in the second round, and so on). The total impact is calculated using the formula 1/(1-MPC), where MPC is the marginal propensity to consume. Given the information, the MPC can be inferred as 0.75 (since $75 billion is 75% of the initial $100 billion). Thus, the multiplier is 1/(1-0.75) = 4. Therefore, the total decline in income will be 4 times the initial decrease, which is 4 * $100 billion = $400 billion.

Question 12

In comparison with the consumption schedule, the investment schedule is:
A)relatively stable.
B)relatively unstable.
C)upsloping.
D)independent of the price level.

Accepted Answer

The investment schedule is relatively unstable because it is influenced by many unpredictable factors such as changes in technology, interest rates, and business expectations. Unlike the consumption schedule, which is more predictable and stable, the investment schedule can fluctuate significantly over time.

Question 13

The following table illustrates the multiplier process in a private closed economy:  Refer to the above table.The marginal propensity to consume is:
A).5.
B).8.
C).75.
D).9.

Accepted Answer

The answer of The following table illustrates the multiplier process...

Question 14

The multiplier effect means that:
A)consumption is typically several times as large as saving.
B)a small change in consumption demand can cause a much larger increase in investment.
C)a small decline in the MPC can cause equilibrium GDP to rise by several times that amount.
D)a small increase in investment can cause national income to change by a larger amount.

Accepted Answer

The multiplier effect refers to the idea that a small change in one component of aggregate expenditure, such as investment, can lead to a larger change in total output or national income. This is because the initial increase in investment leads to an increase in income, which in turn leads to increased consumption and further rounds of spending and income generation throughout the economy. Therefore, a small increase in investment can cause national income to change by a larger amount.

Question 15

If a $500 billion increase in investment spending increases income by $500 billion in the first round of the multiplier process and by $450 in the second round, income will eventually increase by:
A)$2500 billion.
B)$3000 billion.
C)$4000 billion.
D)$5000 billion.

Accepted Answer

The answer of If a $500 billion increase in investment...

Question 16

The multiplier effect:
A)reduces the MPC.
B)magnifies small changes in spending into larger changes in output and income.
C)promotes stability of the general price level.
D)lessens upswings and downswings in business activity.

Accepted Answer

The multiplier effect refers to the idea that an initial change in spending (such as an increase in government spending) can have a larger impact on output and income than the initial change. This is because the increase in spending leads to an increase in income, which in turn leads to increased spending by those who received the higher income, creating a chain reaction or 'multiplier effect'. Therefore, the multiplier effect magnifies small changes in spending into larger changes in output and income, making B the correct choice.

Question 17

The following table illustrates the multiplier process in a private closed economy:  Refer to the above table.The marginal propensity to save is:
A).5.
B).25.
C).2.
D).1.

Accepted Answer

The multiplier process shows that each level of income is equal to the sum of the previous level of income and the marginal propensity to consume (MPC) times the previous level of income. In this case, we can see that at each level, the income increases by 200, which is equal to the MPC of .8 times the previous level of income. Therefore, we can solve for the MPC using the formula MPC = ΔY/Yd (where Yd is disposable income) by setting it equal to .8 and solving for MPC.

At the first level, Y = 1000 and Yd = 800, so MPC = (1200-1000)/800 = .25 which is the marginal propensity to consume. Since the MPC + MPS = 1, we know that the marginal propensity to save (MPS) is 1 - .25 = .75. Therefore, the answer is C, with a marginal propensity to save of .2.

Question 18

The practical significance of the multiplier is that it:
A)brings about an equality of planned investment and saving.
B)magnifies relatively small initial changes in spending into larger changes in GDP.
C)keeps inflation within tolerable limits.
D)helps to stabilize the economy.

Accepted Answer

The multiplier magnifies relatively small initial changes in spending into larger changes in GDP, making it an important tool for policymakers trying to stimulate or restrain economic growth.

Question 19

Assume that for the entire business sector of the economy there is $0 worth of investment projects which will yield an expected rate of return of 25 percent or more.But there are $15 worth of investments which will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and similarly an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range.Refer to the above information.If the real interest rate is 5 percent, what amount of investment will be undertaken?
A)$15
B)$30
C)$45
D)$60

Accepted Answer

Given the real interest rate is 5 percent, businesses will undertake investment projects that have an expected rate of return higher than 5 percent. This includes projects in the 20-25 percent, 15-20 percent, 10-15 percent, and 5-10 percent ranges, each worth $15. Adding these together ($15 + $15 + $15 + $15) gives $60 worth of investments.

Question 20

Assume that for the entire business sector of a private closed economy there is $0 worth of investment projects which will yield an expected rate of return of 25 percent or more.But there are $15 worth of investments which will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and similarly an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range.  Which of the lines on the above diagram represents these data?
A)A
B)B
C)C
D)D

Accepted Answer

Line B represents these data because it shows a decreasing slope as the rate of return decreases, indicating that there are more investment projects with lower rates of return. Line A shows a constant rate of return for all projects, which does not match the given scenario. Lines C and D both show increasing slopes as the rate of return decreases, which also does not match the given scenario.

Quiz 10: Part B: Basic Macroeconomic Relationships

The multiplier effect indicates that:

The simple multiplier is defined as:

If a $50 billion decrease in investment spending causes income to decline by $50 billion in the first round of the multiplier process and by $25 in the second round, the multiplier in the economy is:

The multiplier is useful in determining the:

If a $200 billion increase in investment spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the multiplier in the economy is:

The investment-demand curve will shift to the right as the result of:

Which of the following is the primary explanation for most of the fluctuations in output and employment over the course of the business cycle?

In contrast to the investment schedule, the consumption schedule is:

If a $100 billion decrease in investment spending causes income to decline by $100 billion in the first round of the multiplier process and by $75 billion in the second round, income will eventually decline by:

In comparison with the consumption schedule, the investment schedule is:

The following table illustrates the multiplier process in a private closed economy: Refer to the above table.The marginal propensity to consume is:

The multiplier effect means that:

If a $500 billion increase in investment spending increases income by $500 billion in the first round of the multiplier process and by $450 in the second round, income will eventually increase by:

The multiplier effect:

The following table illustrates the multiplier process in a private closed economy: Refer to the above table.The marginal propensity to save is:

The practical significance of the multiplier is that it: