Question 1

If DI is $275 billion and the APC is 0.8, we can conclude that saving is $55 billion.

Accepted Answer

Saving = DI x (1 - APC) = $275 billion x (1 - 0.8) = $55 billion.

Question 2

The numerical value of the multiplier will be smaller the

Accepted Answer

The multiplier is inversely related to the slope of the saving schedule. A larger slope of the saving schedule means a smaller multiplier because it indicates a higher marginal propensity to save, reducing the impact of an initial change in spending on the overall economy.

Question 3

Assume the MPC is 2/3.If investment spending increases by $2 billion, the level of GDP will increase by

Accepted Answer

The formula for the multipler effect is: 1/MPC, where MPC is the marginal propensity to consume. In this case, the MPC is 2/3, so the multiplier effect is 1/(2/3) = 1.5.

Therefore, an increase in investment spending of $2 billion would lead to a GDP increase of 2 x 1.5 = $3 billion. Choice C is the correct answer.

Question 4

The average propensity to consume is defined as income divided by consumption.

Accepted Answer

The average propensity to consume is defined as consumption divided by income, not the other way around.

Question 5

1 − MPC = MPS.

Accepted Answer

This statement is true. MPC (Marginal Propensity to Consume) is the fraction of an additional dollar of income that is spent, while MPS (Marginal Propensity to Save) is the fraction of an additional dollar of income that is saved. Since income can either be saved or spent, these two fractions must add up to 1, or 100%. Therefore, 1 − MPC = MPS, which means that if MPC is 0.6, for example, then MPS is 0.4.

Question 6

(Last Word) Art Buchwald's article "Squaring the Economic Circle" humorously describes how

Accepted Answer

The article humorously illustrates the ripple effect of one person's decision not to purchase an automobile, which leads to a chain reaction affecting various sectors and ultimately reducing incomes, including that of the original decision-maker.

Question 7

(Consider This) During the Great Recession of 2007-2009,

Accepted Answer

During the Great Recession, both real interest rates and investment spending declined due to economic uncertainty and reduced demand for borrowing and investment.

Question 8

The practical significance of the multiplier is that it

Accepted Answer

The multiplier magnifies initial changes in spending into larger changes in GDP.

Question 9

A $1 billion increase in investment will cause a

Accepted Answer

The correct answer is A because the increase in GDP due to an increase in investment is determined by the multiplier effect, which is 1/MPS (Marginal Propensity to Save). The formula reflects how initial increases in spending (such as investment) lead to larger increases in GDP.

Question 10

The actual multiplier effect in the U.S.economy is less than the multiplier effect in the text examples because

Accepted Answer

The actual multiplier effect in the U.S. economy is less than the multiplier effect in the text examples because households not only save some of the additional income, but they also use some of it to buy imported goods and pay additional taxes. This reduces the total amount of spending and lowers the size of the multiplier effect.

Question 11

The multiplier applies to

Accepted Answer

The multiplier effect applies to investment, net exports, and government spending because any increase in spending in these areas leads to an increase in overall economic activity. Decreases in spending can also have a multiplier effect as they decrease economic activity. The multiplier applies to both private and public sectors.

Question 12

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

Accepted Answer

The multiplier effect shows that the initial change in spending leads to a larger overall change in income. The first round decreases income by $100 billion, and the second round by $75 billion, indicating a marginal propensity to consume (MPC) of 0.75. The total decline in income is calculated as the initial change in spending divided by (1 - MPC), which is $100 billion / (1 - 0.75) = $400 billion.

Question 13

If the MPC is 0.70 and investment increases by $3 billion, the equilibrium GDP will

Accepted Answer

The increase in equilibrium GDP can be calculated using the multiplier effect formula, which is 1/(1-MPC). With an MPC of 0.70, the multiplier is 1/(1-0.70) = 3.33. An increase in investment by $3 billion leads to an increase in GDP by 3.33 * $3 billion = $10 billion.

Question 14

If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will increase

Accepted Answer

The answer of If the marginal propensity to save is...

Question 15

If the MPC is constant at various levels of income, then the APC must also be constant at all of those income levels.

Accepted Answer

While the Marginal Propensity to Consume (MPC) is the change in consumption for a change in income, the Average Propensity to Consume (APC) is the ratio of total consumption to total income at various levels. A constant MPC does not imply a constant APC, as the APC can change with different levels of income even if the MPC remains the same.

Question 16

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

Accepted Answer

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

Question 17

The multiplier effect indicates that

Accepted Answer

The multiplier effect refers to the idea that a change in autonomous spending (such as government spending or investment) will lead to a larger change in aggregate income. This is because the increase in spending will create additional rounds of spending as the recipients of the initial spending also spend their extra income. Therefore, a change in spending will change aggregate income by a larger amount.

Question 18

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

Accepted Answer

The answer of If a $200 billion increase in investment...

Question 19

(Consider This) During the Great Recession of 2007-2009, both real interest rates and investment spending declined.This suggests that

Accepted Answer

During the Great Recession, the decline in both real interest rates and investment spending suggests that the investment demand curve shifted inward, indicating reduced demand for investment at any given interest rate.

Question 20

(Last Word) Art Buchwald's article "Squaring the Economic Circle" is a humorous description of

Accepted Answer

The answer of (Last Word) Art Buchwald's article "Squaring the...

Quiz 30: Basic Macroeconomic Relationships