Question 1

In an economy that has no leakages except savings, the government injects $200 of new spending into the economy, and the total spending in the economy increases by $1,000. The spending multiplier in the economy is _____, and the marginal propensity to consume is:

Accepted Answer

The spending multiplier is calculated as the ratio of the change in total spending to the change in investment spending, which is $1,000 / $200 = 5. The marginal propensity to consume (MPC) is related to the multiplier by the formula multiplier = 1 / (1 - MPC), so solving for MPC gives MPC = 1 - 1/5 = 0.8.

Question 2

In an economy that has no leakages except savings, the government injects $200 of new spending into the economy, and the total spending in the economy increases by $400. The marginal propensity to consume is:

Accepted Answer

The marginal propensity to consume (MPC) is calculated using the multiplier effect formula: Multiplier = 1 / (1 - MPC). Given that the total increase in spending is $400 from an initial government injection of $200, the multiplier is 400 / 200 = 2. Rearranging the multiplier formula to solve for MPC gives MPC = 1 - (1 / Multiplier), so MPC = 1 - (1 / 2) = 0.5.

Question 3

If the marginal propensity to consume for an economy is 0.8 and the overall income in the economy increases by $1,000, then the total saving in the economy will increase by:

Accepted Answer

The marginal propensity to consume (MPC) is 0.8, meaning that for every additional dollar of income, 80 cents will be spent and 20 cents will be saved. Therefore, if income increases by $1,000, savings will increase by $200 (20% of $1,000).

Question 4

If the overall income in an economy increases by $2,000 and consumption spending increases by $1,600 as a result, then the marginal propensity to consume for the economy is:

Accepted Answer

The marginal propensity to consume (MPC) is calculated by dividing the change in consumption by the change in income, which in this case is $1,600 / $2,000 = 0.8.

Question 5

When the total income of an economy is $1,000, the consumption spending is $800. If the total income increases to $1,500, then consumption spending increases to $1,100. The marginal propensity to consume for the economy is:

Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income. Here, the change in consumption is $1,100 - $800 = $300, and the change in income is $1,500 - $1,000 = $500. Therefore, MPC = $300 / $500 = 0.6.

Question 6

When the total income of an economy is $1,000, the consumption spending is $900. If the total income increases to $1,500, then consumption spending increases to $1,300. Assuming that the only leakage in the economy is saving, the spending multiplier for the economy is:

Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, MPC = (1300-900)/(1500-1000) = 0.8. Therefore, the spending multiplier is 1/(1-0.8) = 5.

Question 7

In an economy where the only leakage economy is saving, the marginal propensity to consume for the economy is 0.8. If government spending in the economy increases by $200, then the overall spending in the economy will _____ by:

Accepted Answer

The answer of In an economy where the only leakage...

Question 8

China injects $100 into the U.S. economy by purchasing new software, and the marginal propensity to consume for the U.S. economy is 0.5. Assuming that there are no leakages except savings, the total increase in spending in U.S. economy will be:

Accepted Answer

The total increase in spending in the U.S. economy can be calculated using the multiplier effect formula, which is 1/(1-MPC), where MPC is the marginal propensity to consume. With an MPC of 0.5, the multiplier is 1/(1-0.5) = 2. Therefore, the total increase in spending from the initial $100 injection is $100 * 2 = $200.

Question 9

If the marginal propensity to consume for an economy is 0.8, then the marginal propensity to save for the economy is _____. Assuming that there are no leakages except savings, the spending multiplier for the economy is:

Accepted Answer

The marginal propensity to save (MPS) is 1 minus the marginal propensity to consume (MPC), so if MPC is 0.8, MPS is 0.2. The spending multiplier is 1 divided by (1 - MPC), which equals 5 when MPC is 0.8.

Question 10

Which of the following does NOT represent a leakage out of the multiplier process?

Accepted Answer

Leakages in the multiplier process are withdrawals from the circular flow of income that reduce the money available for further spending, such as income tax, savings, and imports. Consumer spending, however, is an injection into the economy, not a leakage, as it directly contributes to economic activity by increasing demand for goods and services.

Question 11

The greater the _____ and the smaller the _____, the greater the multiplier effect will be in an economy.

Accepted Answer

The multiplier effect in an economy is greater when the Marginal Propensity to Consume (MPC) is high and the Marginal Propensity to Save (MPS) is low, as a higher MPC means more spending from each unit of income, amplifying the initial increase in spending through the economy.

Question 12

If the marginal propensity to save for an economy is 0.2, then the marginal propensity to consume for the economy is:

Accepted Answer

The marginal propensity to consume (MPC) is calculated as 1 minus the marginal propensity to save (MPS). Therefore, if MPS is 0.2, MPC = 1 - 0.2 = 0.8.

Question 13

If an economy has no other leakages except savings and the spending multiplier in the economy is 5, then the marginal propensity to consume for the economy is:

Accepted Answer

The spending multiplier is calculated as 1/(1-MPC) or 1/MPS. Given the multiplier is 5, we can set up the equation 1/(1-MPC) = 5. Solving for MPC gives us 0.8.

Question 14

China injects $100 into the United States by purchasing new software. If the spending multiplier for the U.S. is 5, then the total increase in spending will be:

Accepted Answer

The spending multiplier effect means that an initial injection of spending will lead to a greater total increase in spending. With a multiplier of 5, the total increase in spending is 5 times the initial amount: $100 x 5 = $500.

Question 15

When the government of a country injects $100 into an economy by purchasing new military equipment, the total spending in the economy increases by $500. The marginal propensity to save for the economy is:

Accepted Answer

The marginal propensity to save (MPS) can be calculated using the multiplier effect formula, which is 1/(1-MPC) or alternatively 1/MPS, where MPC is the marginal propensity to consume. Given that the total increase in spending is $500 from an initial government injection of $100, the multiplier is 5 (500/100). Therefore, MPS = 1/5 = 0.2.

Question 16

The marginal propensity to consume for an economy is 0.8. When the government injects $200 into the economy by purchasing military equipment, the total spending in the economy increases by $800. Given this scenario, which of the following statements is true for the economy?

Accepted Answer

The answer of The marginal propensity to consume for an...

Question 17

The marginal propensity to consume for an economy is 0.8. When the government injects $200 into the economy by purchasing military equipment, the total spending in the economy increases by $1,000. Given this scenario, which of the following statements is FALSE for the economy?

Accepted Answer

The spending multiplier is calculated as 1/(1 - marginal propensity to consume), which is 1/(1 - 0.8) = 5. This means for every dollar injected into the economy, total spending increases by $5. Since the total increase in spending is $1,000 from a $200 injection, the multiplier is exactly 5, not more than 5, making statement D false.

Question 18

Country A and Country B are identical in every respect except that Country B has a higher income tax rate than Country A. In both countries, the government increases spending by $100. In which country will the overall GDP increase more? Explain how you arrive at the answer.

Accepted Answer

The answer of Country A and Country B are identical...

Question 19

According to John Maynard Keynes, which one of the following is true about the supply decisions of firms in the short run?

Accepted Answer

Firms are able to supply any level of output at a given price level in the short run, according to Keynes.

Question 20

The real wage of workers increases when the nominal wage _____ by 5% and the overall price level _____.

Accepted Answer

The real wage increases when the nominal wage decreases by a smaller percentage than the overall price level, leading to an increase in purchasing power.

Quiz 14: Aggregate Demand and Aggregate Supply