Question 1

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the saving function is S = -100 + (0.4)Y,the simple multiplier is
A)0.2.
B)1.
C)2.5.
D)5.
E)Insufficient information to know.

Accepted Answer

The simple multiplier is calculated as 1/(1 - MPC) or 1/MPS. Given the saving function S = -100 + 0.4Y, the marginal propensity to save (MPS) is 0.4. Therefore, the multiplier is 1/(1 - 0.6) = 1/0.4 = 2.5.

Question 2

Suppose aggregate output is demand-determined.If the simple multiplier is 4 and there is a $10 billion increase in planned investment spending,then equilibrium income will ________ and the marginal propensity to spend must equal ________.
A)decrease by $40 billion; 0.75
B)decrease by $10 billion; 0.25
C)increase by $40 billion; 0.25
D)increase by $40 billion; 0.75
E)increase by $10 billion; 4.0

Accepted Answer

With a simple multiplier of 4, a $10 billion increase in planned investment spending will lead to a $40 billion increase in equilibrium income (4 x $10 billion). This means that equilibrium income will increase by $40 billion. The marginal propensity to spend must equal 0.75, as the simple multiplier is calculated as 1/(1-MPS), or 4=1/(1-MPS), solving for MPS gives MPS=0.75. Therefore, the correct answer is D.

Question 3

Suppose aggregate output is demand-determined.Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million.The marginal propensity to spend is equal to
A)-0.6.
B)0.4.
C)0.6.
D)2.5.
E)-2.5.

Accepted Answer

The marginal propensity to spend (MPS) is the fraction of a change in income that is spent. We can use the multiplier formula to solve for the MPS:
Multiplier = 1 / (1 - MPS)
Given that a $20 million decrease in autonomous investment expenditure leads to a $50 million decrease in equilibrium national income, we can calculate the multiplier as follows:
Multiplier = ΔY / ΔI = -$50 million / -$20 million = 2.5
Now we can use the formula for the multiplier to solve for the MPS:
2.5 = 1 / (1 - MPS)
2.5(1 - MPS) = 1
2.5 - 2.5MPS = 1
MPS = 0.6
Therefore, the answer is C, with an MPS of 0.6.

Question 4

Consider the following information describing a closed economy with no government.Aggregate output is demand determined and the price level is constant.  TABLE 21-6 Refer to Table 21-6.The simple multiplier in this economy is
A)2.0.
B)2.5.
C)3.0.
D)4.0.
E)5.0.

Accepted Answer

The answer of Consider the following information describing a closed...

Question 5

Consider the following information concerning an economy with demand-determined output.There is no government or foreign trade.  TABLE 21-7 Refer to Table 21-7.The simple multiplier in this economy is
A)2.0.
B)2.5.
C)3.0.
D)4.0.
E)5.0.

Accepted Answer

The answer of Consider the following information concerning an economy...

Question 6

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the consumption function is C = (1/2)Y,the simple multiplier is
A)2/3.
B)1.
C)2.
D)3.
E)Insufficient information to know.

Accepted Answer

The simple multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, the MPC is 1/2. Therefore, the simple multiplier is 1/(1-1/2) = 2.

Question 7

Consider the following information for an economy with demand-determined output and a constant price level.There is no government or foreign trade.  TABLE 21-8 Refer to Table 21-8.This economy's equilibrium level of national income is
A)500.
B)600.
C)750.
D)1000.
E)1500.

Accepted Answer

The answer of Consider the following information for an economy...

Question 8

Consider a simple macro model with a constant price level and demand-determined output.If the marginal propensity to spend is 0.9,the simple multiplier is
A)0.1.
B)0.9.
C)1.0.
D)1.1.
E)10.0.

Accepted Answer

The simple multiplier is calculated as 1/(1 - marginal propensity to spend), which in this case is 1/(1 - 0.9) = 10.

Question 9

Consider the following information concerning an economy with demand-determined output.There is no government or foreign trade.  TABLE 21-7 Refer to Table 21-7.This economy's equilibrium level of national income is
A)500.
B)600.
C)750.
D)1000.
E)1500.

Accepted Answer

The answer of Consider the following information concerning an economy...

Question 10

Suppose aggregate output is demand-determined.Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million.The simple multiplier is equal to
A)-2.5.
B)-0.6.
C)0.4.
D)0.6.
E)2.5.

Accepted Answer

The simple multiplier is calculated using the formula:

Multiplier = Change in Equilibrium National Income / Initial Change in Autonomous Expenditure

In this case, the initial change in autonomous expenditure is -$20 million (a decrease in autonomous investment expenditure of $20 million). We are told that this leads to a reduction in equilibrium national income of -$50 million.

So, the multiplier is:

Multiplier = -$50 million / -$20 million = 2.5

Therefore, the answer is E) 2.5.

Question 11

Consider the following information describing a closed economy with no government.Aggregate output is demand determined and the price level is constant.  TABLE 21-6 Refer to Table 21-6.This economy's equilibrium level of national income is
A)500.
B)600.
C)750.
D)1000.
E)1500.

Accepted Answer

The answer of Consider the following information describing a closed...

Question 12

Consider the following information for an economy with demand-determined output and a constant price level.There is no government or foreign trade.  TABLE 21-8 Refer to Table 21-8.The simple multiplier in this economy is
A)2.0.
B)2.5.
C)3.0.
D)4.0.
E)5.0.

Accepted Answer

The answer of Consider the following information for an economy...

Question 13

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the saving function is S = -100 + (0.2)Y,the simple multiplier is
A)0.2.
B)1.
C)2.5.
D)5.
E)Insufficient information to know.

Accepted Answer

The simple multiplier in a closed economy with no government is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Since the saving function is S = -100 + 0.2Y, the marginal propensity to save (MPS) is 0.2. Therefore, MPC = 1 - MPS = 0.8. The multiplier is 1/(1-0.8) = 1/0.2 = 5.

Question 14

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the consumption function is C = (2/3)Y,then the simple multiplier is
A)2/3.
B)1.
C)2.
D)3.
E)Insufficient information to know.

Accepted Answer

The simple multiplier in a closed economy with no government is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Given C = (2/3)Y, the MPC is 2/3. Thus, the multiplier is 1/(1-2/3) = 1/(1/3) = 3.

Question 15

Suppose aggregate output is demand-determined.Which of the following will lead to an increase in the simple multiplier?
A)an increase in the marginal propensity to consume
B)a decrease in the marginal propensity to consume
C)a decrease in autonomous consumption
D)an increase in autonomous consumption
E)an increase in investment

Accepted Answer

The simple multiplier is calculated as 1/(1-MPC) where MPC is the marginal propensity to consume. An increase in MPC would lead to a larger denominator, therefore resulting in a smaller multiplier. Conversely, a decrease in MPC would lead to a smaller denominator, resulting in a larger multiplier. Therefore, option A would lead to an increase in the simple multiplier.

Quiz 21: The Simplest Short-Run Macro Model

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the saving function is S = -100 + (0.4) Y,the simple multiplier is

Suppose aggregate output is demand-determined.If the simple multiplier is 4 and there is a $10 billion increase in planned investment spending,then equilibrium income will and the marginal propensity to spend must equal .

Suppose aggregate output is demand-determined.Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million.The marginal propensity to spend is equal to

Consider the following information describing a closed economy with no government.Aggregate output is demand determined and the price level is constant. TABLE 21-6 Refer to Table 21-6.The simple multiplier in this economy is

Consider the following information concerning an economy with demand-determined output.There is no government or foreign trade. TABLE 21-7 Refer to Table 21-7.The simple multiplier in this economy is

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the consumption function is C = (1/2) Y,the simple multiplier is

Consider the following information for an economy with demand-determined output and a constant price level.There is no government or foreign trade. TABLE 21-8 Refer to Table 21-8.This economy's equilibrium level of national income is

Consider a simple macro model with a constant price level and demand-determined output.If the marginal propensity to spend is 0.9,the simple multiplier is

Consider the following information concerning an economy with demand-determined output.There is no government or foreign trade. TABLE 21-7 Refer to Table 21-7.This economy's equilibrium level of national income is

Suppose aggregate output is demand-determined.Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million.The simple multiplier is equal to

Consider the following information describing a closed economy with no government.Aggregate output is demand determined and the price level is constant. TABLE 21-6 Refer to Table 21-6.This economy's equilibrium level of national income is

Consider the following information for an economy with demand-determined output and a constant price level.There is no government or foreign trade. TABLE 21-8 Refer to Table 21-8.The simple multiplier in this economy is

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the saving function is S = -100 + (0.2) Y,the simple multiplier is

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the consumption function is C = (2/3) Y,then the simple multiplier is

Suppose aggregate output is demand-determined.Which of the following will lead to an increase in the simple multiplier?