Question 1

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 affected by many factors such as interest rates, business expectations, and technological advancements, which can change quickly and unpredictably. In contrast, the consumption schedule is more stable as it is driven by more consistent factors such as income and preferences.

Question 2

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

If the real interest rate is 5 percent, all investment projects with an expected rate of return greater than 5 percent will be undertaken. This includes all projects from the 5-10 percent range up to the 20-25 percent range, totaling $60 ($15 for each range).

Question 3

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 shows that the total change in income is greater than the initial change in spending. Here, the multiplier is 1/(1-MPC), where MPC is the marginal propensity to consume. Given the decline of $100 billion in the first round and $75 billion in the second, the MPC is 0.75. The multiplier is 4, so the total decline in income is $100 billion * 4 = $400 billion.

Question 4

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 effect magnifies the impact of changes in spending on GDP. For example, an initial increase in spending by businesses or consumers can lead to more spending by other businesses and consumers, creating a chain reaction that ultimately results in a larger increase in GDP than the initial spending increase. This makes the multiplier valuable in fiscal policy since relatively small changes in government spending or taxation can have a significant impact on the overall economy.

Question 5

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 optimism among businesses regarding future business conditions would lead to an increase in investment demand, shifting the investment-demand curve to the right. A decrease in optimism would have the opposite effect. Excess productive capacity (choice A) would not affect the investment-demand curve, as it pertains to the willingness of businesses to invest and expand their operations rather than their ability to do so. An increase in business taxes (choice B) would reduce the profitability of investment, reducing the investment-demand curve. An increase in the real interest rate (choice D) would also reduce investment demand, as the cost of borrowing and investing would increase.

Question 6

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 driver of fluctuations in output and employment over the business cycle. When businesses are optimistic about the future, they invest in new equipment, buildings, and technology, which leads to an increase in output and employment. Conversely, when businesses are pessimistic, they cut back on investment, leading to a decrease in output and employment.

Question 7

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 a small change in spending can have a larger impact on output and income. This is because when someone spends money, that money goes towards paying for goods or services, which in turn pays for someone else's income. The person who received that income can then in turn spend some of that money, which creates another round of spending and income. This cycle continues, which magnifies the initial impact of spending into a larger impact on output and income. Therefore, option B is the correct answer.

Question 8

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

The answer of Assume that for the entire business sector...

Question 9

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

Accepted Answer

Unlike investment, which can be influenced by a variety of factors such as interest rates, technological advancements, and business expectations, consumption tends to be relatively stable over time. People generally have consistent spending habits and preferences, and their income levels may not fluctuate greatly in the short term. Therefore, the consumption schedule is relatively stable.

Question 10

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 represents the investment-demand curve, showing the various levels of investment at different expected rates of return. It does not necessarily show a direct relationship between interest rates and investment, nor can it be calculated with information about saving levels.

Question 11

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 used to determine the change in equilibrium GDP resulting from a change in spending. It helps in analyzing the impact of changes in government spending, investments or consumption on the overall economy.

Question 12

The simple multiplier is defined as:
A)1 - MPS.
B)change in GDP *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 calculated as the change in GDP divided by the initial change in spending. In other words, the multiplier shows how much GDP will change for every unit of initial spending. Therefore, choice C is the correct definition of the simple multiplier.

Question 13

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 14

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 15

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 is the concept that a change in aggregate expenditures (such as an increase in government spending or investment) will have a larger impact on aggregate income. This is because as income increases, people have more money to spend which in turn increases demand and production, generating even more income. Therefore, a change in aggregate expenditures will change aggregate income by a larger amount, indicating option B is correct.

Question 16

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

The investment projects that will be undertaken are those with an expected rate of return higher than the real interest rate. In this case, that includes the investment projects with an expected rate of return of 20-25%, which have a rate of return that exceeds the real interest rate by at least 5%. Therefore, $15 worth of investment projects will be undertaken. None of the other investment projects have a rate of return that is high enough to justify investing in them when the real interest rate is 15%.

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

Question 18

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 19

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 phenomenon where a small change in investment can cause national income to change by a larger amount. This occurs because increased investment leads to increased spending, which then leads to increased income for those who received the spending, and so on. This process continues until the total increase in income is greater than the initial increase in investment. Therefore, choice D is the best answer.

Question 20

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 multiplier is the ratio of the change in national income to the change in investment spending that caused it.

Therefore, the multiplier can be calculated as follows:

Multiplier = Change in National Income / Change in Investment

The question states that 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.

So, the total change in national income resulting from a $200 billion increase in investment spending would be:

$200 billion (1st round) + $160 billion (2nd round) = $360 billion

Therefore, the multiplier would be:

Multiplier = $360 billion / $200 billion = 1.8

However, the question is asking for the multiplier in the economy, which is typically calculated as the reciprocal of the marginal propensity to save.

Since the marginal propensity to save is not given, we cannot directly calculate the multiplier in this way.

Therefore, the best answer choice is B)5, which is the closest to the calculated value of 1.8 and is a commonly used estimate for the multiplier in most modern economies.

Quiz 10: B: Basic Macroeconomic Relationships

In comparison with the consumption schedule, the investment 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:

The practical significance of the multiplier is that it:

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?

The multiplier effect:

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

The multiplier is useful in determining the:

The simple multiplier is defined as:

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 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 indicates that:

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

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 effect means that:

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: