Question 1

Because of a recession in Japan, net exports from the United States decrease by $10 billion.If the MPC is 0.75, how much less spending will occur in the U.S.economy in the second "round" of spending?

Accepted Answer

In the second "round" of spending, the decrease in spending will be the initial decrease ($10 billion) multiplied by the marginal propensity to consume (MPC), which is 0.75. However, since it's the second round, we calculate the effect of the MPC on the initial decrease, not the total multiplier effect. So, $10 billion * 0.75 = $7.5 billion.

Question 2

Businesses in the United States cut their investment projects by $30 billion.If the MPC is 2, what will be the impact on the national income (Y)?

Accepted Answer

The impact on the national income (Y) is calculated using the multiplier effect, which is 1/(1-MPC). With an MPC of 2, the multiplier would be negative or not applicable in standard economic models, as MPC values should be between 0 and 1. Assuming a typographical error and the MPC is 0.5, the multiplier would be 2. Therefore, a $30 billion cut in investment projects would lead to a $60 billion decrease in national income (Y).

Question 3

Assume that the MPC is 0.75, and investment spending rises by $25 billion.How much will real GDP change?

Accepted Answer

The formula for calculating the change in real GDP is 
Change in real GDP = (change in investment spending) / (1 - MPC)

Substituting the given values, we get
Change in real GDP = 25 / (1 - 0.75) = 100 billion

Therefore, the correct answer is C.

Question 4

As the multiplier process works through time, the size of the multiplier effect becomes

Accepted Answer

The multiplier effect diminishes over time as each round of spending becomes smaller due to leakages in the economy, such as savings, taxes, and imports, which reduce the size of subsequent spending rounds.

Question 5

The formula for the multiplier can be written as change in

Accepted Answer

The multiplier formula is Δ Y/Δ I, which represents the change in output (Y) for a given change in investment (I). Therefore, the correct choice is A.

Question 6

Investment increases by $200 million and the value of MPC is 0.75.What would be the total increase in spending?

Accepted Answer

The total increase in spending can be calculated using the multiplier effect formula, which is 1/(1-MPC). Given the MPC is 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, the total increase in spending is 4 times the initial investment increase, which is 4 * $200 million = $800 million.

Question 7

Figure 9-5
​ 
-If the level of investment spending increases by $100 and the MPC in the economy is 0.8, then the cumulative spending increase after three rounds of spending is

Accepted Answer

The cumulative spending increase after three rounds can be calculated using the formula for the spending multiplier effect: Initial Increase + (Initial Increase * MPC) + (Initial Increase * MPC^2). With an initial increase of $100 and an MPC of 0.8, the calculation is $100 + ($100 * 0.8) + ($100 * 0.8^2) = $100 + $80 + $64 = $244.

Question 8

Assume that the MPC is 0.9 and investment falls by $30 billion.What is the change in real GDP?

Accepted Answer

The change in real GDP can be calculated using the multiplier effect formula, which is 1/(1-MPC). With an MPC of 0.9, the multiplier is 1/(1-0.9) = 10. Therefore, a $30 billion decrease in investment would lead to a $300 billion decrease in real GDP (10 * -$30 billion = -$300 billion).

Question 9

The economic impact of the multiplier is ____, and then becomes ____.

Accepted Answer

The economic impact of the multiplier is large initially, as it causes an increase in spending and income. However, as the effects of the multiplier ripple through the economy, the impact becomes smaller. This is because some of the initial spending leaks out of the economy through imports, taxes, and savings. Thus, while the overall impact of the multiplier is positive, it becomes smaller over time.

Question 10

The multiplier principle explains how

Accepted Answer

The multiplier principle states that an initial increase in spending will have a multiplied effect on the economy, resulting in an increase in GDP by more than the initial amount spent. Therefore, option B is the correct choice.

Question 11

The economic impact of a change in spending, working through the multiplier, takes effect

Accepted Answer

The multiplier effect takes place over multiple rounds of spending. As the initial spending leads to more income and spending in the economy, the multiplier effect becomes stronger, resulting in a larger impact on the overall economy over time. However, the exact timing of the multiplier effect can vary depending on various factors such as the size of the initial spending, the velocity of money, and the nature of the economy.

Question 12

The multiplier principle is built on the premise that one person's spending is another person's

Accepted Answer

The multiplier principle is based on the idea that when someone spends money, it becomes income for someone else. This new income can then be spent, creating more income for another person, and so on, leading to a ripple effect throughout the economy. Therefore, the correct choice is C, income.

Question 13

Assume that the MPC is 0.85 and investment spending rises by $100 million.How much consumption spending will this generate in the second round of spending?

Accepted Answer

The marginal propensity to consume (MPC) is 0.85, meaning that for every additional dollar received, individuals will spend 85 cents. In the second round of spending, the $100 million increase in investment spending will generate $85 million in consumption spending (0.85 * $100 million), as individuals spend 85% of the new income they receive.

Question 14

The basic reason for the multiplier effect is that when you spend money,

Accepted Answer

The multiplier effect refers to the impact that an initial increase in spending has on total economic output. When you spend money, someone else receives income, and they in turn are likely to spend some of that income, leading to more income for others and more spending in the economy overall. This cycle of spending and income generation ultimately leads to a larger increase in economic output than the initial amount of spending.

Question 15

An increase in investment spending will be multiplied into a larger increase in GDP illustrates the concept of

Accepted Answer

The concept of how an increase in investment spending can lead to a larger increase in GDP is known as the multiplier effect. As investment spending increases, it leads to increased demand for goods and services, which in turn generates more income and spending, leading to even further increases in GDP. This multiplier effect is a key concept in macroeconomic policy discussions and is the reason why government stimulus spending is often aimed at increasing investment spending as a means of boosting the economy.

Question 16

The effect throughout the entire economy of one firm's increase in spending will be

Accepted Answer

The effect of one firm's increase in spending throughout the economy is typically greater than the firm's initial spending due to the multiplier effect. This means that the initial spending will generate income for others, who will then spend a portion of that income, further generating more income and spending in the economy.

Question 17

The actual multiplier for the U.S.economy is estimated to be

Accepted Answer

The actual multiplier for the U.S. economy is generally estimated to be less than 2, reflecting the relatively low impact of fiscal policy changes on overall economic output.

Question 18

If the government increases defense spending by $1 billion and the MPC is 0.8, how much additional spending will occur in the third "round" of spending?

Accepted Answer

In the third "round" of spending, the additional spending will be $1 billion * 0.8^3 = $512 million. However, since this specific value is not an option and the closest correct answer based on the multiplier effect and the given options is $640 million, it appears there was a misunderstanding in the calculation or the options provided. The correct calculation for the third round specifically should be: Initial spending * (MPC^2) = $1 billion * (0.8^2) = $640 million, considering the initial round as the government's spending, the second round as the direct result of that spending, and the third round as the spending that follows.

Question 19

If businesses spend an additional $150 billion for investment projects in 2010, what will be the impact on national income (Y) if the multiplier is 2?

Accepted Answer

The impact on national income (Y) is calculated by multiplying the additional investment by the multiplier. Here, $150 billion * 2 = $300 billion increase in Y.

Question 20

If the MPC is 0.67, then the oversimplified multiplier is

Accepted Answer

The oversimplified multiplier is calculated as 1/(1-MPC). With an MPC of 0.67, the multiplier is 1/(1-0.67) = 1/0.33 = 3.00.

Quiz 25: Demand-Side Equilibrium: Unemployment or Inflation

Because of a recession in Japan, net exports from the United States decrease by $10 billion.If the MPC is 0.75, how much less spending will occur in the U.S.economy in the second "round" of spending?

Businesses in the United States cut their investment projects by $30 billion.If the MPC is 2, what will be the impact on the national income (Y) ?

Assume that the MPC is 0.75, and investment spending rises by $25 billion.How much will real GDP change?

As the multiplier process works through time, the size of the multiplier effect becomes

The formula for the multiplier can be written as change in

Investment increases by $200 million and the value of MPC is 0.75.What would be the total increase in spending?

Figure 9-5 -If the level of investment spending increases by $100 and the MPC in the economy is 0.8, then the cumulative spending increase after three rounds of spending is

Assume that the MPC is 0.9 and investment falls by $30 billion.What is the change in real GDP?

The economic impact of the multiplier is , and then becomes .

The multiplier principle explains how

The economic impact of a change in spending, working through the multiplier, takes effect

The multiplier principle is built on the premise that one person's spending is another person's

Assume that the MPC is 0.85 and investment spending rises by $100 million.How much consumption spending will this generate in the second round of spending?

The basic reason for the multiplier effect is that when you spend money,

An increase in investment spending will be multiplied into a larger increase in GDP illustrates the concept of

The effect throughout the entire economy of one firm's increase in spending will be

The actual multiplier for the U.S.economy is estimated to be

If the government increases defense spending by $1 billion and the MPC is 0.8, how much additional spending will occur in the third "round" of spending?

If businesses spend an additional $150 billion for investment projects in 2010, what will be the impact on national income (Y) if the multiplier is 2?

If the MPC is 0.67, then the oversimplified multiplier is

Quiz 25: Demand-Side Equilibrium: Unemployment or Inflation

Because of a recession in Japan, net exports from the United States decrease by $10 billion.If the MPC is 0.75, how much less spending will occur in the U.S.economy in the second "round" of spending?

Businesses in the United States cut their investment projects by $30 billion.If the MPC is 2, what will be the impact on the national income (Y) ?

Assume that the MPC is 0.75, and investment spending rises by $25 billion.How much will real GDP change?

As the multiplier process works through time, the size of the multiplier effect becomes

The formula for the multiplier can be written as change in

Investment increases by $200 million and the value of MPC is 0.75.What would be the total increase in spending?

Figure 9-5 ​ -If the level of investment spending increases by $100 and the MPC in the economy is 0.8, then the cumulative spending increase after three rounds of spending is

Assume that the MPC is 0.9 and investment falls by $30 billion.What is the change in real GDP?

The economic impact of the multiplier is ____, and then becomes ____.

The multiplier principle explains how

The economic impact of a change in spending, working through the multiplier, takes effect

The multiplier principle is built on the premise that one person's spending is another person's

Assume that the MPC is 0.85 and investment spending rises by $100 million.How much consumption spending will this generate in the second round of spending?

The basic reason for the multiplier effect is that when you spend money,

An increase in investment spending will be multiplied into a larger increase in GDP illustrates the concept of

The effect throughout the entire economy of one firm's increase in spending will be

The actual multiplier for the U.S.economy is estimated to be

If the government increases defense spending by $1 billion and the MPC is 0.8, how much additional spending will occur in the third "round" of spending?

If businesses spend an additional $150 billion for investment projects in 2010, what will be the impact on national income (Y) if the multiplier is 2?

If the MPC is 0.67, then the oversimplified multiplier is

Figure 9-5 -If the level of investment spending increases by $100 and the MPC in the economy is 0.8, then the cumulative spending increase after three rounds of spending is

The economic impact of the multiplier is , and then becomes .