Question 1

If the Hennige family's marginal propensity to consume is 0.70, then it will necessarily consume seven-
tenths of its total income.

Accepted Answer

The marginal propensity to consume (MPC) refers to the proportion of additional income that a family will spend on consumption. If the Hennige family's MPC is 0.70, it means they will consume seven-tenths of any additional income, not necessarily seven-tenths of their total income.

Question 2

1 − MPC = MPS.

Accepted Answer

This statement is true. MPC (marginal propensity to consume) represents the fraction of additional income that is spent, while MPS (marginal propensity to save) represents the fraction of additional income that is saved. Therefore, if you subtract MPC from 1, you get the fraction of additional income that is saved, which is exactly what MPS represents. So 1 - MPC = MPS.

Question 3

The actual multiplier effect in the U.S. economy is less than the multiplier effect in the text examples because
A) the real-world MPS is larger than the MPS in the examples.
B) in addition to saving, households use some of any increase in income to buy imported goods and to pay additional taxes.
C) the gap between the nominal interest rate and the real interest rate widens as the economy expands or contracts.
D) the MPC in the United States is greater than 1.

Accepted Answer

The actual multiplier effect is less than the multiplier effect in the text examples because in addition to saving, households use some of any increase in income to buy imported goods and to pay additional taxes. This means that a portion of any increase in spending leaks out of the domestic economy, reducing the overall impact of the multiplier effect. Therefore, choice B is the correct answer. Choices A, C, and D are incorrect because they do not explain why the multiplier effect in the U.S. economy is less than the multiplier effect in the text examples.

Question 4

(Last Word) Art Buchwald's article "Squaring the Economic Circle" humorously describes how
A) a person's decision not to buy an automobile eventually reduces many people's incomes, including that of the person making the original decision.
B) a price increase on a single product eventually leads to rapid inﬂation.
C) an increase in imports eventually leads to a greater increase in exports.
D) a government tax rate increase eventually results in the government collecting less tax revenue than before the tax rate hike.

Accepted Answer

Buchwald's article uses satire to demonstrate how individual economic decisions can have far-reaching and unintended consequences, ultimately affecting the incomes and livelihoods of many people. The example he gives is of a person who decides not to buy a car, which leads to reduced demand for cars, which in turn affects the incomes of car manufacturers, auto dealers, mechanics, and others in the industry. This humorous illustration highlights the interconnectedness of economic systems and the ways in which individual actions can have ripple effects.

Question 5

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) $2,500 billion.
B) $3,000 billion.
C) $4,000 billion.
D) $5,000 billion.

Accepted Answer

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

Question 6

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

Question 7

A $1 billion increase in investment will cause a
A) (1/MPS) billion increase in GDP.
B) (MPS) billion increase in GDP.
C) (1 − MPC) billion increase in GDP.
D) (MPC − MPS) billion increase in GDP.

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 8

Investment is highly stable; it increases over time at a very steady rate.

Accepted Answer

Investment is subject to market and economic fluctuations, and therefore, its value can increase or decrease unpredictably. While some investments may have a steady rate of return, this is not true for all types of investments.

Question 9

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) $200 billion.
B) $300 billion.
C) $400 billion.
D) $500 billion.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. If the initial decrease in investment spending is $100 billion, and the multiplier is 4, then the total decrease in income will be $400 billion (4 x $100 billion). Therefore, the correct answer is C, $400 billion.

Question 10

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 11

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

Accepted Answer

S = DI - C, 
where S is savings, DI is disposable income, and C is consumption expenditures. 
APC = C/DI 
0.8 = C/275 billion 
C = 220 billion 
S = 275 billion - 220 billion = 55 billion

Question 12

A decline in the real interest rate will shift the investment demand curve to the right.

Accepted Answer

The answer of A decline in the real interest rate...

Question 13

The greater the MPC, the greater the multiplier.

Accepted Answer

This statement is true. The MPC (marginal propensity to consume) measures the increase in consumer spending for each additional unit of income. The multiplier effect occurs when an initial increase in spending leads to further increases in income and spending. The size of the multiplier depends on the MPC. The higher the MPC, the greater the increase in spending and income, and therefore the greater the multiplier effect.

Question 14

1 + MPS = MPC.

Accepted Answer

The correct equation is 1 = MPS + MPC, where MPS stands for Marginal Propensity to Save and MPC stands for Marginal Propensity to Consume.

Question 15

The slope of the consumption schedule is measured by the MPC.

Accepted Answer

The MPC (marginal propensity to consume) is defined as the change in consumption resulting from a change in income. It represents the slope of the consumption schedule, which shows the relationship between income and consumption. Therefore, the statement is true.

Question 16

(Last Word) Art Buchwald's article "Squaring the Economic Circle" is a humorous description of
A) a negative GDP gap.
B) a positive GDP gap.
C) the marginal propensity to save.
D) the multiplier.

Accepted Answer

Art Buchwald's article humorously describes the concept of the multiplier, which refers to the effect of increased spending leading to an increase in national income and consumption greater than the initial amount spent.

Question 17

If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will increase
A) GDP by $120 billion.
B) GDP by $20 billion.
C) saving by $25 billion.
D) consumption by $80 billion.

Accepted Answer

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

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 multiplier is calculated as the total change in income divided by the initial change in spending. Here, the first round change is $50 billion, and the second round change is $25 billion, indicating a marginal propensity to consume (MPC) of 0.5. The multiplier is 1/(1-MPC) = 1/(1-0.5) = 2.

Question 19

A speciﬁc investment will be undertaken if the expected rate of return, r, exceeds the interest rate, i.

Accepted Answer

This statement is correct. It is a basic principle of finance that an investment should only be undertaken if the expected rate of return exceeds the cost of capital, which is often measured by the interest rate.

Question 20

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.

Quiz 10: Basic Macroeconomic Relationships

If the Hennige family's marginal propensity to consume is 0.70, then it will necessarily consume seven- tenths of its total income.

1 − MPC = MPS.

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

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

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

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 $1 billion increase in investment will cause a

Investment is highly stable; it increases over time at a very steady rate.

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

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