Question 1

The multiplier is
A)the part of consumption that is independent of the level of disposable income.
B)the proportion of total disposable income that is consumed.
C)the percentage of a given change in income that goes towards consumption.
D)the number which is multiplied by an autonomous change which gives the change in the equilibrium level of real GDP.

Accepted Answer

The multiplier is the number which is multiplied by an autonomous change which gives the change in the equilibrium level of real GDP. It represents the overall effect of a change in autonomous spending on the economy. Choices A, B, and C all refer to concepts related to the marginal propensity to consume, which is a component of the multiplier.

Question 2

The ratio of the change in the equilibrium level of real GDP to the change in autonomous real expenditures is the
A)average propensity to consume.
B)marginal propensity to consume.
C)multiplier.
D)unplanned investment.

Accepted Answer

This ratio is known as the spending multiplier, which measures the amount by which an initial change in autonomous real expenditures will ultimately affect the equilibrium level of real GDP. It is calculated as 1/(1 - MPC), where MPC is the marginal propensity to consume.

Question 3

If initial equilibrium real Gross Domestic Product (GDP)is $400 billion, MPC = 0.9, and autonomous investment increases $40 billion, equilibrium real Gross Domestic Product (GDP)will be
A)$440 billion.
B)$360 billion.
C)$600 billion.
D)$800 billion.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), which is 1/(1-0.9) = 10. The increase in GDP is the multiplier times the increase in investment: 10 * $40 billion = $400 billion. Adding this to the initial GDP of $400 billion results in a new equilibrium GDP of $800 billion.

Question 4

If the multiplier in the economy is 3, the marginal propensity to save (MPS)must be
A)0.33.
B)0.67.
C)1.
D)3.

Accepted Answer

The multiplier is equal to 1/MPS, so if the multiplier is 3, then MPS must be 1/3 or 0.33. Therefore, the correct answer is A)0.33.

Question 5

Other things being constant, if the marginal propensity to save (MPS)is 0.1, and private investment spending falls by $100 million, then real Gross Domestic Product (GDP)
A)decreases by $10 million.
B)increases by $90 million.
C)decreases by $1 billion.
D)increases by $1 billion.

Accepted Answer

The multiplier effect tells us that the initial change in investment spending will have a greater impact on GDP as it ripples through the economy. The formula for the multiplier is 1/MPS. In this case, the multiplier is 1/0.1 = 10. Therefore, the $100 million decrease in investment spending will lead to a $1 billion decrease in GDP (10 x $100 million).

Question 6

A permanent reduction in planned real investment spending leads to
A)a more than proportional increase in real GDP.
B)a more than proportional decrease in real GDP.
C)a less than proportional decrease in real GDP.
D)a proportional decrease in real GDP.

Accepted Answer

A permanent reduction in planned real investment spending leads to a decrease in real GDP. This is because investment spending is a component of aggregate demand, and a decrease in investment spending leads to a decrease in aggregate demand, causing a decrease in real GDP. The decrease in real GDP is likely to be more than proportional because it can lead to a multiplier effect, where the decrease in investment spending causes a decrease in income, which leads to a decrease in consumption spending, which further decreases aggregate demand and real GDP.

Question 7

If the multiplier has a value of 1, then the value of the marginal propensity to save (MPS)is
A)1.00.
B)0.
C)10.00.
D)0.10.

Accepted Answer

The marginal propensity to save (MPS) is the complement of the marginal propensity to consume (MPC). If the multiplier, which is 1/(1-MPC), equals 1, it implies that 1-MPC = 1, making MPC = 0. Since MPS + MPC = 1, if MPC is 0, MPS must be 1.

Question 8

A decrease in autonomous investment of $100 that occurs when the marginal propensity to save (MPS)equals 0.25 will lead to a decrease in real Gross Domestic Product (GDP)of
A)$25.
B)$100.
C)$400.
D)$800.

Accepted Answer

The decrease in autonomous investment of $100 will lead to a decrease in aggregate demand, which will lead to a decrease in GDP. The multiplier effect will magnify the initial decrease in investment. The multiplier (1/MPS) in this case is 4. Therefore, the decrease in GDP will be equal to 4 times the initial decrease in investment, which is $400.

Question 9

If the MPS is one-third, a $100 increase in net exports will
A)reduce real Gross Domestic Product (GDP)by $100.
B)reduce real Gross Domestic Product (GDP)by $300.
C)increase real Gross Domestic Product (GDP)by $33.
D)increase real Gross Domestic Product (GDP)by $300.

Accepted Answer

The Marginal Propensity to Save (MPS) is one-third, meaning the Marginal Propensity to Consume (MPC) is two-thirds. The spending multiplier is 1/(1-MPC) = 1/(1-2/3) = 3. Therefore, a $100 increase in net exports will increase real GDP by $100 * 3 = $300.

Question 10

The multiplier helps explain
A)why a rise in government expenditures causes real Gross Domestic Product (GDP)to rise by more than the amount of the increase in government spending.
B)why an increase in disposable income causes real Gross Domestic Product (GDP)to rise by less than the amount of the increase in disposable income.
C)why a decrease in taxes causes real Gross Domestic Product (GDP)to fall by more than the amount of the decrease in taxes.
D)why a fall in investment cause real Gross Domestic Product (GDP)to rise by more than the amount of the decrease in investment.

Accepted Answer

The multiplier effect shows how an initial increase in government spending leads to an increase in income and consumption, which leads to further rounds of spending and income. This leads to a larger increase in real GDP than the initial increase in government spending.

Question 11

If an increase of $5 billion in investment is associated with an increase of $25 billion in real Gross Domestic Product (GDP), the multiplier is
A)1.
B)3.
C)5.
D)7.

Accepted Answer

The multiplier is calculated as the change in GDP divided by the change in investment. Here, $25 billion / $5 billion = 5.

Question 12

If the multiplier is 4, the marginal propensity to consume (MPC)must be
A)0.25.
B)0.5.
C)0.75.
D)1.

Accepted Answer

The formula for the multiplier is 1/(1-MPC), which means that if the multiplier is 4, then 1/(1-MPC) = 4. Solving for MPC we get MPC = 0.75. Therefore, the best choice is C, which corresponds to 0.75.

Question 13

If the marginal propensity to save (MPS)is 0.1, the multiplier will be
A)0.1.
B)1.
C)5.
D)10.

Accepted Answer

The answer of If the marginal propensity to save (MPS)is...

Question 14

If autonomous investment increases by $200 billion and the marginal propensity to consume (MPC)is 0.5, then
A)real Gross Domestic Product (GDP)will rise by $400 billion.
B)real Gross Domestic Product (GDP)will rise by $200 billion.
C)real Gross Domestic Product (GDP)will rise by $100 billion.
D)real Gross Domestic Product (GDP)will decrease by $100 billion.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.5, the multiplier is 2. Therefore, an increase in autonomous investment by $200 billion will increase GDP by $200 billion * 2 = $400 billion.

Question 15

If the marginal propensity to save (MPS)is 0.5 and net exports falls by $100 million, then
A)real Gross Domestic Product (GDP)will increase by $100 million.
B)real Gross Domestic Product (GDP)will fall by $200 million.
C)real Gross Domestic Product (GDP)will not change.
D)the effect on real Gross Domestic Product (GDP)cannot be determined from the given information.

Accepted Answer

If the marginal propensity to save (MPS) is 0.5, it means that for every additional dollar earned, 50 cents will be saved and 50 cents will be spent. 
If net exports fall by $100 million, it means that there is a decrease in aggregate demand in the economy. This decrease in aggregate demand will lead to a decrease in real GDP. 
The multiplier effect shows that the total impact on GDP will be larger than the initial impact. Given that MPS is 0.5, the spending multiplier will be 2. This means that for every dollar decrease in spending, real GDP will fall by $2. 
Therefore, the initial decrease in net exports of $100 million will result in a decrease in real GDP of $200 million (2*$100 million).

Question 16

If an economy saves 20 percent of any increase in real Gross Domestic Product (GDP), then an increase in investment of $2 billion can produce an increase in real Gross Domestic Product (GDP)of as much as
A)$2 billion.
B)$10 billion.
C)$0.4 billion.
D)$1.6 billion.

Accepted Answer

If an economy saves 20% of any increase in real GDP, it means that 80% of the increase goes towards consumption. Therefore, an increase in investment of $2 billion would increase GDP by:

Increase in GDP = 2 billion / (1 - 0.8)
Increase in GDP = 2 billion / 0.2
Increase in GDP = 10 billion

Therefore, the answer is (B) $10 billion.

Question 17

The multiplier is the ratio of the
A)change in the equilibrium level of real GDP to the change in autonomous expenditures.
B)equilibrium level of real GDP to the change in induced expenditures.
C)change in induced expenditures to the change in autonomous expenditures.
D)change in autonomous expenditures to the change in the equilibrium level of real GDP.

Accepted Answer

The multiplier is defined as the ratio of the change in the equilibrium level of real GDP to the change in autonomous expenditures. Autonomous expenditures are those that are not influenced by changes in income, such as government spending or investment. The multiplier effect occurs when these autonomous expenditures increase, leading to an increase in income, which in turn leads to an increase in consumption and further increases in income. Therefore, the multiplier is a measure of the impact of a change in autonomous expenditures on the overall economy.

Question 18

If the marginal propensity to consume (MPC)is 0.75 and government purchases increase by $200 billion, then
A)equilibrium real Gross Domestic Product (GDP)will increase by $800 billion.
B)equilibrium real Gross Domestic Product (GDP)will increase by $200 billion.
C)equilibrium real Gross Domestic Product (GDP)will increase by $50 billion.
D)the effect on equilibrium real Gross Domestic Product (GDP)cannot be determined from the given information.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.75, the multiplier is 4. Therefore, an increase in government purchases by $200 billion will increase GDP by 4 times $200 billion, which is $800 billion.

Question 19

Suppose the marginal propensity to consume (MPC)equals 0.80, an increase in autonomous investment of $100 will lead to an increase in real Gross Domestic Product (GDP)by
A)$100.
B)$400.
C)$500.
D)$800.

Accepted Answer

The multiplier effect can be calculated using the formula: 1/(1-MPC). In this case, the multiplier would be 1/(1-0.80) = 5. With the increase in autonomous investment of $100, the total increase in GDP would be 5 times that amount, or $500. Therefore, the correct answer is C.

Question 20

The multiplier effect tends to
A)generate instability.
B)promote stability of the general price level.
C)magnify small changes in spending into much larger changes in real Gross Domestic Product (GDP).
D)increase the MPC.

Accepted Answer

The multiplier effect magnifies small changes in spending into much larger changes in real GDP. This can lead to economic instability if the changes in spending are too large or too unpredictable, but it can also help promote stability of the general price level by keeping demand and supply in balance. The multiplier effect is based on the idea that spending by one person or group generates income for another person or group, who in turn spends some of that income, generating income for yet another person or group, and so on. This creates a chain reaction that multiplies the initial spending impact.

Quiz 11: Consumption, Real GDP, and the Multiplier

The multiplier is

The ratio of the change in the equilibrium level of real GDP to the change in autonomous real expenditures is the

If initial equilibrium real Gross Domestic Product (GDP) is $400 billion, MPC = 0.9, and autonomous investment increases $40 billion, equilibrium real Gross Domestic Product (GDP) will be

If the multiplier in the economy is 3, the marginal propensity to save (MPS) must be

Other things being constant, if the marginal propensity to save (MPS) is 0.1, and private investment spending falls by $100 million, then real Gross Domestic Product (GDP)

A permanent reduction in planned real investment spending leads to

If the multiplier has a value of 1, then the value of the marginal propensity to save (MPS) is

A decrease in autonomous investment of $100 that occurs when the marginal propensity to save (MPS) equals 0.25 will lead to a decrease in real Gross Domestic Product (GDP) of

If the MPS is one-third, a $100 increase in net exports will

The multiplier helps explain

If an increase of $5 billion in investment is associated with an increase of $25 billion in real Gross Domestic Product (GDP) , the multiplier is

If the multiplier is 4, the marginal propensity to consume (MPC) must be

If the marginal propensity to save (MPS) is 0.1, the multiplier will be

If autonomous investment increases by $200 billion and the marginal propensity to consume (MPC) is 0.5, then

If the marginal propensity to save (MPS) is 0.5 and net exports falls by $100 million, then

If an economy saves 20 percent of any increase in real Gross Domestic Product (GDP) , then an increase in investment of $2 billion can produce an increase in real Gross Domestic Product (GDP) of as much as

The multiplier is the ratio of the

If the marginal propensity to consume (MPC) is 0.75 and government purchases increase by $200 billion, then

Suppose the marginal propensity to consume (MPC) equals 0.80, an increase in autonomous investment of $100 will lead to an increase in real Gross Domestic Product (GDP) by

The multiplier effect tends to