Question 1

The multiplier is the ratio of the

Accepted Answer

The multiplier is the ratio of the change in the equilibrium level of real GDP to the change in autonomous expenditures. This is because autonomous expenditures (such as investment or government spending) can have a magnified effect on the overall level of GDP through the multiplier process. As these expenditures increase, it spurs further spending and economic activity, resulting in a larger overall increase in GDP. The multiplier therefore measures the extent to which changes in autonomous expenditures can impact the economy as a whole.

Question 2

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

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 3

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

Accepted Answer

If an economy saves 20% of any increase in real GDP, then the remaining 80% is spent on consumption goods and services. This means that the multiplier is 1/0.8, or 1.25. Therefore, an increase in investment of $2 billion can lead to an increase in real GDP of (1.25 x $2 billion) = $2.5 billion.

Question 4

The multiplier effect tends to

Accepted Answer

The multiplier effect magnifies small changes in spending into much larger changes in real Gross Domestic Product (GDP). This can lead to economic growth and expansion. However, it can also cause instability if the changes in spending are sudden and unpredictable. The multiplier effect does not necessarily affect the stability of the general price level or the MPC.

Question 5

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

Accepted Answer

The answer of If initial equilibrium real Gross Domestic Product...

Question 6

The multiplier helps explain

Accepted Answer

The multiplier helps explain why a rise in government expenditures causes real GDP to rise by more than the amount of the increase in government spending. This is because the initial increase in government spending stimulates demand, which leads to an increase in production and income, which in turn leads to further increases in consumption and investment.

Question 7

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

Accepted Answer

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Question 8

If the multiplier has a value of 10, then the value of the marginal propensity to save (MPS) is

Accepted Answer

The multiplier formula is 1/MPS, therefore if the multiplier is 10, then MPS must equal 0.1.

Question 9

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

Accepted Answer

The multiplier in the economy is given by the formula: 
multiplier = 1 / MPS
If the multiplier in the economy is 3, then:
3 = 1 / MPS
MPS = 1 / 3
MPS = 0.33
Therefore, the marginal propensity to save (MPS) must be 0.33. The correct choice is A).

Question 10

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

Accepted Answer

The answer of If the marginal propensity to consume (MPC)...

Question 11

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

Accepted Answer

With an MPC of 0.80, the multiplier is 1/1-MPC = 1/0.2 = 5. Therefore, an increase in autonomous investment of $100 will lead to an increase in real GDP of 5*$100 = $500.

Question 12

The multiplier is

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. This means that the multiplier shows the total impact on real GDP from a change in one of the components of GDP, such as consumption or investment. Option A refers to the concept of autonomous consumption, which is not the same as the multiplier. Option B refers to the marginal propensity to consume, which is a component of the multiplier but is not the same thing. Option C refers to the marginal propensity to consume as a percentage, which again is a component of the multiplier but is not the definition of the multiplier itself.

Question 13

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

Accepted Answer

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Question 14

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)

Accepted Answer

The multiplier effect states that a change in investment spending will lead to a larger change in GDP. The formula for the multiplier is 1/MPS. In this case, the multiplier is 1/0.1 = 10. Therefore, a decrease in private investment spending by $100 million will lead to a decrease in GDP by $1 billion (10 times the initial change in investment spending).

Question 15

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

Accepted Answer

The ratio of the change in the equilibrium level of real GDP to the change in autonomous real expenditures is the multiplier. The multiplier concept shows how much larger the change in equilibrium GDP will be compared to the initial change in autonomous expenditures. It is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume.

Question 16

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

Accepted Answer

The formula for calculating the change in real GDP due to a change in net exports is given as follows: Change in real GDP = Change in net exports x (1/MPS). Therefore, in this case, the change in real GDP would be: -$100 million x (1/0.5) = -$200 million. This means that real GDP would fall by $200 million.

Question 17

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

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 18

A permanent reduction in planned real investment spending leads to

Accepted Answer

A permanent reduction in planned real investment spending will have a negative impact on the economy, as it will result in less production, less employment, and less income. This will cause a decrease in real GDP, and the decrease will be more than proportional because of the multiplier effect: a decrease in investment spending will result in a decrease in income, which in turn will lead to a decrease in consumption spending, thus decreasing income further, and so on.

Question 19

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

Accepted Answer

The answer of If an increase of $5 billion in...

Question 20

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

Accepted Answer

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

Quiz 12: Consumption, Real GDP, and the Multiplier