Question 1

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the consumption function is C = (1/2)Y,the simple multiplier is
A)2/3.
B)1.
C)2.
D)3.
E)Insufficient information to know.

Accepted Answer

The simple multiplier is given by 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, MPC is 1/2, so the multiplier is 1/(1-1/2) = 2. Therefore, the answer is C.

Question 2

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the saving function is S = -100 + (0.4)Y,the simple multiplier is
A)0.2.
B)1.
C)2.5.
D)5.
E)Insufficient information to know.

Accepted Answer

The simple multiplier is calculated as 1/(1 - MPC) or 1/MPS. Given the saving function S = -100 + 0.4Y, the marginal propensity to save (MPS) is 0.4. Therefore, the multiplier is 1/(1 - 0.6) = 1/0.4 = 2.5.

Question 3

Suppose aggregate output is demand-determined.If the simple multiplier is 4 and there is a $10 billion increase in planned investment spending,then equilibrium income will ________ and the marginal propensity to spend must equal ________.
A)decrease by $40 billion; 0.75
B)decrease by $10 billion; 0.25
C)increase by $40 billion; 0.25
D)increase by $40 billion; 0.75
E)increase by $10 billion; 4.0

Accepted Answer

The formula for the simple multiplier is:

Multiplier = 1 / (1 - MPC)

where MPC is the marginal propensity to consume. If the simple multiplier is 4, then we can solve for MPC:

4 = 1 / (1 - MPC)
4(1 - MPC) = 1
4 - 4MPC = 1
MPC = 0.75

Now, if there is a $10 billion increase in planned investment spending, we can use the multiplier to determine the overall impact on equilibrium income:

ΔY = Multiplier x ΔI
ΔY = 4 x $10 billion
ΔY = $40 billion

So equilibrium income will increase by $40 billion. Therefore, the answer is D: increase by $40 billion; 0.75.

Question 4

Consider a simple macro model with a constant price level and demand-determined output.If the marginal propensity to spend is 0.9,the simple multiplier is
A)0.1.
B)0.9.
C)1.0.
D)1.1.
E)10.0.

Accepted Answer

The simple multiplier is calculated as 1/(1 - marginal propensity to spend), which in this case is 1/(1 - 0.9) = 10.

Question 5

Consider the following information describing a closed economy with no government.Aggregate output is demand determined and the price level is constant.  TABLE 21-6
-Refer to Table 21-6.The simple multiplier in this economy is
A)2.0.
B)2.5.
C)3.0.
D)4.0.
E)5.0.

Accepted Answer

The answer of Consider the following information describing a closed...

Question 6

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the saving function is S = -100 + (0.2)Y,the simple multiplier is
A)0.2.
B)1.
C)2.5.
D)5.
E)Insufficient information to know.

Accepted Answer

Given: S = -100 + (0.2)Y
The simple multiplier, denoted by 'k', is given by:
k = 1/(1-MPC), where MPC is the marginal propensity to consume.
Since we don't have the consumption function explicitly, we can use the fact that in a closed economy with no government, Y = C + I, where I is investment spending.
To solve for the MPC, we can rearrange the given saving function as follows:
S = -100 + (0.2)Y
=> Y = (1/0.2)*(S+100)
=> Y = 5S + 500
Comparing this with Y = C + I, we see that C = 5S and I = 500.
The MPC is given by the slope of the consumption function, which is the same as the coefficient of S in the above equation, i.e., MPC = 5.
Therefore, the simple multiplier is k = 1/(1-MPC) = 1/(1 - 5) = 1/-4 = -0.25 (negative sign indicates that savings changes in the opposite direction to income).
However, the question asks for the absolute value of the multiplier, which is 5, since the initial increase in income of 1 unit leads to a total increase in demand of 5 units (i.e., 1 unit of consumption and 4 units of investment).

Question 7

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the consumption function is C = (2/3)Y,then the simple multiplier is
A)2/3.
B)1.
C)2.
D)3.
E)Insufficient information to know.

Accepted Answer

The answer of Suppose the price level is constant,output is...

Question 8

Suppose aggregate output is demand-determined.The simple multiplier will increase as a result of
A)an increase in the marginal propensity to consume.
B)a decrease in the marginal propensity to consume.
C)a decrease in autonomous consumption.
D)an increase in autonomous consumption.
E)an increase in investment.

Accepted Answer

An increase in the marginal propensity to consume will lead to a higher consumption spending in response to an increase in income, resulting in a larger increase in aggregate demand and output, thus increasing the simple multiplier.

Question 9

Consider the following information for an economy with demand-determined output and a constant price level.There is no government or foreign trade.  TABLE 21-8
-Refer to Table 21-8.This economy's equilibrium level of national income is
A)500.
B)600.
C)750.
D)1000.
E)1500.

Accepted Answer

The answer of Consider the following information for an economy...

Question 10

Suppose aggregate output is demand-determined.Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million.The simple multiplier is equal to
A)-2.5.
B)-0.6.
C)0.4.
D)0.6.
E)2.5.

Accepted Answer

The simple multiplier is defined as the ratio of the change in equilibrium national income to the initial autonomous expenditure that caused the change. In this case, the initial autonomous expenditure is the decrease in investment expenditure of $20 million.

Therefore, the simple multiplier = (change in equilibrium national income) / (initial autonomous expenditure)

The question tells us that the change in equilibrium national income is a decrease of $50 million.

Therefore, the simple multiplier = (-$50 million) / (-$20 million) = 2.5

So the answer is E.

Question 11

Consider the following information concerning an economy with demand-determined output.There is no government or foreign trade.  TABLE 21-7
-Refer to Table 21-7.This economy's equilibrium level of national income is
A)500.
B)600.
C)750.
D)1000.
E)1500.

Accepted Answer

The equilibrium level of national income in a demand-determined economy is determined by the point where aggregate demand equals aggregate supply. In this case, the aggregate demand at all levels of national income is given by the equation Y = 400 + 0.8Y, and the aggregate supply is given by Y = 600. Setting these two equations equal to each other, we get:

400 + 0.8Y = 600
0.8Y = 200
Y = 250

Therefore, the equilibrium level of national income is 600.

Question 12

Consider the following information describing a closed economy with no government.Aggregate output is demand determined and the price level is constant.  TABLE 21-6
-Refer to Table 21-6.This economy's equilibrium level of national income is
A)500.
B)600.
C)750.
D)1000.
E)1500.

Accepted Answer

The equilibrium level of national income can be found where aggregate expenditure (AE) equals aggregate output (Y). In this case, at a price level of 100, AE is equal to 750 at both the 400 and 500 levels of output, but AE is greater than output at the 300 level and less than output at the 600 and 700 levels. Therefore, the equilibrium level of national income is 750 at a price level of 100.

Question 13

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the marginal propensity to spend is 0.7,the simple multiplier is
A)0.33.
B)0.70.
C)1.00.
D)1.42.
E)3.33.

Accepted Answer

The simple multiplier is calculated as 1/(1 - marginal propensity to spend), which in this case is 1/(1 - 0.7) = 1/0.3 = 3.33.

Question 14

Consider the following information concerning an economy with demand-determined output.There is no government or foreign trade.  TABLE 21-7
-Refer to Table 21-7.The simple multiplier in this economy is
A)2.0.
B)2.5.
C)3.0.
D)4.0.
E)5.0.

Accepted Answer

The simple multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, MPC is 0.8, so the simple multiplier is 1/(1-0.8) = 5.

Question 15

Suppose aggregate output is demand-determined.Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million.The marginal propensity to spend is equal to
A)-0.6.
B)0.4.
C)0.6.
D)2.5.
E)-2.5.

Accepted Answer

The marginal propensity to spend (MPS) can be calculated using the formula MPS = ∆Y/∆A, where ∆Y is the change in equilibrium national income and ∆A is the change in autonomous expenditure. In this case, ∆A = -$20 million and ∆Y = -$50 million. Therefore, MPS = (-$50 million)/(-$20 million) = 0.6. Thus, the correct answer is C.

Question 16

Consider the following information for an economy with demand-determined output and a constant price level.There is no government or foreign trade.  TABLE 21-8
-Refer to Table 21-8.The simple multiplier in this economy is
A)2.0.
B)2.5.
C)3.0.
D)4.0.
E)5.0.

Accepted Answer

The answer of Consider the following information for an economy...

Quiz 21: The Simplest Short-Run Macro Model

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the consumption function is C = (1/2) Y,the simple multiplier is

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the saving function is S = -100 + (0.4) Y,the simple multiplier is

Suppose aggregate output is demand-determined.If the simple multiplier is 4 and there is a $10 billion increase in planned investment spending,then equilibrium income will and the marginal propensity to spend must equal .

Consider a simple macro model with a constant price level and demand-determined output.If the marginal propensity to spend is 0.9,the simple multiplier is

Consider the following information describing a closed economy with no government.Aggregate output is demand determined and the price level is constant. TABLE 21-6 -Refer to Table 21-6.The simple multiplier in this economy is

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the saving function is S = -100 + (0.2) Y,the simple multiplier is

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the consumption function is C = (2/3) Y,then the simple multiplier is

Suppose aggregate output is demand-determined.The simple multiplier will increase as a result of

Consider the following information for an economy with demand-determined output and a constant price level.There is no government or foreign trade. TABLE 21-8 -Refer to Table 21-8.This economy's equilibrium level of national income is

Suppose aggregate output is demand-determined.Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million.The simple multiplier is equal to

Consider the following information concerning an economy with demand-determined output.There is no government or foreign trade. TABLE 21-7 -Refer to Table 21-7.This economy's equilibrium level of national income is

Consider the following information describing a closed economy with no government.Aggregate output is demand determined and the price level is constant. TABLE 21-6 -Refer to Table 21-6.This economy's equilibrium level of national income is

Suppose the price level is constant,output is demand-determined,and the economy is closed with no government.If the marginal propensity to spend is 0.7,the simple multiplier is

Consider the following information concerning an economy with demand-determined output.There is no government or foreign trade. TABLE 21-7 -Refer to Table 21-7.The simple multiplier in this economy is

Suppose aggregate output is demand-determined.Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million.The marginal propensity to spend is equal to

Consider the following information for an economy with demand-determined output and a constant price level.There is no government or foreign trade. TABLE 21-8 -Refer to Table 21-8.The simple multiplier in this economy is