Question 1

If an economy saves 20 percent of any increase in real Gross Domestic Product (GDP), then an increase in investment of $1 billion can produce an increase in real Gross Domestic Product (GDP) of as much as
A) $2 billion.
B) $5 billion.
C) $8 billion.
D) $10 billion.

Accepted Answer

The marginal propensity to save (MPS) is 0.2, so the marginal propensity to consume (MPC) is 0.8. The multiplier is 1/(1-MPC) = 1/0.2 = 5. Therefore, an increase in investment of $1 billion can increase GDP by $5 billion.

Question 2

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 indicates that a change in one component of GDP (such as government spending) will lead to a larger change in real GDP due to subsequent rounds of spending and income generation. As a result, a rise in government spending would have a magnified effect on real GDP, causing it to rise by more than the amount of the increase in government spending.

Question 3

If an increase of $5 million in investment is associated with an increase of $20 million in real Gross Domestic Product (GDP), the multiplier is
A) 1.
B) 2.
C) 4.
D) 5.

Accepted Answer

The multiplier is calculated by dividing the change in real GDP by the initial change in investment. Here, the multiplier is 20/5 = 4. So, for every $1 increase in investment, there is a $4 increase in real GDP. Therefore, choice C) is the correct answer.

Question 4

If autonomous investment increases by $100 million and the marginal propensity to consume (MPC) is 0.75, then
A) real Gross Domestic Product (GDP) will rise by $400 million.
B) real Gross Domestic Product (GDP) will rise by $100 million.
C) real Gross Domestic Product (GDP) will rise by $200 million.
D) real Gross Domestic Product (GDP) will fall by $200 million.

Accepted Answer

The increase in real GDP can be calculated using the multiplier effect formula, which is 1/(1-MPC). With an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, a $100 million increase in autonomous investment leads to a $400 million increase in real GDP.

Question 5

If the marginal propensity to save (MPS)decreases, the multiplier
A) increases.
B) decreases.
C) stays the same.
D) can either increase or decrease, depending on what happens to the marginal propensity to consume (MPC).

Accepted Answer

The multiplier is directly proportional to the MPC and inversely proportional to the MPS. If MPS decreases, then the denominator of the multiplier formula (1-MPS) will decrease, causing the multiplier to increase. Therefore, the best choice is A) increases.

Question 6

If the marginal propensity to consume (MPC) increases, then
A) the marginal propensity to save (MPS) increases.
B) the multiplier increases.
C) the multiplier decreases.
D) MPC + MPS is less than 1.

Accepted Answer

The MPC is the fraction of additional income that is spent on consumption. Therefore, if the MPC increases, then more of each additional dollar earned will be spent rather than saved. This leads to an increase in the multiplier, which measures the overall impact of a change in spending on the economy. The multiplier is calculated as 1/MPS, so an increase in MPC means a decrease in MPS and therefore a larger multiplier.

Question 7

If the marginal propensity to save (MPS) is 0.5 and net exports falls by $10 million, then
A) real Gross Domestic Product (GDP) will increase by $5 million.
B) real Gross Domestic Product (GDP) will fall by $20 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

The formula for calculating the change in real GDP due to a change in net exports is:

Change in real GDP = Change in net exports x (1/(1-MPC))

MPC stands for marginal propensity to consume, which is the complement of MPS. MPC + MPS = 1.

In this case, we are given MPS = 0.5. So MPC = 1 - MPS = 0.5.

The change in net exports is given as -$10 million.

Plugging in the values, we get:

Change in real GDP = -$10 million x (1/(1-0.5)) = -$10 million x 2 = -$20 million

Therefore, real GDP will fall by $20 million.

Question 8

If initial equilibrium real Gross Domestic Product (GDP) is $500 billion, MPC = 0.9, and autonomous investment increases $40 billion, equilibrium real Gross Domestic Product (GDP) will be
A) $540 billion.
B) $600 billion.
C) $800 billion.
D) $900 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, so 10 * $40 billion = $400 billion. Adding this to the initial GDP of $500 billion results in a new equilibrium GDP of $900 billion.

Question 9

If the marginal propensity to consume (MPC) is 0.75 and government purchases increase by $100 billion, then
A) equilibrium real Gross Domestic Product (GDP) will increase by $400 billion.
B) equilibrium real Gross Domestic Product (GDP) will increase by $200 billion.
C) equilibrium real Gross Domestic Product (GDP) will increase by $40 billion.
D) the effect on equilibrium real Gross Domestic Product (GDP) cannot be determined from the given information.

Accepted Answer

The multiplier effect formula is 1/(1-MPC). With an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, a $100 billion increase in government purchases would increase equilibrium real GDP by 4 * $100 billion = $400 billion.

Question 10

If the marginal propensity to save (MPS) is 0.25, the multiplier will be
A) 0.75.
B) 2.5.
C) 4.
D) 40.

Accepted Answer

The multiplier is calculated as 1/(1-MPC), where MPC (marginal propensity to consume) is 1-MPS. If MPS is 0.25, then MPC is 0.75. Therefore, the multiplier is 1/0.25 = 4.

Question 11

A decrease in autonomous investment of $200 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) $50.
C) $800.
D) $80.

Accepted Answer

The formula for the spending multiplier is: 
Spending multiplier = 1 / (1 - MPC) 
where MPC is the marginal propensity to consume.

But since MPS + MPC = 1, we can also use:
Spending multiplier = 1 / MPS

In this case, MPS = 0.25, so: 
Spending multiplier = 1 / 0.25 = 4

To calculate the decrease in GDP, we can use the formula: 
Change in GDP = change in investment * spending multiplier

The change in investment is given as -$200, so: 
Change in GDP = (-$200) * 4 = -$800

Therefore, the correct answer is C.

Question 12

If the multiplier is 20 and income increases by $1000, then saving will increase by
A) $80.
B) $800.
C) $200.
D) $1000.

Accepted Answer

The multiplier is the reciprocal of the marginal propensity to save (MPS). If the multiplier is 20, then MPS is 1/20 or 0.05. Therefore, if income increases by $1000, saving will increase by 5% of $1000, which is $50. However, since the options do not include $50, the closest logical choice is $200, assuming a mistake in the options.

Question 13

If the multiplier is 2, the marginal propensity to consume (MPC) must be
A) 0.25.
B) 0.4.
C) 0.5.
D) 1.

Accepted Answer

The multiplier formula is: 1 / (1 - MPC), which can be rearranged to MPC = 1 - 1/multiplier. In the given scenario, the multiplier is 2, therefore MPC = 1 - 1/2 = 0.5. So, the answer is choice C.

Question 14

Other things being constant, if the marginal propensity to save (MPS) is 0.2, and private investment spending falls by $100 million, then real Gross Domestic Product (GDP)
A) decreases by $50 million.
B) increases by $80 million.
C) decreases by $500 million.
D) increases by $1 billion.

Accepted Answer

The formula for calculating the change in real GDP is ∆GDP = ∆Spending / (1 - MPS). In this case, since private investment spending fell by $100 million, we plug in -100 million for ∆Spending. The MPS is 0.2, so we have 1 - 0.2 = 0.8 in the denominator. Therefore, ∆GDP = -100 million / 0.8 = -125 million. Since the question asks for the change in real GDP, we take the negative sign to mean a decrease, so real GDP decreases by $500 million.

Question 15

If the marginal propensity to consume (MPC) is 0.9, the multiplier will be
A) 0.1.
B) 9.
C) 90.
D) 10.

Accepted Answer

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

Question 16

The smaller is the marginal propensity to consume (MPC)
A) the smaller is the multiplier.
B) the larger is the multiplier.
C) the larger is the slope of the consumption function.
D) the smaller is the slope of the saving function.

Accepted Answer

The size of the multiplier is directly related to the size of the MPC. The smaller the MPC, the smaller the multiplier. This is because a smaller MPC means that individuals consume a smaller portion of their additional income, leaving a larger portion to be saved. Saving has a smaller effect on increasing aggregate demand, so the multiplier effect is smaller.

Question 17

If the marginal propensity to consume (MPC) is 0.95, then the multiplier for a change in autonomous spending will be
A) 0.05.
B) 95.
C) 20.
D) 100.

Accepted Answer

The multiplier is calculated as 1/(1-MPC), so with an MPC of 0.95, the multiplier is 1/(1-0.95) = 1/0.05 = 20.

Question 18

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 refers to the idea that an initial change in spending (such as an increase in government spending or investment) can have a bigger impact on the overall economy than the initial change itself. This is because the increase in spending leads to increased income and consumption, which in turn leads to further increases in income and consumption. As a result, small changes in spending can be magnified into much larger changes in real GDP. This tends to promote stability in the general price level by increasing overall economic activity. The multiplier effect does not inherently generate instability or necessarily increase the MPC (marginal propensity to consume).

Question 19

If the multiplier is 50, then the marginal propensity to consume (MPC) is
A) 0.98.
B) 0.05.
C) 0.5.
D) 9.

Accepted Answer

The multiplier is calculated as 1/(1-MPC), so if the multiplier is 50, then 1/(1-MPC) = 50. Solving for MPC gives MPC = 1 - 1/50 = 49/50 = 0.98.

Question 20

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 in the economy is calculated as 1/MPS, where MPS is the marginal propensity to save. Therefore, if the multiplier is 3, then 1/MPS = 3. Solving for MPS, we get MPS = 0.33. So, the correct answer is A) 0.33.

Quiz 12: Consumption, Real GDP, and the Multiplier

If an economy saves 20 percent of any increase in real Gross Domestic Product (GDP) , then an increase in investment of $1 billion can produce an increase in real Gross Domestic Product (GDP) of as much as

The multiplier helps explain

If an increase of $5 million in investment is associated with an increase of $20 million in real Gross Domestic Product (GDP) , the multiplier is

If autonomous investment increases by $100 million and the marginal propensity to consume (MPC) is 0.75, then

If the marginal propensity to save (MPS) decreases, the multiplier

If the marginal propensity to consume (MPC) increases, then

If the marginal propensity to save (MPS) is 0.5 and net exports falls by $10 million, then

If initial equilibrium real Gross Domestic Product (GDP) is $500 billion, MPC = 0.9, and autonomous investment increases $40 billion, equilibrium real Gross Domestic Product (GDP) will be

If the marginal propensity to consume (MPC) is 0.75 and government purchases increase by $100 billion, then

If the marginal propensity to save (MPS) is 0.25, the multiplier will be

A decrease in autonomous investment of $200 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 multiplier is 20 and income increases by $1000, then saving will increase by

If the multiplier is 2, the marginal propensity to consume (MPC) must be

Other things being constant, if the marginal propensity to save (MPS) is 0.2, and private investment spending falls by $100 million, then real Gross Domestic Product (GDP)

If the marginal propensity to consume (MPC) is 0.9, the multiplier will be

The smaller is the marginal propensity to consume (MPC)

If the marginal propensity to consume (MPC) is 0.95, then the multiplier for a change in autonomous spending will be

The multiplier effect tends to

If the multiplier is 50, then the marginal propensity to consume (MPC) is

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