1. The multiplier effect means that:
A) consumption is typically several times as large as saving.
B) a small change in consumption demand can cause a much larger increase in investment.
C) a small increase in investment can cause national income to change by a larger amount.
D) a small decline in the MPC can cause equilibrium GDP to rise by several times that amount.
Ans: C
2. The multiplier may be calculated as:
A) 1/(MPS + MPC)
B) MPC/MPS
C) 1/(1 – MPC)
D) 1 – MPC = MPS
Ans: C
3. If the MPS is only half as large as the MPC, the multiplier:
A) is 2.
B) is 3.
C) is 4.
D) cannot be determined from the information given.
Ans: B
4. The multiplier effect:
A) reduces the MPC.
B) magnifies small changes in spending into larger changes in output and income.
C) promotes stability of the general price level.
D) lessens upswings and downswings in business activity.
Ans: B
5. If the MPC is .6, the multiplier will be:
A) 4.0.
B) 6.0.
C) 2.5.
D) 1.67.
Ans: C
6. The multiplier effect indicates that:
A) a decline in the interest rate will cause a proportionately larger increase in investment.
B) a change in aggregate expenditures will change aggregate income by a larger amount.
C) a change in aggregate expenditures will increase aggregate income by the same amount.
D) a small increase in total income will generate a large change in aggregate expenditures.
Ans: B
7. 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.
Ans: B
8. Suppose that the level of GDP increased by $100 billion in an economy where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by:
A) $100 billion.
B) $50 billion.
C) $500 billion.
D) $5 billion.
Ans: B
9. At the equilibrium GDP for an open economy:
A) net exports may be either positive or negative.
B) imports will always exceed exports.
C) exports will always exceed imports.
D) exports and imports will be equal.
Ans: A
10. If the multiplier in an economy is 5, a $20 billion increase in net exports will:
A) increase GDP by $100 billion.
B) reduce GDP by $20 billion.
C) decrease GDP by $100 billion.
D) increase GDP by $20 billion.
Ans: A
11. In a mixed open economy the equilibrium level of GDP exists where:
A) Ca + Ig + Xn intersects the 45-degree line.
B) Ca + Ig = Sa + T + X .
C) Ca + Ig + Xn + G = GDP.
D) Ca + Ig + Xn = Sa + T .
Ans: C
12. The multiplier associated with a change in government purchases is:
A) always equal to 1.
B) smaller than that associated with an equal change in taxes.
C) the same as that associated with a change in investment.
D) less than that associated with a change in investment.
E) greater than that associated with a change in investment.
Ans: C