978-1259723223 Test Bank TBChap030 Part 9

30-156

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Test Bank: II

Topic:

The Multiplier Effect

303.

Change in

Income

Change in

Consumption

Change in

Saving

Assumed Increase in

Investment

$5.00

$

$1.25

Second Round

$

$2.81

$

All Other Rounds

$

$8.44

$

Totals

$

$5.00

The table illustrates the multiplier process resulting from an autonomous increase in investment

by $5. The total change in income resulting from the initial change in investment will be

304.

Change in

Income

Change in

Consumption

Change in

Saving

Assumed Increase in

Investment

$5.00

$

$1.25

Second Round

$

$2.81

$

All Other Rounds

$

$8.44

$

Totals

$

$5.00

The table illustrates the multiplier process resulting from an autonomous increase in investment

by $5. The multiplier in this economy is

305. In general, the steeper the consumption schedule, the

306. An increase in spending of $25 billion increases real GDP from $600 billion to $700

billion. The marginal propensity to consume must be

307. The value of the multiplier is likely to fall if there is a fall in

308. If the MPC is 0.8, what change in investment spending is required to effect a total change

in income by $60 billion?

309. An $18 billion increase in spending creates $18 billion of new income in the first round of

the multiplier process and $13.5 billion in the second round. The multiplier in the economy is

310. Which statement about the multiplier is correct?

311. If households in the economy save more of any extra income that they earn, then the

multiplier effect will

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C. be unaffected.

D. become less than 1.0.

312. The change in real GDP resulting from an initial change in spending can be calculated by

313. The simple multiplier 1/MPS

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Learning Objective: 30-05 Illustrate how changes in investment or one of the other

components of total spending can increase or decrease real GDP by a multiple amount.

Test Bank: II

Topic:

The Multiplier Effect

314. Art Buchwald’s article in the Last Word section of the chapter, “Squaring the Economic

Circle,” is a humorous description of

315. Art Buchwald’s article, “Squaring the Economic Circle,” is a humorous description of what

would happen to total income if

316. There are only two things that people can do with their disposable income—spend it or

save it.

317. Saving equals disposable income plus consumption.

318. If disposable income is $350 billion and the average propensity to consume is 0.80, then

personal saving is $70 billion.

319. The marginal propensity to consume shows the fraction of any level of total income that is

consumed.

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AACSB: Knowledge Application

Acces sibili ty:

Keyboard Navigation

Blooms: Understand

D i f ficult y :

02 Medium

Learning Objective: 30–01 Describe how changes in income affect consumption and

saving.

Test Bank: II

Topic:

The Income-Consumption and Income-Saving Relationships

320. The average propensity to save is equal to the percentage of total income that is saved.

321. The marginal propensity to consume is the ratio of consumption to saving.

322. If people saved more of any extra income that they received, then the consumption

schedule would become flatter.

30-164

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Learning Objective: 30–01 Describe how changes in income affect consumption and

saving.

Test Bank: II

Topic:

The Income-Consumption and Income-Saving Relationships

323. If the consumption schedule becomes steeper, then the saving schedule will become

steeper also.

324. If households see the value of their financial assets increase significantly, then the saving

schedule will shift upward.

325. The wealth effect will tend to decrease consumption and increase saving.

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Topic:

Nonincome Determinants of Consumption and Saving

326. An increase in taxes will shift both the consumption schedule and the saving schedule

down.

327. The Great Recession of 2007–2009 caused a basic change in consumer behavior, shifting

the saving schedule up.

328. If the real rate of interest increases, then the level of investment in the economy will also

increase.

329. A business firm will purchase additional capital goods if the real rate of interest in the

economy is less than the expected rate of return from the investment.

330. An increase in business taxes will tend to shift the investment-demand curve rightward.

331. Investment is not affected by current profits; it is affected by expected future profits only.

332. The economic performance in the Great Recession of 2007–2009 clearly illustrated the

relationship that if interest rates fall, then investment spending will increase.

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AACSB: Knowledge Application

Acces sibili ty:

Keyboard Navigation

Blooms: Remember

Dif f i c ul t y :

01 Easy

Learning Objective: 30-04 Identify and explain factors other than the real interest rate

that can affect investment.

Test Bank: II

Topic:

The Interest-Rate-Investment Relationship

333. The multiplier measures the change in real GDP that results from a given change in the

price level.

334. The multiplier effect magnifies the effect of a decrease in spending, resulting in a bigger

decrease in real GDP.

335. The multiplier value is the reciprocal of the marginal propensity to consume.

30-168

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Acces sibili ty:

Keyboard Navigation

Blooms: Understand

D i f ficult y :

02 Medium

Learning Objective: 30–05 Illustrate how changes in investment or one of the other

components of total spending can increase or decrease real GDP by a multiple

amount.

Test Bank: II

Topic:

The Multiplier Effect

336. The multiplier will be larger, the steeper is the saving schedule.

337. If a $100 billion increase in consumption spending creates $100 billion of new income in

the first round of the multiplier process and $75 billion in the second round, the multiplier in the

economy is 4.

338. The lower the marginal propensity to consume, the larger is the multiplier.

30-169

written consent of McGraw-Hill Education.

Ac ce ssi bilit y:

Keyboard Navigation

Blooms: Understand

D i f f i c u l t y :

02 Medium

Learning Objective: 30-05 Illustrate how changes in investment or one of the other

components of total spending can increase or decrease real GDP by a multiple amount.

Test Bank: II

Topic:

The Multiplier Effect

339. If households do not spend any extra income they receive but instead save the entire extra

amount, then the multiplier will be zero.