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30-156
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
30-160
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
30-161
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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.
30-163
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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.
30-165
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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.
30-167
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
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
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
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.
