Chapter 12 Consumption, Real GDP, and the Multiplier 531
13) If the multiplier is 4, the marginal propensity to consume (MPC) must be
A) 0.25. B) 0.5. C) 0.75. D) 1.
14) 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.
15) If an economy saves 20 percent of any increase in real Gross Domestic Product (GDP), then an
increase in investment of $2 billion can produce an increase in real Gross Domestic Product
(GDP) of as much as
A) $2 billion. B) $10 billion. C) $0.4 billion. D) $1.6 billion.
16) If initial equilibrium real Gross Domestic Product (GDP) is $400 billion, MPC 0.9, and
autonomous investment increases $40 billion, equilibrium real Gross Domestic Product (GDP)
will be
A) $440 billion. B) $360 billion. C) $600 billion. D) $800 billion.
17) Other things being constant, if the marginal propensity to save (MPS) is 0.1, and private
investment spending falls by $100 million, then real Gross Domestic Product (GDP)
A) decreases by $10 million. B) increases by $90 million.
C) decreases by $1 billion. D) increases by $1 billion.
18) If an increase of $5 billion in investment is associated with an increase of $25 billion in real Gross
Domestic Product (GDP), the multiplier is
A) 1. B) 3. C) 5. D) 7.
19) 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.
20) If the marginal propensity to consume (MPC) is 0.75 and government purchases increase by
$200 billion, then
A) equilibrium real Gross Domestic Product (GDP) will increase by $800 billion.
B) equilibrium real Gross Domestic Product (GDP) will increase by $200 billion.
C) equilibrium real Gross Domestic Product (GDP) will increase by $50 billion.
D) the effect on equilibrium real Gross Domestic Product (GDP) cannot be determined from
the given information.
21) If the marginal propensity to save (MPS) is 0.5 and net exports falls by $100 million, then
A) real Gross Domestic Product (GDP) will increase by $100 million.
B) real Gross Domestic Product (GDP) will fall by $200 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.
22) If autonomous investment increases by $200 billion and the marginal propensity to consume
(MPC) is 0.5, then
A) real Gross Domestic Product (GDP) will rise by $400 billion.
B) real Gross Domestic Product (GDP) will rise by $200 billion.
C) real Gross Domestic Product (GDP) will rise by $100 billion.
D) real Gross Domestic Product (GDP) will decrease by $100 billion.
23) A decrease in autonomous investment of $100 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) $100. C) $400. D) $800.
24) Suppose the marginal propensity to consume (MPC) equals 0.80, an increase in autonomous
investment of $100 will lead to an increase in real Gross Domestic Product (GDP) by
A) $100. B) $400. C) $500. D) $800.
25) If the MPS is one third, a $100 increase in net exports will
A) reduce real Gross Domestic Product (GDP) by $100.
B) reduce real Gross Domestic Product (GDP) by $300.
C) increase real Gross Domestic Product (GDP) by $33.
D) increase real Gross Domestic Product (GDP) by $300.
26) The multiplier is the ratio of the
A) change in the equilibrium level of real GDP to the change in autonomous expenditures.
B) equilibrium level of real GDP to the change in induced expenditures.
C) change in induced expenditures to the change in autonomous expenditures.
D) change in autonomous expenditures to the change in the equilibrium level of real GDP.
27) If the multiplier has a value of 10, then the value of the marginal propensity to save (MPS) is
A) 1.00. B) 0.90. C) 10.00. D) 0.10.
28) The multiplier is
A) the part of consumption that is independent of the level of disposable income.
B) the proportion of total disposable income that is consumed.
C) the percentage of a given change in income that goes towards consumption.
D) the number which is multiplied by an autonomous change which gives the change in the
equilibrium level of real GDP.
29) The ratio of the change in the equilibrium level of real GDP to the change in autonomous real
expenditures is the
A) average propensity to consume. B) marginal propensity to consume.
C) multiplier. D) unplanned investment.
30) A permanent reduction in planned real investment spending leads to
A) a more than proportional increase in real GDP.
B) a more than proportional decrease in real GDP.
C) a less than proportional decrease in real GDP.
D) a proportional decrease in real GDP.
31) An increase in real net exports leads to an increase in real GDP. Further,
A) real consumption spending and real saving increase.
B) real consumption spending increases but real saving does not change.
C) real consumption spending increases while real investment spending decreases.
D) real government spending decreases to offset the increase in real net exports.
32) The multiplier equals
A) consumption/real disposable income.
B) change in consumption/change in real disposable income.
C) 1/MPC.
D) 1/(1 MPC).
33) If the marginal propensity to consume (MPC) is 0.8, the spending multiplier will be
A) 0.2. B) 1.25. C) 4.0. D) 5.0.
34) If the marginal propensity to consume (MPC) is 0.9, the spending multiplier will be
A) 10. B) 1.11. C) 0.9. D) 0.1.
35) If the marginal propensity to consume (MPC) is 0.75 and there is an increase in planned
investment spending of $0.5 trillion, then saving will
A) increase by $0.25 trillion. B) increase by $0.5 trillion.
C) increase by $1 trillion. D) remain unchanged.
36) Suppose the marginal propensity to consume (MPC) is 0.8 and there is a $2,000 increase in
autonomous consumption. Given this information, real GDP will increase by
A) $1,600. B) $2,000. C) $2,500. D) $10,000.
37) Suppose marginal propensity to consume (MPC) is 0.7 and there is a $1,000 increase in
autonomous consumption. Given this information, real GDP will increase by
A) $3,333. B) $1,429. C) $1,000. D) $700.
38) Suppose the marginal propensity to consume (MPC) is 0.9 and there is a $3,000 increase in
planned investment. Given this information, real GDP will increase by
A) $3,000. B) $2,700. C) $30,000. D) $3,333.
39) Suppose the marginal propensity to consume (MPC) is 0.8 and there is a $4,000 increase in
planned investment. Given this information, real GDP will increase by
A) $4,000. B) $20,000. C) $5,000. D) $2,000.
40) The larger the marginal propensity to consume,
A) the larger the marginal propensity to save is.
B) the larger the multiplier is.
C) the smaller the multiplier is.
D) the smaller autonomous consumption is.
41) If the marginal propensity to consume (MPC) is 0.8 and there is a desire to increase real GDP by
$500 billion, then
A) an increase in autonomous real consumption spending of $500 billion will generate this
change.
B) a decrease in autonomous real saving of $500 billion will generate this change.
C) an increase in planned real investment spending of $200 billion will generate this change.
D) an increase in real autonomous spending of $100 billion will generate this change.
42) The multiplier tells us the relationship between
A) the interest rate and the level of investment expenditure.
B) the exchange rate and the level of exports.
C) the exchange rate and the level of imports.
D) a change in autonomous spending and the resulting change in equilibrium real GDP.
43) The multiplier effect applies to any
A) change in autonomous investment but not autonomous consumption.
B) change in autonomous consumption but not autonomous investment.
C) change in both autonomous consumption and autonomous investment.
D) change in any source of spending other than consumption and investment.
44) The larger the value of the marginal propensity to save (MPS),
A) the larger is the value of the multiplier.
B) the larger is the value of the marginal propensity to consumption (MPC).
C) the larger is the value of autonomous consumption.
D) the smaller is the value of the multiplier.
45) If the MPC 0.8, and planned autonomous investment increases by $80 billion, then
equilibrium real GDP will increase by
A) $64 billion. B) $80 billion. C) $320 billion. D) $400 billion.
46) If the MPC is 0.75, the multiplier is equal to
A) 0.25. B) 0.75/0.25 3. C) 4. D) 5.
47) The size of the multiplier depends on
A) the level of autonomous investment. B) the marginal propensity to consume.
C) the level of net exports. D) the level of autonomous consumption.
48) If the marginal propensity to consume (MPC) is 0.75, what is the value of the multiplier?
A) 4.0 B) 3.0 C) 2.0 D) 1.0
49) An increase in the marginal propensity to save (MPS)
A) increases the value of the multiplier.
B) increases autonomous consumption.
C) increases the marginal propensity to consume (MPC).
D) none of the above.
50) When the marginal propensity to consume (MPC) increases,
A) the multiplier remains unchanged.
B) the multiplier increases.
C) the multiplier decreases.
D) the average propensity to save remains unchanged.
51) If the marginal propensity to consume (MPC) is 0.8, the multiplier is
A) 5.0. B) 1.2. C) 0.2. D) 0.8.
52) Suppose government spending decreases by $100 billion and the marginal propensity to
consume (MPC) is 0.8. Given this information, this decrease in government spending will cause
a(n)
A) increase in equilibrium real GDP equal to $500 billion.
B) increase in equilibrium real GDP equal to $800 billion.
C) increase in equilibrium real GDP equal to $500 billion.
D) decrease in equilibrium real GDP equal to $800 billion.
53) Suppose there is a $200 billion increase in government spending. We know that this increase in
government spending will cause which of the following to occur?
A) an increase in equilibrium real GDP and an increase in the multiplier.
B) an increase in equilibrium real GDP and a reduction in the multiplier.
C) an increase in equilibrium real GDP and no change in the multiplier.
D) equilibrium real GDP will increase by exactly $200 billion
54) If that the marginal propensity to save (MPS) increased from 0.20 to 0.25, this would cause the
multiplier effect to
A) decrease. B) increase.
C) stay the same. D) None of the above is correct.
55) A permanent reduction in net exports leads to
A) a more than proportional decrease in real Gross Domestic Product (GDP).
B) a less than proportional decrease in real Gross Domestic Product (GDP).
C) a proportional increase in real Gross Domestic Product (GDP).
D) a reduction in taxes, autonomous government spending, and a fall in real Gross Domestic
Product (GDP).
56) What is the significance of the multiplier? What causes the multiplier to be larger or smaller?
57) What is the multiplier? How is it calculated? Why is the multiplier related only to consumption
spending?
12.7 How a Change in Real Autonomous Spending Affects Real GDP When the Price
Level Can Change
1) If the aggregate supply curve is upward sloping, then an increase in autonomous consumption
leads to a(n)
A) increase in aggregate demand and a rise in the price level.
B) decrease in aggregate demand and a rise in the price level.
C) decrease in aggregate demand and a fall in the price level.
D) no change in aggregate demand and no change in the price level.
2) When the SRAS curve slopes upward, the actual affect of an increase in real autonomous
spending on equilibrium real GDP is smaller than predicted by the multiplier because
A) the price level falls. B) the price level rises
C) real GDP increases. D) real GDP decreases.
3) Because a decrease in real autonomous spending results in a ________ in the price level, the
ultimate effect on real GDP is ________ that predicted by the multiplier.
A) fall; smaller B) fall; larger C) rise; smaller D) fall, smaller
4) When the equilibrium price level adjusts to an increase in autonomous investment spending, the
impact of the multiplier effect resulting from that spending increase
A) will increase real GDP by an amount smaller than the multiplier effect would indicate.
B) will increase nominal GDP by an amount smaller than the multiplier effect would indicate.
C) will have no impact on the real GDP.
D) is only felt when there are changes in consumption.
5) Suppose that aggregate demand increases along the upward sloping portion of the aggregate
supply curve. What is the result?
A) Nominal GDP and real GDP decrease by the same amount.
B) Nominal GDP and real GDP increase by the same amount.
C) Nominal GDP increases more than real GDP increases.
D) Real GDP increases more than nominal GDP increases.
12.8 The Relationship Between Aggregate Demand and the C I G X Curve
1) Which of the following is a true statement?
A) The C I G X curve has no relationship to the aggregate demand curve other than
some of the variables that affect one curve also affect the other.
B) The C I G X curve is used to derive the aggregate demand curve, but the
CI G X curve is drawn for one price level while price levels vary along the aggregate
demand curve.
C) The C I G X curve is used to derive the aggregate demand curve, but the aggregate
demand curve is drawn for one price level.
D) Both the C I G X curve and the aggregate demand curve are drawn for one price
level.
2) A higher price level causes
A) the aggregate demand curve to shift to the left.
B) the aggregate demand curve to shift to the right.
C) the C I G X curve to shift down.
D) the C I G X curve to shift up.
3) A lower price level causes the C I G X curve to shift as a result of a change in all the
following EXCEPT
A) an increase in real wealth.
B) a decrease in interest rates.
C) an increase in aggregate supply.
D) an increase in foreign spending on domestic goods.
4) A rise in the price level causes
A) an increase in aggregate demand.
B) a decrease in aggregate demand.
C) a reduction in total planned real expenditures.
D) an increase in total planned real expenditures.
5) An increase in planned real investment spending causes
A) a movement along the C I G X curve and a shift of the aggregate demand curve.
B) a shift of the C I G X curve and a movement along the aggregate demand curve.
C) a shift of the C I G X curve but has no effect on the aggregate demand curve.
D) a shift of the C I G X curve that causes the aggregate demand curve to shift.
6) An increase in the price level causes
A) reduced investment spending, because interest rates increase, but an increase in net
exports as U.S. residents buy fewer imports. The change in investment is usually greater
than the change in net exports.
B) a reduction in net exports as higher priced U.S. goods induce foreigners to buy fewer
American products, and an increase in investment spending as the higher prices make
businesses more profitable.
C) reduced investment spending, because interest rates increase and a decrease in net exports
as the higher prices induce foreigners to buy fewer U.S. goods.
D) increased government spending, which crowds out investment spending, so that the net
effect on aggregate demand is nil.
7) If society wants aggregate demand to increase without changes in the price level, then there
must be
A) a gap between full employment and the current level of real GDP and an increase in
autonomous spending.
B) an increase in autonomous spending combined with an increase in the marginal
propensity to save.
C) an increase in autonomous saving so that autonomous investment spending can increase.
D) an increase in autonomous spending and a horizontal short run aggregate supply curve.
8) How does a reduction in the price level affect the position of the C I G X curve and in turn
the equilibrium level of real GDP?
A) The C I G X curve shifts down, thereby reducing the equilibrium level of real GDP.
B) The C I G X curve shifts down, thereby increasing the equilibrium level of real GDP.
C) The C I G X curve shifts up, thereby reducing the equilibrium level of real GDP.
D) The C I G X curve shifts up, thereby increasing the equilibrium level of real GDP.
9) How does an increase in the price level affect the position of the C I G X curve and in turn
the equilibrium level of real GDP?
A) The C I G X curve shifts down, thereby reducing the equilibrium level of real GDP.
B) The C IG X curve shifts down, thereby increasing the equilibrium level of real GDP.
C) The C I G X curve shifts up, thereby reducing the equilibrium level of real GDP.
D) The C I G X curve shifts up, thereby increasing the equilibrium level of real GDP.
12.9 Appendix C: The Keynesian Model and the Multiplier
1) According to the Keynesian model, an increase in autonomous investment leads to
A) a more than proportional decrease in real Gross Domestic Product (GDP).
B) a less than proportional decrease in real Gross Domestic Product (GDP).
C) a proportional increase in real Gross Domestic Product (GDP).
D) a reduction in taxes, autonomous government spending, and a fall in real Gross Domestic
Product (GDP).
2) In the Keynesian model, a decrease in real autonomous spending results in a more than
proportional decrease in real Gross Domestic Product (GDP) because
A) consumption decreases as a result of lower real disposable income.
B) consumption increases while real disposable income decreases.
C) real autonomous spending decreases further as real disposable income decreases.
D) government spending also decreases.
3) In the Keynesian model, an increase in real autonomous spending results in a greater increase in
real Gross Domestic Product (GDP) if
A) the marginal propensity to consume (MPC) is lower.
B) the marginal propensity to consume (MPC) is higher.
C) the average propensity to save (APS) is higher.
D) the average propensity to save (APS) is lower.
4) Suppose the economy is initially at equilibrium, in which total planned real expenditures equals
real GDP. Which of the following will occur if there is an increase in autonomous investment?
A) Inventories will increase immediately and production of goods and services will decrease
until real GDP catches up with total planned real expenditures.
B) Inventories will decrease immediately and production of goods and services will increase
until real GDP catches up with total planned real expenditures.
C) Both inventories and production of goods and services will increase.
D) Inventories will not change and production of goods and services will not change either.