25) If the MPS is 1/3, a $200 increase in net exports will
A) reduce real Gross Domestic Product (GDP) by $600.
B) reduce real Gross Domestic Product (GDP) by $300.
C) increase real Gross Domestic Product (GDP) by $300.
D) increase real Gross Domestic Product (GDP) by $600.
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 1, then the value of the marginal propensity to save (MPS) is
A) 1.00.
B) 0.
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) 8.
C) 4.0.
D) 5.0.
34) If the marginal propensity to save (MPS) is 0.1, the spending multiplier will be
A) 10.
B) 1.1.
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 $1 trillion, then saving will
A) increase by $0.5 trillion.
B) increase by $1 trillion.
C) increase by $1.5 trillion.
D) remain unchanged.
36) Suppose the marginal propensity to consume (MPC) is 0.8 and there is a $1,000 increase in
autonomous consumption. Given this information, real GDP will increase by
A) $1,600.
B) $2,000.
C) $2,500.
D) $5,000.
37) Suppose marginal propensity to consume (MPC) is 0.7 and there is a $100 increase in
autonomous consumption. Given this information, real GDP will increase by
A) $333.
B) $143.
C) $1,000.
D) $700.
38) Suppose the marginal propensity to consume (MPC) is 0.9 and there is a $4,000 increase in
planned investment. Given this information, real GDP will increase by
A) $20,000.
B) $10,000.
C) $40,000.
D) $45,000.
39) Suppose the marginal propensity to consume (MPC) is 0.8 and there is a $2,000 increase in
planned investment. Given this information, real GDP will increase by
A) $4,000.
B) $20,000.
C) $50,000.
D) $200,000.
40) The smaller the marginal propensity to consume
A) the smaller the marginal propensity to save is.
B) the smaller the multiplier is.
C) the large 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 $400 billion, then
A) an increase in autonomous real consumption spending of $100 billion will generate this
change.
B) a decrease in autonomous real saving of $400 billion will generate this change.
C) an increase in planned real investment spending of $100 billion will generate this change.
D) an increase in real autonomous spending of $80 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 0.85, the multiplier is
A) 6.67.
B) 5.
C) 8.5.
D) 15.
52) Suppose government spending decreases by $10 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 $50 billion.
B) increase in equilibrium real GDP equal to $80 billion.
C) decrease in equilibrium real GDP equal to $50 billion.
D) decrease in equilibrium real GDP equal to $80 billion.
53) Suppose there is a $20 million 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 $20 million.
54) If the marginal propensity to save (MPS) increased from 0.3 to 0.4, 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) 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.
57) 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.
58) Because a decrease in real autonomous spending results in a ________ in the price level, the
ultimate effect on real GDP is ________ than predicted by the multiplier.
A) fall; smaller
B) fall; larger
C) rise; smaller
D) fall, smaller
59) 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.
60) 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.
61) 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
C + I + 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.
62) 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.
63) 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.
64) A decrease in the price level causes
A) a decrease in aggregate demand.
B) an increase in aggregate demand.
C) an increase in total planned real expenditures.
D) a decrease in total planned real expenditures.
65) 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.
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66) 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.
67) 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.
68) 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.
69) 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 + 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.
70) What is the significance of the multiplier? What causes the multiplier to be larger or smaller?
71) What is the multiplier? How is it calculated? Why is the multiplier related only to
consumption spending?
12.6 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 increase in real Gross Domestic Product (GDP).
B) a less than proportional increase 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.
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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.