EC2105
Exam 3, Practice Multiple Choice Questions
Question Set 2
(Spring 2002)

1. The multiplier model makes it possible to estimate how a change in __________ affects equilibrium output.
1. The price level
2. Input costs
3. Induced expenditures
4. Autonomous expenditures
2. The multiplier effect arises because changes in __________ give rise to changes in __________.
1. Production and income; induced expenditures.
2. Production and income; autonomous expenditures.
3. Induced expenditures; production and income.
4. Autonomous expenditures; production and income.
3. The multiplier model does not answer which of the following questions?
1. What causes changes in autonomous expenditures?
2. How will output be affected by changes in autonomous expenditures?
3. How do induced expenditures change in response to changes in autonomous expenditures?
4. How will the aggregate demand curve be affected by a change in autonomous expenditures?
 Table 1 Income Expenditures \$0 \$200 100 233 200 267 300 300 400 333

4.  Given Table 1, what is the level of autonomous expenditures?
a.  \$33
b.  \$200
c.  \$300
d.  \$333

5.  Given Table 1, what is the level of induced expenditures when income is \$300?
a.  \$33
b.  \$100
c.  \$200
d.  \$300

1. The expenditure function that reflects Table 1 is:
1. AE = 0.33Y.
2. AE = 200 + 0.33Y.
3. Y = 200 + 0.33AE.
4. Y = 0.33AE.
2. In Table 1, if income rises from \$200 to \$300, induced expenditures:
1. Remain equal to \$200.
2. Rise by \$200.
3. Rise by \$33.
4. Remain equal to \$167.
3. In Table 1, if income rises from \$200 to \$300, autonomous expenditures:
1. Remain equal to \$200.
2. Rise by \$200.
3. Rise by \$33.
4. Remain equal to \$167.
4. In Table 1, the marginal propensity to consume is:
1. \$200.
2. \$333.
3. 0.333.
4. 0.667.
5. If autonomous expenditures are \$1,000, income is \$4,000, and the marginal propensity to consume is 0.75, then total expenditures according to the expenditure function would be:
1. \$3,000.
2. \$4,000.
3. \$5,000.
4. \$13,500.
6. Given AE = \$2000 + 0.8Y, when income equals \$6000, autonomous expenditures will be:
1. \$2,000
2. \$4,800
3. \$6,000
4. \$6,800
7. Given AE = \$2000 + 0.8Y, when income equals \$6000, induced  expenditures will be:
1. \$2,000
2. \$4,800
3. \$6,000
4. \$6,800

13.  Refer to the figure above.  The mpc equals:
1. 0.25.
2. 0.50.
3. 0.75.
4. 1.00.

14.  For levels of income to the left of the point where the expenditure function intersects the aggregate production line:
a.  Inventories are falling.
b.  Inventories are constant.
c.  Inventories are rising.
d.  The economy is in equilbrium.

15.  Suppose you are told that AE = 7000 + 0.8Y.  Using this equation and the multiplier, what will equilibrium income be?
a.  \$7,000.
b.  \$8,750.
c.  \$35,000.
d.  \$56,000.

16.  Given AE = 2000 + .8Y, when income equals \$6,000, expenditures will be:
a.  \$2,000
b.  \$4,800
c.  \$6,800
d.  \$8,000

17.  If the mpc is 0.75 and autonomous expenditures are \$300, then the multiplier equation implies that total equilibrium expenditures in the economy are:

1. \$225.
2. \$300.
3. \$375.
4. \$1,200.

18.  According to the multiplier equation, an increase in the marginal propensity to consume:

1. Decreases autonomous expenditures.
2. Increases autonomous expenditures.
3. Increases total output.
4. Decreases total output.

19.  Suppose autonomous expenditures equal 1,000 and the mpc is 0.6.  Now suppose the mpc rises to 0.75.  Using the multiplier equation, we know that equilibrium income will:

1. Increase by 150.
2. Decrease by 150.
3. Increase by 750.
4. Increase by 1,500.

20.  In the multiplier model, if the mpc is 0.6, then the multiplier is:

1. 0.40.
2. 2.50
3. 4.00.
4. 6.00.

21.  If the marginal propensity to save is 0.4, a \$100 change in income will ultimately lead to:

1. A \$40 change in expenditures.
2. A \$60 change in expenditures.
3. A \$100 change in expenditures.
4. A \$250 change in expenditures.

22. Refer to the graph above.  If the mpc were to change to .75,  equilibrium real income would be:
1. Greater than \$600.
2. \$600.
3. Less than \$600.

23. Refer to the graph above.  If autonomous expenditures were to change to \$250, equilibrium real income would be:

1. Greater than \$600.
2. \$600.
3. Less than \$600.

24. Suppose that foreign income decreases and this reduces US exports.  The U.S. AE curve will likely:

1. Become steeper.
2. Become flatter.
3. Shift up.
4. Shift down.

25.  A multiplier of 8 means that a \$80 billion increase in autonomous investment will:

1. Decrease equilibrium real GDP by \$10 billion.
2. Increase equilibrium real GDP by \$100 billion.
3. Increase equilibrium real GDP by \$640 billion.
4. Increase equilibrium real GDP by \$720 billion.

26.  Suppose that a \$200 billion decrease in autonomous expenditures causes equilibrium GDP to decline by \$500 billion.  What is the multiplier?

1. 0.2.
2. 0.4.
3. 2.5.
4. 5.0.

27.  Because of political unrest in South Korea , investment in that country declines by 50.  If the mpc is 0.75, equilibrium income would likely decline by:

1. 37.5.
2. 50.
3. 87.5.
4. 200.

28.  If the paradox of thrift arises, an increase in saving will:

1. Decrease the price level.
2. Increase the price level.
3. Decrease equilibrium income.
4. Increase equilibrium income.