Practice Questions: The Multiplier Model

Basics

1.  Suppose aggregate expenditures in an economy are equal to $7,000 billion.  Income in the economy is:
a.    Less than $7,000 billion.
b.    Greater than $7,000 billion.
c.    Exactly $7,000 billion.
d.    Somewhere between $7,000 billion and $8,000 billion.

2. The multiplier model assumes:
a.    The price level is constant.
b.    The price level increases as more is produced.
c.    The price level falls as more is produced.
d.    The amount produced cannot change.

3. Graphically, the aggregate production curve is a straight line that:
a.    Goes through the origin and has a slope equal to the mpc.
b.    Begins at the level of autonomous expenditures and has a slope equal to the mpc.
c.    Begins at the level of autonomous expenditures and has a slope of 1.
d.    Goes through the origin and has a slope of 1.

4. The multiplier model makes it possible to estimate how a change in __________ affects equilibrium output.
a.    The price level
b.    Input costs
c.    Induced expenditures
d.    Autonomous expenditures

5. The multiplier effect arises because changes in __________ give rise to changes in __________.
a.    Production and income; induced expenditures.
b.    Production and income; autonomous expenditures.
c.    Induced expenditures; production and income.
d.    Autonomous expenditures; production and income.

6. The multiplier model does not answer which of the following questions?
a.    What causes changes in autonomous expenditures?
b.    How will output be affected by changes in autonomous expenditures?
c.    How do induced expenditures change in response to changes in autonomous expenditures?
d.    How will the aggregate demand curve be affected by a change in autonomous expenditures?

The Expenditure Function

7. Induced expenditures are defined as expenditures that:
a.    Occur only in equilibrium.
b.    Do not depend on income.
c.    Occur even when income is zero.
d.    Change as income changes.

8.  Expenditures that do not depend on income are called:
a.    Endogenous expenditures.
b.    Aggregate expenditures.
c.    Induced expenditures.
d.    Autonomous expenditures.

9. The marginal propensity to consume tells us:
a.    The fraction of income consumed.
b.    The percentage of income consumed.
c.    The level of induced expenditures.
d.    The fraction of an additional dollar of income that is spent.

10.  The marginal propensity to consume:
a.    Is less than the slope of the expenditure function.
b.    Is equal to the slope of the expenditure function.
c.    Is greater than the slope of the expenditure function.
d.    Is not related to the slope of the expenditure function.

11. The expenditure function is flatter than the aggregate production curve because:
a.    People increase their spending by more than their income when their income rises.
b.    People increase their spending by less than their income when their income rises.
c.    The mpc becomes smaller at points farther out along the expenditure function.
d.    The mpc is greater than one.

Income

Expenditures

$0

$200

100

233

200

267

300

300

400

333

12. Given the table, what is the level of autonomous expenditures?
a.    $33
b.    $200
c.    $300
d.    $333

13.  Given the table above, what is the level of induced expenditures when income is $300?
a.    $33
b.    $100
c.    $200
d.    $300

14. The expenditure function that reflects the table above is:
a.    AE = 0.33Y.
b.    AE = 200 + 0.33Y.
c.    Y = 200 + 0.33AE.
d.    Y = 0.33AE.

15. In the table above, if income rises from $200 to $300, induced expenditures:
a.    Remain equal to $200.
b.    Rise by $200.
c.    Rise by $33.
d.    Remain equal to $167.

16. In the table above, if income rises from $200 to $300, autonomous expenditures:
a.    Remain equal to $200.
b.    Rise by $200.
c.    Rise by $33.
d.    Remain equal to $167.

17. In the table above, the marginal propensity to consume is:
a.    $200.
b.    $333.
c.    0.333.
d.    0.667.

18.  Which part of the expenditure function represents induced expenditures?
a.    .
b.    Y.
c.    mpcY.
d.     + mpcY.

19. If a family’s expenditures increase from $25,000 to $30,000 per year when its income increases from $30,000 to $37,500 its induced expenditures:
a.    Do not change.
b.    Increase by $5,000.
c.    Increase by $7,500.
d.    Change by an amount that cannot be determined without more information.

20. Given AE = $1000 + 0.8Y, when income equals $6000, autonomous expenditures will be:
a.    $500.
b.    $1000.
c.    $4800.
d.    $5800.

21. Given AE = $2000 + 0.8Y, when income equals $6000, autonomous expenditures will be:
a.    $2,000
b.    $4,800
c.    $6,000
d.    $6,800

22. Given AE = $2000 + 0.8Y, when income equals $6000, induced  expenditures will be:
a.    $2,000
b.    $4,800
c.    $6,000
d.    $6,800

23. 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:
a.    $3,000.
b.    $4,000.
c.    $5,000.
d.    $13,500.

24. If autonomous expenditures are $1,000, income is $5,000 and the marginal propensity to consume is 0.6, then total planned expenditures according to the expenditure function would be:
a.    $3,000.
b.    $4,000.
c.    $5,000.
d.    $13,500.

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

26. Which of the following would be expected to cause an upward shift in the aggregate expenditure curve?
a.    Business expectations that the economic conditions will worsen.
b.    An increase in the interest rate.
c.    An increase in consumer wealth.
d.    An increase in income.

27. Suppose that foreign income decreases and this reduces US exports.  The U.S. AE curve will likely:
a.    Become steeper.
b.    Become flatter.
c.    Shift up.
d.    Shift down.

28.  Suppose consumers become more optimistic about the future.  The AE curve will likely:
a.    Become steeper.
b.    Become flatter.
c.     Shift up.
d.     Shift down.

29. Refer to the figure above.  The mpc equals:
a.    0.25.
b.    0.50.
c.    0.75.
d.    1.00.

 

The Multiplier

30. In the multiplier model, if the mpc is 0.2, then the multiplier is:
a.    1.25.
b.    2.00.
c.    5.00.
d.    20.0.

31.  In the multiplier model, if the mpc is 0.5, then the multiplier is:
a.    0.5.
b.    2.
c.    4.
d.    5.

32.  In the multiplier model, if the mpc is 0.6, then the multiplier is:
a.    0.40.
b.    2.50
c.    4.00.
d.    6.00.

33.  As the marginal propensity to consume falls, the multiplier:
a.    Decreases.
b.    Remains constant.
c.    Increases.
d.    May or may not change.

34.  According to the multiplier equation, an increase in the marginal propensity to consume:
a.    Decreases autonomous expenditures.
b.    Increases autonomous expenditures.
c.    Increases total output.
d.    Decreases total output.

 

Equilibrium in the Multiplier Model

35. 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.

36.  For levels of income to the right of the point where the expenditures function intersects the aggregate production curve:
a.    Planned expenditures exceed production and businesses increase production.
b.    Planned expenditures exceed production and businesses decrease production.
c.    Production exceeds planned expenditures and businesses decrease production.
d.    Production exceeds planned expenditures and businesses increase production.

37.  Given AE = 9000 + .75Y, equilibrium income will be:
a.    $9,000.
b.    $12,000.
c.    $25,000.
d.    $36,000.

38. Given AE = 6000 + 0.5Y, equilibrium income will be:
a.    $3000.
b.    $4000.
c.    $8000.
d.    $12,000.

39.  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.

40.  If the mpc is 0.75 and autonomous expenditures are $300, then the multiplier equation implies that total equilibrium expenditures in the economy are:
a.    $225.
b.    $300.
c.    $375.
d.    $1,200.

41.  A multiplier of 8 means that a $80 billion increase in autonomous investment will:
a.    Decrease equilibrium real GDP by $10 billion.
b.    Increase equilibrium real GDP by $100 billion.
c.    Increase equilibrium real GDP by $640 billion.
d.    Increase equilibrium real GDP by $720 billion.

42.  In the multiplier model, if the mpc is 0.75 and autonomous investment increased by $30 billion, equilibrium income would increase by:
a.    $30 billion.
b.    $37.5 billion.
c.    $90 billion.
d.    $120 billion.

43.  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:
a.    37.5.
b.    50.
c.    87.5.
d.    200.

44.  In the context of the multiplier model, which of the following changes would increase equilibrium income by $200 billion if the mpc were 0.80.
a.    An increase in autonomous expenditures of $200 billion.
b.    An increase in autonomous expenditures of $160 billion.
c.    An increase in autonomous expenditures of $40 billion.
d.    An increase in autonomous expenditures of $20 billion.

45.  Suppose that a $200 billion decrease in autonomous expenditures causes equilibrium GDP to decline by $500 billion.  What is the multiplier?
a.    0.2.
b.    0.4.
c.    2.5.
d.    5.0.

46.  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:
a.    Increase by 150.
b.    Decrease by 150.
c.    Increase by 750.
d.    Increase by 1,500.

47. Refer to the graph above.  If autonomous expenditures were to change to $250, equilibrium real income would be:
a.    Greater than $600.
b.    $600.
c.    Less than $600.
d.    Indeterminate (you cannot say for sure without more information).

48. Refer to the graph above.  If the mpc were to change to .75,  equilibrium real income would be:
a.    Greater than $600.
b.    $600.
c.    Less than $600.
d.    Indeterminate (you cannot say for sure without more information).

 

Aggregate Demand Management

49.  Increases in government spending or decreases in taxes are examples of:
a.    Expansionary monetary policy.
b.    Contractionary monetary policy.
c.    Expansionary fiscal policy.
d.    Contractionary fiscal policy.

50. Contractionary fiscal policy involves:
a.    Decreasing taxes.
b.    Decreasing government spending.
c.    Decreasing the money supply.
d.    Reducing the exchange rate.

51.  What is the purpose of aggregate demand management policies?
a.    To keep unemployment as low as possible.
b.    To keep inflation as low as possible.
c.    To reduce or eliminate fluctuations in output around potential.
d.    To keep the budget balanced.

52. The purpose of an expansionary fiscal policy is to:
a.    Reduce inflationary pressures.
b.    Reduce aggregate demand, employment, and output.
c.    Increase aggregate demand, employment, and output.
d.    Reduce interest rates.

53. When equilibrium income is above potential income there is:
a.    Too low a level of aggregate demand.
b.    An inflationary gap.
c.    A recessionary gap.
d.    Too much unemployment.

54. If output is less than potential output, one fiscal policy that might close the gap is:
a.    A cut in social security payments.
b.    A cut in the income tax rate.
c.    A cut in education spending.
d.    An increase in property taxes.

55. Suppose the Japanese economy faces a recessionary gap of 60.  If the mpc is 0.8 and the price level is constant, the government should:
a.    Increase autonomous expenditures by 12.
b.    Increase autonomous expenditures by 30.
c.    Increase autonomous expenditures by 60.
d.    Increase autonomous expenditures by 120.

56. Suppose equilibrium income is $3,000 billion and government policy makers determine that potential output is $3,400 billion. By how much must government spending change to close the GDP gap if the mpc = .60.
a.    Increase by $160 billion.
b.    Decrease by $160 billion.
c.    Increase by $400 billion.
d.    Decrease by $400 billion.

57. Assume the mpc = .75, GDP = $2,400 billion, and Potential GDP = $2,200 billion.  According to the multiplier model, the economy could achieve potential GDP if government spending were:
a.    Decreased by $50 billion.
b.    Decreased by $40 billion.
c.    Increased by $50 billion.
d.    Increased by $40 billion.

58. The mpc in Singapore is .75, and there is an inflationary gap of 160.  Singapore should:
a.    Decrease autonomous spending by 40.
b.    Decrease autonomous spending by 140.
c.    Increase autonomous spending by 40.
d.    Increase autonomous spending by 160.

 

Limitations of Fiscal Policy

59.  The multiplier model assumes that:
a.    Financing the deficit causes crowding out.
b.    Political pressures affect the choice of government policy.
c.    The government knows both the level of equilibrium income and the level of potential income.
d.    The size of the government debt matters.

60. Which of the following is not assumed in the multiplier model?
a.    Financing the deficit causes crowding out.
b.    The government knows what the mpc is.
c.    The government knows the level of potential income.
d.    The government can quickly change its spending and taxes.

61.  Using fiscal policy to achieve economic stability:
a.    Is difficult even though the government has access to the best information available.
b.    Is simple provided the political process works smoothly.
c.    Is difficult because there are no fiscal policy lags, so the government doesn’t have adequate time to formulate the appropriate policy.
d.    Is simple because economists have developed sophisticated theoretical models of the macro-economy.

62. Suppose you know that the value of the multiplier is 2, potential GDP is $9 trillion, and actual GDP is $8.5 trillion.  Given this information:
a.    Fine tuning the economy would be possible.
b.    Fine tuning the economy would be much easier but mistakes would still occur on occasion.
c.    Fine tuning the economy would still be very difficult.
d.    Fine tuning the economy would be more difficult than without this information.

63.  If the paradox of thrift arises, an increase in saving will:
a.    Decrease the price level.
b.    Increase the price level.
c.    Decrease equilibrium income.
d.    Increase equilibrium income.

64.  When tax revenues exceed government expenditures, the government budget is:
a.    In deficit.
b.    Balanced.
c.    In surplus.
d.    Not in equilibrium.

65. Politically, it is most difficult for government to:
a.    Increase spending and decrease taxes.
b.    Increase taxes and decrease spending.
c.    Decrease both spending and taxes.
d.    Increase both spending and taxes.

66. Reducing a budget deficit could conceivably __________ income if interest rates __________.
a.    Increase; fall enough.
b.    Increase; rise enough.
c.    Decrease; fall too much.
d.    Decrease; rise enough.

67. Crowding out is associated with:
a.    Higher interest rates and lower business investment.
b.    Lower interest rates and lower business investment.
c.    Higher interest rates and higher business investment.
d.    Lower interest rates and higher business investment.

68.  Crowding out occurs when:
a.    Financing a budget deficit is no longer possible.
b.    Financing a budget deficit causes interest rates to rise.
c.    Financing a budget deficit causes interest rates to fall.
d.    Tax receipts rise more slowly than anticipated, resulting in the need to cut government spending.

69. When the government spends more than it collects in taxes:
a.    It must buy bonds.
b.    It must sell bonds.
c.    It must decrease the money supply.
d.    It is running a budget surplus.

70. Expansionary fiscal policy that is financed by selling government bonds is most likely to:
a.    Reduce business investment by increasing interest rates.
b.    Reduce business investment by reducing interest rates.
c.    Increase business investment by increasing interest rates.
d.    Increase business investment by reducing interest rates.

71. A government runs a budget deficit when:
a.    Tax revenues exceed government expenditures.
b.    Government expenditures exceed tax revenues.
c.    Accumulated deficits minus accumulated surpluses.
d.    Accumulated surpluses minus accumulated deficits.

72. If the government has no debt initially, but then has annual revenues of $1 billion each year for 5 years and annual expenditures of $1.2 billion each year for five years, then the government has a:
a.    Deficit of $200 million per year, and a debt of $1 billion.
b.    Surplus of $200 million per year, and a debt of $1 billion.
c.    Deficit of $200 million and a debt of $1 billion per year.
d.    Surplus of $200 million and a debt of $1 billion per year.

 

Year

Surplus or Deficit (-) in billions of dollars

1946

-15.9

1947

4.0

1948

11.8

1949

0.9

1950

-3.1

73. Use the table above to determine which statement is true.
a.    In 1950, the U.S. national debt was $2.3 billion.
b.    From 1945 to 1950, the US national debt fell by $2.3 billion.
c.    From 1945 to 1950, the US national debt rose by $2.3 billion.
d.    In 1950, the US national debt was $3.1 billion.