a.
.b. Y.
c. mpcY.
d.
+ mpcY.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
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
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.
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
b. From
1945 to 1950, the
c. From
1945 to 1950, the
d. In
1950, the