ECO 120 - Multiplier Effect Problems

Suppose that a financial crisis decreases investment spending by $100 billion and the marginal propensity to consume is 0.8. Assuming no taxes and no trade, real GDP will _________ by _______. A. decrease; $500 billion B. decrease; $200 billion C. decrease; $800 billion D. increase; $400 billion

A. decrease; $500 billion

If disposable income increases by $5 billion and consumer spending increases by $4 billion, the marginal propensity to consume equals: A. 20 B. 0.8 C. 1.25 D. 9

B. 0.8

The multiplier effect of changes in government purchases of goods and services is equal to: A. 1/(1-MPS) B. 1/(1-MPC) C. MPS/(1-MPC) D. MPC/(1-MPS)

B. 1/(1-MPC)

A $100 million increase in government spending increases equilibrium GDP by: A. $100 million B. more than $100 million C. less than $100 million D. zero

B. more than $100 million

A cut in taxes will have the most effect on aggregate demand if it is given to: A. people with a low marginal propensity to consume B. people with a high marginal propensity to consume C. everyone in the economy D. those who hold a large amount of wealth

B. people with a high marginal propensity to consume

The marginal propensity to save is: A. savings divided by aggregate income B. the fraction of an additional dollar of disposable income that is saved C. 1 + MPC D. savings divided by aggregate income, or 1 + MPC

B. the fraction of an additional dollar of disposable income that is saved

If you disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 t0 $12,000, your marginal propensity to consume is: A. 0.2 B. 0.4 C. 0.6 D. 0.8

C. 0.6

If the marginal propensity to save is 0.1, then the government spending multiplier has a value of: A. 0.1 B. 9 C. 10 D. 0.11

C. 10

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is: A. 0.8 B. 1.25 C. 5 D. 4

C. 5

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If the actual real GDP is $700 billion, ________ government spending by _________ would bring the economy to potential output. A. increasing; $25 billion B. increasing; $100 billion C. increasing; $20 billion D. decreasing; $100 billion

C. increasing; $20 billion

The marginal propensity to consume equals the: A. proportion of consumer spending as a function of aggregate disposable income. B. change in savings divided by the change in aggregate disposable income. C. ratio of the change in consumer spending to the change in aggregate disposable income. D. change in savings divided by the change in consumer spending.

C. ratio of the change in consumer spending to the change in aggregate disposable income

If the marginal propensity to consume is 0.8 and the government spending decreases by $50 million, then equilibrium GDP will decrease by: A. $40 million B. $50 million C. $200 million D. $250 million

D. $250 million

Suppose that the marginal propensity to consume is 0.8 and investment spending increases by $100 billion. The increase in real GDP is: A. $100 billion, the same amount as investment spending. B. $125 billion, composed of $100 billion in investment spending and $25 billion in consumption. C. $80 billion, composed of $100 billion in investment spending and a decrease in consumption of $20 billion. D. $500 billion, composed of $100 billion in investment spending and $400 billion in consumption.

D. $500 billion, composed of $100 billion in investment spending and $400 billion in consumption.

If the marginal propensity to consume is 0.9, then the government spending multiplier is: A. 0.1 B. 1.11 C. 9 D. 10

D. 10

If the government spends an extra $5 billion on goods and services, GDP will: A. go up by $5 billion B. remain unchanged C. increase by less than $5 billion D. increase by more than $5 billion

D. increase by more than $5 billion