The Multiplier Principle: Ch. 10

13. T F Concerning the multiplier effect, the initial change in spending that leads to the multiplier can come from consumption, investment, government spending, or net exports.

T

15. T F If the value of the multiplier is 5, the marginal propensity to consume equals 0.8.

T

7. T F The multiplier is based on the idea that any change in income will cause both consumption and saving to vary in the same direction as a change in income and by a fraction of the change in income.

T

6. If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will increase: A. GDP by $100 billion. B. GDP by $20 billion. C. saving by $25 billion. D. consumption by $80 billion.

A

5. The multiplier applies to: A. investment but not to net exports or government spending. B. investment, net exports, and government spending. C. increases in spending but not to decreases in spending. D. spending by the private sector but not by the public sector.

B

1. The multiplier is: A. 1/MPC. B. 1/(1 + MPC). C. 1/MPS. D. 1/(1 - MPS).

C

2. The multiplier is defined as: A. 1 - MPS. B. change in GDP initial change in spending. C. change in GDP/initial change in spending. D. change in GDP - initial change in spending.

C

4. If the MPC is .6, the multiplier will be: A. 4.0. B. 6.0. C. 2.5. D. 1.67.

C

3. The above figure shows the saving schedules for economies 1, 2, 3, and 4. Which economy has the largest multiplier? A. 1 B. 2 C. 3 D. 4

D

10. T F The multiplier effect works in both positive and negative directions.

T

11. T F The main reason for the multiplier effect is that the initial change in income (spending) induces additional rounds of income (spending) that add progressively less in each round as some of the income (spending) gets saved because of the marginal propensity to save.

T

12. T F The multiplier's size is directly related to the marginal propensity to save and inversely related to the marginal propensity to consume.

F

14. T F The size of the multiplier is independent of the saving and consumption habits of households.

F

8. T F The higher the marginal propensity to save, the larger will be the multiplier.

F

9. T F The multiplier is equal to the change in real GDP (income) multiplied by the initial change in spending.

F