Question 1

Which statement about the multiplier is correct?

Accepted Answer

A)  If a $20 billion increase in spending creates $20 billion of new income in the first round of the multiplier process and $15 billion in the second round, the multiplier in the economy is 5 
B)  If a $40 billion increase in spending creates $40 billion of new income in the first round of the multiplier process and $20 billion in the second round, the multiplier in the economy is 4 
C)  If a $60 billion increase in spending creates $60 billion of new income in the first round of the multiplier process and $50 billion in the second round, the multiplier in the economy is 5 
D)  If an $80 billion increase in spending creates $80 billion of new income in the first round of the multiplier process and $60 billion in the second round, the multiplier in the economy is 4 
A)  If a $20 billion increase in spending creates $20 billion of new income in the first round of the multiplier process and $15 billion in the second round, the multiplier in the economy is 5 
B)  If a $40 billion increase in spending creates $40 billion of new income in the first round of the multiplier process and $20 billion in the second round, the multiplier in the economy is 4 
C)  If a $60 billion increase in spending creates $60 billion of new income in the first round of the multiplier process and $50 billion in the second round, the multiplier in the economy is 5 
D)  If an $80 billion increase in spending creates $80 billion of new income in the first round of the multiplier process and $60 billion in the second round, the multiplier in the economy is 4

Question 2

The average propensity to save is equal to the percentage of total income that is saved.

Accepted Answer

A) True 
 B)False

Question 3

Which factor explains the variability of investment?

Accepted Answer

A)  The regularity of innovation 
B)  The durability of capital goods 
C)  The constancy of expectations 
D)  The constancy of profits 
A)  The regularity of innovation 
B)  The durability of capital goods 
C)  The constancy of expectations 
D)  The constancy of profits

Question 4

The saving schedule would be shifted upward by:

Accepted Answer

A)  An increase in the value real and financial assets 
B)  A reduction in real interest rates 
C)  Expectations of rising prices of products 
D)  A decrease in taxes 
A)  An increase in the value real and financial assets 
B)  A reduction in real interest rates 
C)  Expectations of rising prices of products 
D)  A decrease in taxes

Question 5

If a $100 billion increase in consumption spending creates $100 billion of new income in the first round of the multiplier process and $75 billion in the second round, the multiplier in the economy is 4.

Accepted Answer

A) True 
 B)False

Question 6

The following factors help explain the instability of investment, except:

Accepted Answer

A)  Business expectations can quickly change for unpredictable reasons 
B)  Innovations in the economy occur quite irregularly 
C)  Profits of firms are highly variable from one period to the next 
D)  Purchases of capital goods are usually nondiscretionary and cannot be postponed 
A)  Business expectations can quickly change for unpredictable reasons 
B)  Innovations in the economy occur quite irregularly 
C)  Profits of firms are highly variable from one period to the next 
D)  Purchases of capital goods are usually nondiscretionary and cannot be postponed

Question 7

The lower the marginal propensity to consume, the larger is the multiplier.

Accepted Answer

A) True 
 B)False

Question 8

If the MPC is 0.8, what change in investment spending is required to effect a total change in income by $60 billion?

Accepted Answer

A)  $12 billion 
B)  $15 billion 
C)  $20 billion 
D)  $25 billion 
A)  $12 billion 
B)  $15 billion 
C)  $20 billion 
D)  $25 billion

Question 9

If businesses feel more optimistic about the state of the economy, then this change is likely to:

Accepted Answer

A)  Cause a movement up the investment demand curve 
B)  Cause a movement down the investment demand curve 
C)  Shift the investment demand curve to the left 
D)  Shift the investment demand curve to the right 
A)  Cause a movement up the investment demand curve 
B)  Cause a movement down the investment demand curve 
C)  Shift the investment demand curve to the left 
D)  Shift the investment demand curve to the right

Question 10

If households see the value of their financial assets increase significantly, then the saving schedule will shift upward.

Accepted Answer

A) True 
 B)False

Question 11

If the real rate of interest increases, then the level of investment in the economy will also increase.

Accepted Answer

A) True 
 B)False

Question 12

Personal saving is equal to:

Accepted Answer

A)  Disposable income plus consumption 
B)  Consumption minus disposable income 
C)  Disposable income minus consumption 
D)  Consumption divided by disposable income 
A)  Disposable income plus consumption 
B)  Consumption minus disposable income 
C)  Disposable income minus consumption 
D)  Consumption divided by disposable income

Question 13

The Great Recession of 2007-2009 caused a basic change in consumer behavior, shifting the saving schedule up.

Accepted Answer

A) True 
 B)False

Question 14

A firm invests in a new machine that costs $2,000 a year but which is expected to produce an increase in total revenue of $2,200 a year. The current real rate of interest is 8 percent. The firm should:

Accepted Answer

A)  Undertake the investment because the expected rate of return of 12 percent is greater than the real rate of interest 
B)  Undertake the investment because the expected rate of return of 10 percent is greater than the real rate of interest 
C)  Undertake the investment because the expected rate of return of 9 percent is greater than the real rate of interest 
D)  Not undertake the investment because the expected rate of return of 7 percent is less than the real rate of interest 
A)  Undertake the investment because the expected rate of return of 12 percent is greater than the real rate of interest 
B)  Undertake the investment because the expected rate of return of 10 percent is greater than the real rate of interest 
C)  Undertake the investment because the expected rate of return of 9 percent is greater than the real rate of interest 
D)  Not undertake the investment because the expected rate of return of 7 percent is less than the real rate of interest

Question 15

The multiplier can be calculated by dividing:

Accepted Answer

A)  The initial change in spending by the change in real GDP 
B)  The change in real GDP by the initial change in spending 
C)  One by one minus the marginal propensity to save 
D)  One by one minus the marginal propensity to invest 
A)  The initial change in spending by the change in real GDP 
B)  The change in real GDP by the initial change in spending 
C)  One by one minus the marginal propensity to save 
D)  One by one minus the marginal propensity to invest

Question 16

Refer to the consumption schedule above. Disposable income equals consumption at point:

Accepted Answer

A)  A 
B)  C 
C)  D 
D)  G 
A)  A 
B)  C 
C)  D 
D)  G

Question 17

The variability of business profits:

Accepted Answer

A)  Helps explain the instability of investments over time 
B)  Does not affect investment spending, which depends on expected profits not current profits 
C)  Explains why the durability of capital goods is variable 
D)  Causes the variations in consumption spending over time 
A)  Helps explain the instability of investments over time 
B)  Does not affect investment spending, which depends on expected profits not current profits 
C)  Explains why the durability of capital goods is variable 
D)  Causes the variations in consumption spending over time

Question 18

The multiplier value is the reciprocal of the marginal propensity to consume.

Accepted Answer

A) True 
 B)False

Question 19

All of the following statements about consuming in excess of one's disposable income are true, except:

Accepted Answer

A)  It is possible, and it's called dissaving 
B)  In this case, the values of both saving and the APS are negative 
C)  (APC + APS) will be less than 1 in this situation 
D)  The value of APC will be greater than 1 in this case 
A)  It is possible, and it's called dissaving 
B)  In this case, the values of both saving and the APS are negative 
C)  (APC + APS) will be less than 1 in this situation 
D)  The value of APC will be greater than 1 in this case

Question 20

Refer to the consumption schedule above. At income level 3, the amount of consumption is represented by the line segment:

Accepted Answer

A)  FG 
B)  FH 
C)  FD 
D)  GH 
A)  FG 
B)  FH 
C)  FD 
D)  GH

Exam 10: Basic Macroeconomic Relationships

Which statement about the multiplier is correct?

The average propensity to save is equal to the percentage of total income that is saved.

Which factor explains the variability of investment?

The saving schedule would be shifted upward by:

If a $100 billion increase in consumption spending creates $100 billion of new income in the first round of the multiplier process and $75 billion in the second round, the multiplier in the economy is 4.

The following factors help explain the instability of investment, except:

The lower the marginal propensity to consume, the larger is the multiplier.

If the MPC is 0.8, what change in investment spending is required to effect a total change in income by $60 billion?

If businesses feel more optimistic about the state of the economy, then this change is likely to:

If households see the value of their financial assets increase significantly, then the saving schedule will shift upward.

If the real rate of interest increases, then the level of investment in the economy will also increase.

Personal saving is equal to:

The Great Recession of 2007-2009 caused a basic change in consumer behavior, shifting the saving schedule up.

A firm invests in a new machine that costs $2,000 a year but which is expected to produce an increase in total revenue of $2,200 a year. The current real rate of interest is 8 percent. The firm should:

The multiplier can be calculated by dividing:

Refer to the consumption schedule above. Disposable income equals consumption at point:

The variability of business profits:

The multiplier value is the reciprocal of the marginal propensity to consume.

All of the following statements about consuming in excess of one's disposable income are true, except:

Refer to the consumption schedule above. At income level 3, the amount of consumption is represented by the line segment:

Limits, Alternatives, and Choices

The Market System and the Circular Flow

Demand, Supply, and Market Equilibrium

Market Failures: Public Goods and Externalities

Governments Role and Government Failure

An Introduction to Macroeconomics

Measuring Domestic Output and National Income

Economic Growth

Business Cycles, Unemployment, and Inflation

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Money Creation

Interest Rates and Monetary Policy

Financial Economics

Extending the Analysis of Aggregate Supply

Current Issues in Macro Theory and Policy

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

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