Q: Suppose a country's marginal propensity to consume (MPC) is 0.8. What is the value of the multiplier?

$$\text{Multiplier} = \frac{1}{1 - 0.8} = 5$$

Q: If the marginal propensity to save (MPS) is 0.25, what is the value of the multiplier?

$$\text{Multiplier} = \frac{1}{0.25} = 4$$

Q: If the multiplier is 2.5 and there is an initial increase in investment spending of $40 billion, what is the total change in GDP?

$$\text{Change in GDP} = 2.5 \times 40 = 100$$ billion

Question 1

Suppose a country's marginal propensity to consume (MPC) is 0.8. What is the value of the multiplier?

Accepted Answer

$$	ext{Multiplier} = \frac{1}{1 - 0.8} = 5$$

Question 2

If disposable income increases and the average propensity to consume (APC) decreases, what does this imply about the average propensity to save (APS)?

Accepted Answer

APS increases, since $$APC + APS = 1$$

Question 3

Which of the following would cause a rightward shift in the investment demand curve, as shown in the first image?

Accepted Answer

A decrease in business taxes

Question 4

If the marginal propensity to save (MPS) is 0.25, what is the value of the multiplier?

Accepted Answer

$$	ext{Multiplier} = \frac{1}{0.25} = 4$$

Question 5

A household's disposable income increases by $$1,000, and its consumption increases by 700. $$What is the marginal propensity to consume (MPC)?

Accepted Answer

$$MPC = \frac{700}{1000} = 0.7$$

Question 6

Which of the following best explains why investment is considered the most volatile component of GDP?

Accepted Answer

Investment is highly sensitive to changes in expectations, profits, and technological innovations.

Question 7

If the government increases taxes, what is the likely effect on the consumption and saving schedules?

Accepted Answer

Both schedules shift downward (to the left)

Question 8

A firm is considering an investment project with an expected rate of return of 8%. If the real interest rate rises from 6% to 9%, what is the likely outcome for this investment?

Accepted Answer

The investment will not be undertaken because the cost exceeds the expected return.

Question 9

Which of the following is a non-income determinant of consumption and saving?

Accepted Answer

Household wealth

Question 10

If the marginal propensity to consume (MPC) is 0.6, what is the marginal propensity to save (MPS)?

Accepted Answer

$$MPS = 1 - 0.6 = 0.4$$

Question 11

A technological breakthrough leads to the development of a new, more efficient production process. What is the likely effect on the investment demand curve?

Accepted Answer

The investment demand curve shifts to the right.

Question 12

If the multiplier is 2.5 and there is an initial increase in investment spending of $40 billion, what is the total change in GDP?

Accepted Answer

$$	ext{Change in GDP} = 2.5 	imes 40 = 100$$ billion

Question 13

Which of the following scenarios would most likely cause a leftward shift in the investment demand curve?

Accepted Answer

An increase in business taxes

Question 14

If a household's average propensity to consume (APC) is 0.85, what is its average propensity to save (APS)?

Accepted Answer

$$APS = 1 - 0.85 = 0.15$$

Question 15

Which of the following best describes the multiplier effect?

Accepted Answer

An initial change in spending leads to a larger change in GDP due to repeated rounds of spending.

Question 16

A country experiences a sudden increase in household wealth due to a booming stock market. What is the likely effect on the consumption schedule?

Accepted Answer

The consumption schedule shifts upward.

Question 17

Which of the following is NOT a reason for the instability of investment?

Accepted Answer

The stability of government transfer payments

Question 18

If the marginal propensity to consume (MPC) is 0.9, what is the value of the multiplier?

Accepted Answer

$$	ext{Multiplier} = \frac{1}{1 - 0.9} = 10$$

Question 19

A decrease in the real interest rate will have what effect on the quantity of investment demanded, according to the investment demand curve?

Accepted Answer

It will increase the quantity of investment demanded.

Question 20

If a firm's profits are highly variable from year to year, what is the likely effect on its investment behavior?

Accepted Answer

Investment will be more volatile due to uncertainty in profits.

Basic Macroeconomic Relationships: Consumption, Saving, Investment, and the Multiplier

Study Guide - Practice Questions

Study Guide - Flashcards