Download Chapters 9 and 10 practice--ANSWERS Define the multiplier. How is

Chapters 9 and 10 practice--ANSWERS
1.
Define the multiplier. How is it related to real GDP and the initial change in spending? How
can the multiplier have a negative effect?
The multiplier is simply the ratio of the change in real GDP to the initial change in spending. Multiplying
the initial change in spending by the multiplier gives you the amount of change in real GDP. The
multiplier effect can work in a positive or a negative direction. An initial increase in spending will result
in a larger increase in real GDP, and an initial decrease in spending will result in a larger decrease in real
GDP. [text: E p. 183; MA p. 183]
2. What is the relationship between the multiplier and the marginal propensities?
The multiplier is directly related to the marginal propensities. By definition, the multiplier is related to
the marginal propensity to save because it equals 1/MPS. Thus, the multiplier and the MPS are
inversely related. The multiplier is also related to the marginal propensity to consume because it also
equals 1/ (1–MPC). [text: E pp. 184-186; MA pp. 184-186]
3. Assume the following output-income and saving data for the private sector of the economy.
Real GDP (Y)
$240
260
280
300
320
340
360
380
400
Consumption (C)
$244
260
276
292
308
324
340
356
372
(a) Describe the consumption schedule in equation form.
(b) Assuming net investment is $5 billion and independent of the level of GDP, what will be the
equilibrium level of GDP?
(c) Assuming net investment of $15 billion and independent of the level of GDP, what will be
the equilibrium level of GDP?
(d) Using your answers to (a) and (b), find the size of the multiplier.
(e) Check your answer using the MPC embodied in these data.
4. ______Saving is always equal to:
a. Planned investment less unintended increases in inventories.
b. Planned investment.
c. Unintended changes in inventories
d. Actual investment.
5. ______At the point where the consumption schedule intersects the 45-degree line:
a. The MPC is 1.00.
b. The APC is 1.00.
c. Saving is equal to consumption.
d. The economy is in equilibrium.
6. ______The most important determinant of consumer spending is:
a. The level of household debt.
b. Consumer expectations.
c. The stock of wealth.
d. The level of income
Answer the next question(s) on the basis of the following information for a private closed economy.
Assume that for the entire business sector of the economy there is $0 worth of investment projects that
will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that
will yield an expected rate of return of 20-25 percent
7.
______ Refer to the above information. If the real interest rate is 15 percent, what amount of
investment will be undertaken?
a. $15
b. $30
c. $45
d. $60
8. ______A rightward shift of the investment-demand curve might be caused by:
a. An increase in the price level.
b. A decline in the real interest rate.
c. An increase in the expected rate of return on investment.
d. An increase in business taxes.
9. Complete the following table assuming that (a) MPS = 1/3, (b) there is no government and all
saving is personal saving.
Level of output
and income
$100
130
160
190
220
Consumption
$120
____
____
____
____
Saving
$___
___
___
___
___
250
____
___
and income
$100
130
160
190
220
250
Consumption
$120
140
160
180
200
220
Saving
$–20
–10
0
10
20
30
Level of output
[text: E pp. 161-164; MA pp. 161-164]
10. Complete the accompanying table.
Level of output
and income
(GDP = DI)
Consumption
$100
$___
125
___
150
___
175
___
200
___
225
___
Saving
$–5
0
5
10
15
20
APC
____
____
____
____
____
____
APS
____
____
____
____
____
____
MPC
___
___
___
___
___
___
MPS
___
___
___
___
___
___
a. What is the break-even level of income?
b. Now, assume there is planed investment of $5 what is the equilibrium point for the
new economy? ______. What if planned investment increases to $20? ______
Level of output
and income
(GDP = DI)
$100
125
150
175
200
225
Consumption
$105
125
145
165
185
205
Saving
$–5
0
5
10
15
20
APC
1.05
1.00
0.97
0.94
0.925
0.91
APS
–.05
.00
.03
.06
.075
.09
(a) The break-even level of income is 125 where saving equals zero
(b) GDP=150, GDP=225
11. Use the table below to answer the following questions:
Real GDP
$300
310
C
$290
298
MPC
0.8
0.8
0.8
0.8
0.8
0.8
MPS
0.2
0.2
0.2
0.2
0.2
0.2
320
330
340
350
360
306
314
322
330
338
a. What is the size of the multiplier in this economy?
(a) To find the MPC compare the change in C with the change in GDP to get 8/10 or 0.8; this means the
MPS is 0.2 and the multiplier will be 1/.2 or 5.