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AP Economics Study Guide Chapter 10 6. If, in an economy, a $120 billion increase in investment spending creates $120 billion of new income in the first round of the multiplier process and $90 billion in the second round, the multiplier and the marginal propensity to consume will be, respectively,: A) 5.00 and 0.80. B) 4.00 and 0.75. C) 3.33 and 0.70. D) 2.50 and 0.40. 1. In a closed private economy, an increase in investment spending will increase the: A) interest rate. B) consumption schedule. C) equilibrium level of GDP. D) rate of return on investment. 2. If the MPC is .75, the multiplier will be: A) 2. B) 3. C) 3.5. D) 4. 7. The value of the marginal propensity to consume is 0.8. If real GDP increases by $30 billion, this situation was the result of an increase in the aggregate expenditures schedule of: A) $5 billion. B) $6 billion. C) $8 billion. D) $24 billion. Use the following to answer questions 3-5: The table shows a private, closed economy. All figures are in billions of dollars. Expected rate of return 10% 8 6 4 2 0 Investment $ 0 100 200 300 400 500 Consumption $400 500 600 700 800 900 $ 8. In general, the steeper the aggregate expenditure schedule the: A) smaller is the marginal propensity to consume. B) greater is the average propensity to consume. C) smaller is the multiplier. D) larger is the multiplier. GDP 400 600 800 1000 1200 1400 9. In a closed private economy where the MPC is 0.8, what change in investment is required to reduce domestic output by $60 billion? A) $12 billion B) $15 billion C) $20 billion D) $25 billion 3. Refer to the above table. If the real rate of interest is 2%, then the equilibrium level of GDP will be: A) $800 billion. B) $1000 billion. C) $1200 billion. D) $1400 billion. Use the following to answer question 10: The data are for a closed, private (no government) economy. All figures are in billions of dollars. 4. Refer to the above table. An increase in the real interest rate by 4% will: A) decrease the equilibrium level of GDP by $200 billion. B) decrease the equilibrium level of GDP by $300 billion. C) decrease the equilibrium level of GDP by $400 billion. D) increase the equilibrium level of GDP by $400 billion. Possible levels of domestic output and income (GDP = DI) $540 560 580 5. Refer to the above table. The multiplier for this economy is: A) 2.00. B) 2.50. C) 3.00. D) 3.33. Consumption $540 555 570 10. Refer to the above information. The multiplier is: A) 5. B) 4. C) 3. D) 2.5. Page 1 11. Other things being equal, a decrease in an economy's exports will: A) increase domestic aggregate expenditures and the equilibrium level of GDP. B) decrease domestic aggregate expenditures and the equilibrium level of GDP. C) have no effect on domestic GDP because imports will offset the change in exports. D) decrease the marginal propensity to import. 16. Assume that an economy is operating at less than its full-employment level of output. Which event would most likely increase an economy's exports? A) a rise in the tariff on products imported from abroad B) a fall in the prosperity of trading partners for this economy C) an appreciation of a nation's currency relative to foreign currencies D) a depreciation of a nation's currency relative to foreign currencies Use the following to answer questions 12-14: Use the following to answer questions 17-19: All figures are in billions. GDP $500 550 600 650 700 750 Aggregate expenditures (closed economy) $525 560 595 630 665 700 The data are for a no-government economy. All figures are in billions of dollars. Exports $15 15 15 15 15 15 Imports $10 10 10 10 10 10 GDP $440 490 540 590 640 12. Refer to the above data. The equilibrium level of GDP in a private, open economy is: A) $550 billion. B) $600 billion. C) $650 billion. D) $700 billion. Consumption $450 490 530 570 610 17. Refer to the above data. If a lump-sum tax of $30 billion is imposed at all levels of GDP and net exports are zero, the consumption schedule becomes: A) $420, 460, 500, 540, 580. B) $426, 466, 506, 546, 586. C) $430, 470, 510, 550, 590. D) $432, 472, 512, 552, 592. 13. Refer to the above data. The multiplier for this open economy is: A) 1.25. B) 2.00. C) 2.50. D) 3.33. 18. Refer to the above data. If gross investment is $34 billion, net exports are zero, and there is a lump-sum tax of $30 billion at all levels of GDP, then the after-tax equilibrium level of GDP will be: A) $490 billion. B) $540 billion. C) $590 billion. D) $640 billion. 14. Refer to the above data. If exports increased by $15 billion at each level of GDP, then the equilibrium level of GDP would be: A) $550 billion. B) $600 billion. C) $650 billion. D) $700 billion. 19. Refer to the above data. Given the levels of investment at $34 billion, zero net exports, and a lump-sum tax of $30 billion, the addition of government expenditures of $20 billion at each level of GDP will result in an equilibrium GDP of: A) $490 billion. B) $540 billion. C) $590 billion. D) $640 billion. 15. Over time, an increase in the real output and incomes of the trading partners of the United States will: A) increase U.S. exports and U.S. imports. B) decrease U.S. exports and U.S. imports. C) increase U.S. exports and decrease U.S. imports. D) decrease U.S. exports and increase U.S. imports. Page 2 20. If the marginal propensity to consume is 0.8 and both taxes and government purchases of goods and services increase by $10 billion, real GDP will: A) decrease by $50 billion. B) increase by $50 billion. C) decrease by $10 billion. D) increase by $10 billion. 21. Suppose the GDP is in equilibrium at full employment and the MPC is .80. If government wants to increase its purchase of goods and services by $16 billion without causing either inflation or unemployment, taxes should be: A) increased by $20 billion. B) reduced by $16 billion. C) increased by $16 billion. D) reduced by $20 billion. 22. If the economy has a recessionary gap of $15 billion and the MPS is 0.3, then the equilibrium level of GDP is: A) $16 billion below the full-employment level. B) $21 billion below the full-employment level. C) $50 billion below the full-employment level. D) $50 billion above the full-employment level. Page 3