Question

13. The reason for the multiplier effect is that a. one person's additional expenditure constitutes a new source of income for another person, and this additional income leads to still more spending, and so on. b. changes in government spending typically deepen recessions or exacerbate inflationary conditions in the economy. c. businesses make decisions about investment projects based on anticipated profits. d. additional spending lowers the real interest rate and leads to further borrowing and spending by businesses. 14. If we observe that every increase in income of $150 billion indicates an increase in consumption of $100 billion, then the multiplier is a. 1 b. 2 c. 3 d. 4 e. 5 The increase in income that results from an increase in investment spending would be greater the: a. smaller the MPS. b. smaller the APC. c. larger the MPS. d. smaller the MPC. The equilibrium level of GDP in an economy is where: a. MPC APC. b. unemployment is about 6 percent of the labor force. c. consumption equals saving. d. aggregate expenditures equal GDP. 17. If an unintended increase in business inventories occurs at some level of GDP, then GDP: a. entails a rate of aggregate expenditures in excess of the rate of aggregate production. b. may be either above or below the equilibrium output. c. is too low for equilibrium. d. is too high for equilibrium.

Answer 1

13) Option A. Increase in income in initially stage increases consumption in the first round, but then this increases income in other rounds which further increases the consumption

14) Option C. MPC is 100/150 = 2/3. Hence Multiplier = 1/(1-2/3) = 3

15) Option D. If MPC is smaller multiplier is large and so multiplier effect is greater

16) Option D

17) Option D