Question

QUESTION 21 Suppose investment spending initially increases by $50 billion in an economy whose MPC is 2/3. By how much will this ultimately change real GDP? O A $75 billion OB. $50 billion OC $ 150 billion D. $ 200 billion QUESTION 22 Which of the following statements is FALSE? O A When income increases MPS is constant When income increases APS Increases C. When income increases MPC is increases D. When income increases APC decreases

Answer 1

Question 21:

Investment increase = $50 billion

MPC = 2/3

Change in real GDP = 1/(1-MPC)*Investment increase

=1/(1-2/3)*$50 billion

=3*$50 billion

=$150 billion

Hence, the correct answer is C. $150 billion

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Question 22:

MPS = Marginal Propensity to Save

MPC = Marginal Propensity to Consume

APS = Average Propensity to Save

APC = Average Propensity to Consume

It shall be noted that as income increases, consumption rises. Further, as the rise in consumption is less than the rise in income, APC declines.

So, when income increases APC declines and APS increases

Also, Marginal Propensity to Consume is the proportion of an increase in income that gets spent on consumption. MPC varies by income level. MPC is typically lower at higher incomes.

That means, MPC increases with an increase in income.

Thus, the correct answer is - A. When income increases, MPS is constant

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Question 23:

Increase in G = Increase in Tax = $100 billion

MPC = 0.75

Since this is a balanced budget, the increase in GDP will be by $100 billion

Hence, the correct answer is D. The GDP will increase by $100 billion