1. If the MPS = 0.2, then the multiplier equals: * 4 5 9 10 2....
1. If the MPS = 0.2, then the multiplier equals: *
4
5
9
10
2. Suppose that a financial crisis decreases investment spending by $200 billion and the marginal propensity to consume is 0.75. Assuming no taxes and no trade, real GDP will _____ by _____.
decrease; $500 billion
decrease; $200 billion
decrease; $800 billion
increase; $400 billion
3. An increase in the marginal propensity to consume:
increases the multiplier.
shifts the autonomous investment line upward.
decreases the multiplier.
shifts the autonomous investment line downward.
4. A smaller marginal propensity to save will:
make the multiplier smaller.
make the multiplier larger.
not affect the value of the multiplier.
increase the interest rate.
Homework Answers
1) multiplier is 1 / MPS. Therefore the multiplier is 1 / 0.2 which is equivalent to 5
2) marginal propensity to consume is 0.75 which means MPSC is 0.25. multiplier is therefore 1 / 0.25 or 4. Decline in investment spending is $200 billion which indicates that real GDP will decline by 200*4 = $800 billion. Select decrease; $800 billion
3) increases the multiplier. this is because it decreases the marginal propensity to save and therefore or increases the value of 1 / MPS.
4) make the multiplier larger. The lower the people will save the additional income the more will be spent by them and therefore the multiplier will be larger.
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