Week 3(2nd Quarter) Multipliers

1. In economics, a multiplier generally refers to:

• A) The change in investment due to a change in interest rates

• B) The proportionate increase in output resulting from an increase in investment or government spending

• C) The effect of inflation on consumer prices

• D) A reduction in unemployment due to technological advancements

2. The formula for the simple spending multiplier is:

• A) 1 / Marginal Propensity to Save (MPS)

• B) Marginal Propensity to Save (MPS) / Marginal Propensity to Consume (MPC)

• C) 1 / Marginal Propensity to Consume (MPC)

• D) Marginal Propensity to Invest (MPI) / MPC

3. If the Marginal Propensity to Consume (MPC) is 0.8, what is the spending multiplier?

• A) 1.25

• B) 4

• C) 5

• D) 10

4. An increase in government spending is expected to have a multiplied effect on GDP because:

• A) Spending increases tax rates

• B) Each dollar spent creates income, which is partly re-spent, creating more income

• C) It leads to inflation directly

• D) It reduces interest rates

5. If the MPC is 0.6, the multiplier effect on total income due to an increase in autonomous spending will be:

• A) 1.5

• B) 2.5

• C) 4

• D) 6

6. The tax multiplier differs from the spending multiplier because:

• A) The tax multiplier only affects consumer spending

• B) The tax multiplier is always positive

• C) The tax multiplier is always negative and smaller in magnitude

• D) The tax multiplier applies only to exports

7. If the government implements a tax cut, the resulting increase in aggregate demand is determined by the:

• A) Spending multiplier

• B) Interest rate

• C) Tax multiplier

• D) Exchange rate

8. The crowding-out effect refers to:

• A) The reduction in private investment due to increased government borrowing

• B) The increase in government spending from private sector taxes

• C) The increase in investment when government spending increases

• D) An increase in tax rates due to higher government spending

9. If the MPC is 0.75 and the government decreases taxes by $200 million, what is the change in aggregate demand?

• A) $100 million

• B) $150 million

• C) $600 million

• D) $800 million

10. The multiplier effect is stronger when:

• A) The MPC is lower

• B) The MPC is higher

• C) The interest rate is high

• D) The exchange rate is low