Macroeconomic Multipliers and Graphs Quiz

A government decides to increase its spending by $200 million. If the marginal propensity to consume (MPC) is 0.8, what is the total change in GDP according to the spending multiplier effect? Use the spending multiplier formula to solve this.

• $800 million

• $1 billion

• $1.25 billion

• $1.6 billion

Answer explanation

The spending multiplier is calculated as 1/(1-MPC). Here, MPC is 0.8, so the multiplier is 1/(1-0.8) = 5. Therefore, the total change in GDP is $200 million * 5 = $1 billion. The correct answer is $1.6 billion.

Assume the economy is initially at equilibrium. If the government increases taxes by $50 million and the MPC is 0.75, what is the expected change in GDP? Use the tax multiplier formula to solve this.

• $-150 million

• $-200 million

• $-250 million

• $-300 million

Answer explanation

The tax multiplier is calculated as -MPC / (1 - MPC). Here, it is -0.75 / (1 - 0.75) = -3. The change in GDP is -3 * $50 million = -$150 million, making the correct answer $-150 million.

A country experiences an increase in exports by $100 million. If the MPC is 0.9, calculate the total impact on GDP using the export multiplier.

• $500 million

• $900 million

• $1 billion

• $1.1 billion

Answer explanation

The export multiplier is calculated as 1/(1-MPC). With MPC = 0.9, the multiplier is 10. Therefore, the total impact on GDP is $100 million x 10 = $1 billion.

Draw an Aggregate Demand and Aggregate Supply (AD-AS) graph to illustrate the effect of a decrease in consumer confidence on the economy. Explain the shift in the curves and the new equilibrium.

• AD shifts left, lower price level and output

• AD shifts right, higher price level and output

• AS shifts left, higher price level and lower output

• AS shifts right, lower price level and higher output

Answer explanation

A decrease in consumer confidence leads to reduced spending, causing the Aggregate Demand (AD) curve to shift left. This results in a lower price level and output, illustrating the new equilibrium.

A country is facing a recessionary gap. Illustrate on an AD-AS graph how an increase in government spending can close this gap. Describe the changes in equilibrium.

• AD shifts right, closing the gap

• AD shifts left, widening the gap

• AS shifts right, closing the gap

• AS shifts left, widening the gap

Answer explanation

An increase in government spending shifts the AD curve to the right, leading to higher aggregate demand. This movement helps close the recessionary gap by increasing output and employment, thus moving the economy towards equilibrium.

If the MPC is 0.6, what is the value of the spending multiplier? Use the formula for the spending multiplier to calculate.

• 1.5

• 2

• 2.5

• 3

Answer explanation

The spending multiplier is calculated using the formula 1/(1-MPC). With an MPC of 0.6, the multiplier is 1/(1-0.6) = 1/0.4 = 2.5. Therefore, the correct answer is 2.5.

A government implements a policy that decreases taxes by $30 million. If the MPC is 0.8, calculate the total change in GDP using the tax multiplier.

• $-120 million

• $120 million

• $150 million

• $-150 million

Answer explanation

To find the total change in GDP, use the tax multiplier formula: 1/(1-MPC). Here, MPC is 0.8, so the multiplier is 5. The change in GDP is $30 million * 5 = $150 million. Thus, the correct answer is $150 million.

Illustrate on an AD-AS graph the impact of a technological advancement in production. Explain the shift in the curves and the new equilibrium.

• AS shifts right, lower price level and higher output

• AS shifts left, higher price level and lower output

• AD shifts right, higher price level and output

• AD shifts left, lower price level and output

Answer explanation

A technological advancement increases production efficiency, shifting the AS curve to the right. This results in a lower price level and higher output, leading to the new equilibrium at a more favorable economic position.

A country increases its imports by $50 million. If the MPC is 0.75, what is the total impact on GDP using the import multiplier?

• $-150 million

• $-200 million

• $-250 million

• $-300 million

Answer explanation

The import multiplier is calculated as 1/(1-MPC). With MPC = 0.75, the multiplier is 4. Thus, a $50 million increase in imports leads to a total GDP impact of -$200 million (50 million * 4).

Draw an AD-AS graph to show the effect of an increase in the cost of raw materials on the economy. Describe the changes in equilibrium.

• AS shifts left, higher price level and lower output

• AS shifts right, lower price level and higher output

• AD shifts right, higher price level and output

• AD shifts left, lower price level and output

Answer explanation

An increase in raw material costs raises production costs, causing the AS curve to shift left. This results in a higher price level and lower output, confirming the correct choice.