Name: __________________________ Date: _____________
1. If the multiplier is 4, and investment spending falls by $100 billion, the change in
equilibrium income will be:
A) –$25 billion.
B) $25 billion.
C) –$400 billion.
D) $400 billion.
2. Falling inventories indicate ______ unplanned inventory investment and a ______
economy.
A) negative; growing
B) negative; slowing
C) positive; growing
D) positive; slowing
3. The multiplier process assumes that:
A) interest rates are constantly changing.
B) aggregate prices are perfectly flexible.
C) the economy is open and there is free trade.
D) the economy is operating with sticky aggregate price levels.
4. David receives a tax refund of $800. He spends $600 and saves $200. David's marginal
propensity to consume is:
A) 0.20.
B) 0.6.
C) 0.75.
D) 0.25.
5. If the consumption function were plotted on the vertical axis of a graph, with disposable
income on the horizontal axis:
A) the slope of the line would be positive and determined by the marginal propensity
to consume.
B) the vertical axis intercept would be determined by the current interest rate.
C) the horizontal axis intercept would be determined by the level of autonomous
consumption.
D) the slope of the line would be negative and determined by the marginal propensity
to save.
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Use the following to answer question 6:
Scenario: Income-Expenditure Equilibrium
GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The
marginal propensity to consume is 0.8.
6. (Scenario: Income-Expenditure Equilibrium) How much is consumption?
A) $700
B) $500
C) $6,900
D) $8,000
7. Aggregate spending increases when:
A) there is a fall in prices.
B) there is an increase in planned investment spending.
C) there is an increase in prices.
D) there is an increase in unplanned investment spending.
8. In the aggregate expenditures model, if aggregate expenditures are greater than real
GDP:
A) aggregate output decreases.
B) there will be unplanned decreases in inventories.
C) actual real output is greater than equilibrium real output.
D) employment decreases.
9. The marginal propensity to consume (MPC) is equal to the change in:
A) consumer spending divided by the change in gross domestic product.
B) disposable income divided by the change in consumer spending.
C) consumer spending divided by the change in investment spending.
D) consumer spending divided by the change in disposable income.
10. If disposable income increases by $5 billion and consumer spending increases by $4
billion, the marginal propensity to consume is equal to:
A) 9.
B) 20.
C) 0.8.
D) 1.25.
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Answer Key
1. C
2. A
3. D
4. C
5. A
6. C
7. B
8. B
9. D
10. C
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