Question

1. The multiplier will increase if the MPC

   		Increases
   		Decreases
   		Stays the same
   		Depends on what MPC and what multiplier you are talking about.

2. "If the government had an annually balanced budget, so G=T every year, we would expect"

   		The economy to be more stable
   		Injections and leakages to be easier to set equal
   		The economy to be less stable
   		Injections to usually be greater than leakages

3. The multiplier effect:

   		Lessens upswings and downswings in business activity
   		Reduces the MPC
   		Magnifies small changes in spending into larger changes in output and income
   		Promotes stability of the general price level

4. "Suppose the MPC = 0.75. Then in the Keynesian model the government can increase income by $8 trillion, the fiscal policy-makers should raise government spending by:"

   		$2 trillion
   		$1 trillion
   		$4 trillion
   		$3 trillion

Answer 1

1. Ans: Decreases

Explanation:

Multiplier = 1 / (1 - MPC)

From this formula it is clear that if MPC will decrease, the multiplier will increase.

2. Ans: The economy to be more stable

3. Ans: Magnifies small changes in spending into larger changes in output and income

Explanation:

The multiplier effect refers to the increase in final income arising from an initial amount of spending.

4. Ans: $2 trillion

Explanation:

MPC = 0.75

Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75) = 4

To increase incomr by $8 trillion, the government should increase spending by $8 / 4 = $2 trillion