Question

1. Assume an economy is opersting below its full employment capacity and the MPC is .75, a $50 billion increase in investment spending will cause the equilibrium output to rise by

a)$5 billion

b) $50 billion

c) $10 billion

d) $200 billion

2. when business and consumers become more optimitic about the future and increase their expenditures?

a) real GDP rises and employment falls

b) real GDp falls and employment rises

c) real GDP and employment and income to decline

d) real GDP and employment rise

3. Assume that consumers become more pessimistic and therefore, decrease their consumption by $10 billion. If the marginal propensity to consume is .80, how will this $10 billion decrease in consumption affect the equilibrium level of GDP?

a) Real GDP will decrease by $50 billion

b) Real GDP will decrease by $10 billion

c) Real GDP will decrease by $8 billion

d) Real GDP will decrease by $40 billion

Answer 1

1. Multiplier = 1/1-MPC

MPC = 0.75

Multiplier = 1/1-0.75

Multiplier = 4.

Net change in output = 4 * $50 billion = $200 billion.

Thus, option B is correct.

2. Option D is correct.

When consumers are optimistic about the future, the consumption and investment level increases in the economy. This increases the real GDP and employment.

3. Multiplier = 1/1-MPC

Multiplier = 1/1-0.80

Multiplier = 5

Net change in output = 5 * (-$10 billion) = -$50 billion. Therefore, the real GDP would reduce by $50 billion.

Option A is correct.