Question

Each question has 6-7 parts, depending on the work. Please answer every part. Thank you.

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What is the formula for the Average Propensity to Consume (APC)?

Group of answer choices

consumption divided by income

the change in consumption divided by a change in income

income divided by consumption

the change in income to a change in consumption

None of the above

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How does the size of the Marginal Propensity to Consume (MPC) affect the size of the multiplier ?

Group of answer choices

There is NO RELATIONSHIP between the two.

MPC * the Multiplier = 1

The multiplier becomes SMALLER as MPC becomes larger.

MPC + the Multiplier = 1

The multiplier becomes LARGER as MPC becomes larger.

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How does the size of the Marginal Propensity to Save (MPS) affect the size of the multiplier ?

Group of answer choices

There is NO RELATIONSHIP between the two.

The multiplier becomes LARGER as MPS becomes larger.

The multiplier becomes SMALLER as MPS becomes larger.

MPS + the Multiplier = 1

MPS * the Multiplier = 1

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What is the formula for the multiplier associated with investment ?

Group of answer choices

1/(1+MPC)

1/ (1+MPS)

None of the above

1 / MPC

1 / MPS

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What is the relationship between the tax multiplier and the government spending multiplier?

Group of answer choices

There is NO relationship between the two multipliers.

In absolute terms, both are EQUAL.

In absolute terms, the government spending multiplier is LARGER.

In absolute terms, the tax multiplier is LARGER.

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According to Keynes, what determines the autonomous level (i.e. “fixed level”) of business Investment?

Group of answer choices

“shadow prices”

“animal spirits”

“wildcat strikes”

“monkey business”

“irrational exuberance”

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“Crowding out” refers to …

Group of answer choices

an increase in private investment driving out consumption.

an increase in consumption driving out private investment.

an increase in government spending driving out private investment.

an increase in private investment driving out government spending.

an increase in government spending driving out consumption.

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Suppose Investment increases by $200, if MPC = .6, what will be the change in equilibrium income?

Group of answer choices

+ $300

+$1,200

+ $500

+ $120

+ $200

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Suppose Taxes increase by $300, if MPC = .75, what will be the change in equilibrium income?

Group of answer choices

+ $300

- $225

- $300

+ $225

- $900

Answer 1

Ques) What is the formula for Average propensity to consume?

Ans.) Formula for APC is - Consumption divided by income.

Average propensity to consume (APC) is Consumption divided by income. We can say consumption share out of income.

Ques) How does the size of Marginal propensity to consume affect the size of multiplier ?

Ans : The multiplier becomes Larger as MPC becomes larger.

As much as value of MPC becomes larger multiplier value will be larger. We know that Multiplier = 1/1-MPC , if MPC becomes larger (1- MPC) will be lower. As (1- MPC ) will be lower (1/1-MPC ) will be larger.

Ques) How does the size of the Marginal Propensity to Save (MPS) affect the size of Multiplier ?

Ans: The multiplier becomes SMALLER as MPS becomes larger.

If value MPS becomes lower then multiplier will be larger. Multiplier value = 1/1-MPC = 1/MPS , (as MPC + MPS = 1). Therefore as MPS becomes lower 1/MPS = Multiplier will be larger.

Ques). What is the formula for the multiplier associated with investment ?

Ans). 1/MPS.

Formula of Multiplier associated with investment is 1/1- MPC = 1/MPS.

Ques) What is the relationship between tax rate multiplier and government spending multiplier ?

Ans). In absolute terms, government spending multiplier is larger.

Government spending multiplier is larger than tax multiplier. Because we know with MPC , government expenditure multiplier is 1/1- MPC but absolute value of tax multiplier is MPC/1-MPC. As there is MPC multiplied numerator which is less than 1 i.e why tax multiplier will be lower.

Ques) According to Keynes, what determines autonomous level of business investment?

Ans). Animal spirits.

Ques) Crowding out refers to -

Ans). An increase in government spending drive out private investment.

Crowding out is a situation where part of government expenditure effect are drive out by decrease in private investment expenditure. When government takes expansionary fiscal policy then the effect of this increase are reduced or sometimes eliminated by decrease in investment expenditure due to higher interest rate.

Ques) If investment increases by $200, and MPC = 0.6 then what will be change in equilibrium income?

Ans). Change in equilibrium income will be equal to

(1/1-MPC) * change in investment

= (1/1-0.6)*$200 = (1/0.4)*$200 = 2.5*200 = $500

Ans. + $500.

Ques) Suppose taxes increased by $300 and MPC = 0.75 , what will be change in equilibrium income ?

Ans) Change in equilibrium income = (- MPC/1- MPC)*$300 = - 0.75/1-0.75 = (-0.75/0.25)*$300 = -3*300 = -$900.

Ans) - $900.