Question 1

  1. If businesses see that inventories are piling up:
    d. They will lower prices and cut production

Question 2

  1. If leakages are greater than injections into the economy then:

Question 3

  1. In an economy that is below full employment, an increase in investment, ceteris paribus, leads to:
    d. No change in desired saving and no change in income

Question 4

  1. The multiplier process describes:

Question 5

  1. The amount of change in aggregate demand that will close a recessionary gap:
    d. Will equal the amount of leakages

Question 6

  1. The major difference between classical and Keynesian economists is:

Question 7

  1. Which of the following is not a leakage from the economy?

Question 8

  1. If investment spending falls by $100 billion, then:

Question 9

  1. Cyclical unemployment:

Question 10

  1. The formula for the multiplier is:

Short Answers

1. Explain briefly how spending can multiply, and then calculate the spending multiplier

when the MPC is

a. 0.75

b. 0.8

c. 0.6

2. The economy is experiencing a contraction (recessionary gap) of $400 billion. What

government spending stimulus would you recommend to move the economy back to full

employment if the MPC is 0.75? Would your policy be any different if the MPC were


3. If the consumption function is C= $200 billion + 0.9Y,

a) How much do consumers spend with income of $3 trillion?

b) How much do they save?

4. Suppose that investment demand increases by $100. Assume that households have a

marginal propensity to consume of 80 percent. Compute the first three rounds of

multiplier effects as follows:

a) What are the first cycle changes in spending? Total cumulative change equals?

b) What are the second cycle changes in spending? Total cumulative change equals?

c) What are the third cycle changes in spending? Total cumulative change equals?

5. If Korean exports to the U.S. decline by $15 billion, by how much will total Korean

spending drop if their MPC is 0.60?

6. What are the key features of the consumption function? What causes
consumption to rise and fall? Does the level of consumption deserve
concern today?

7. What is the MPC and APC all about? Can you compare and contrast these
concepts? Is it better to have a high propensity to consume or lower?
Which people fit the high versus low category?