Question 1

Which of the following correctly describes the multiplier in an economy?

Accepted Answer

The multiplier effect in an economy refers to the increase in final income arising from any new injection of spending. The most common form of this is associated with government spending or investment, which leads to an increase in output larger than the initial amount spent. Thus, option B correctly describes the multiplier as it measures how much output grows following an increase in autonomous spending (such as government spending, investment, etc.).

Question 2

Suppose the government increases both spending and taxes by 100. According to the balanced budget multiplier, which of the following is likely to happen?

Accepted Answer

The balanced budget multiplier suggests that when the government increases spending and taxes by the same amount, the equilibrium level of output in the economy will increase. This is because the increase in government spending directly increases aggregate demand, while the tax increase does not fully offset this effect due to the marginal propensity to consume being less than 1.

Question 3

If planned aggregate expenditure in the economy is 400 and the level of national output is 250, then which of the following is true?

Accepted Answer

When planned aggregate expenditure (400) exceeds the level of national output (250), it indicates that the demand for goods and services is higher than what is being produced, leading to excess demand in the economy.

Question 4

Suppose the value of marginal propensity to save (MPS) is 0.25, investment is £300 and autonomous consumption is £250 in a closed economy with no government sector. What is the equilibrium national output?

Accepted Answer

The answer of Suppose the value of marginal propensity to...

Question 5

In a closed economy with no government sector, the marginal propensity to save (MPS) is 0.25. Therefore, the value of the multiplier will be equal to _____.

Accepted Answer

The multiplier is calculated as 1/(1-MPC), where MPC (marginal propensity to consume) is 1 - MPS. Given MPS is 0.25, MPC is 0.75. Thus, the multiplier is 1/(1-0.75) = 1/0.25 = 4.

Question 6

Suppose the value of the marginal propensity to consume (MPC) in a closed economy is 0.75, autonomous consumption is £300 and national output is 1500. If the tax rate is 8%, what is the level of consumption in the economy?

Accepted Answer

The consumption function is C = C₀ + MPC * (Y - T), where C₀ is autonomous consumption, Y is national output, and T is taxes. Taxes are 8% of 1500, so T = 0.08 * 1500 = £120. Therefore, C = 300 + 0.75 * (1500 - 120) = 300 + 0.75 * 1380 = 300 + 1035 = £1335.

Question 7

If the marginal propensity to save (MPS) in a closed economy is 0.02 and the marginal propensity to tax (MPT) is 0.06, what is the value of the multiplier?

Accepted Answer

The answer of If the marginal propensity to save (MPS)...

Question 8

In the Keynesian Cross model, the equilibrium national output is determined at the point where:

Accepted Answer

In the Keynesian Cross model, the equilibrium national output is determined at the point where the 45° line (which represents all points where aggregate output, or income, equals aggregate expenditure) intersects the aggregate demand line (or planned expenditure line). This intersection point shows the level of output where planned spending equals actual output, indicating equilibrium.

Question 9

Suppose the marginal propensity to consume in an economy is equal to 0.6. The government increases both taxes and spending by 100. What is the net effect on aggregate demand?

Accepted Answer

The balanced budget multiplier is equal to 1, so an increase in government spending by 100 increases aggregate demand by 100. However, the increase in taxes reduces consumption by 60 (0.6 * 100), leading to a net increase in aggregate demand of 40.

Question 10

The higher the level of taxation in an economy, _____.

Accepted Answer

The answer of The higher the level of taxation in...

Question 11

According to the Keynesian Cross model, ﬁrms will have to reduce production when:

Accepted Answer

In the Keynesian Cross model, when the level of national output exceeds aggregate demand, it indicates that the goods produced are not being fully purchased, leading to an accumulation of unsold goods or inventories. Firms will then reduce production to prevent further accumulation of unsold stock.

Question 12

If the value of the multiplier in a closed economy with no government sector is equal to 5, then which of the following is true?

Accepted Answer

The multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. If the multiplier is 5, then 1/(1-MPC) = 5, which means 1-MPC = 0.2. Therefore, the marginal propensity to save (MPS) is 0.2.

Question 13

The largest source of revenue for the UK government is _____.

Accepted Answer

Income tax is the largest source of revenue for the UK government, as it directly taxes the earnings of individuals, making it a significant contributor to the government's finances.

Question 14

In a closed economy with no government sector, the marginal propensity to consume (MPC) is 0.6. Therefore, the value of the multiplier will be equal to _____.

Accepted Answer

The value of the multiplier is calculated as 1/(1-MPC). Given an MPC of 0.6, the multiplier is 1/(1-0.6) = 1/0.4 = 2.5.

Question 15

Assume a closed economy with no government sector. If the level of consumption in the economy is £200, savings is £150 and investment is £100, then planned aggregate expenditure in the economy will be equal to _____.

Accepted Answer

In a closed economy with no government sector, planned aggregate expenditure is the sum of consumption and investment. Therefore, it equals £200 (consumption) + £100 (investment) = £300.

Question 16

Expenditure on _____ accounts for more than 60 per cent of government spending in the UK.

Accepted Answer

The majority of government spending in the UK is allocated to social security, health, and education. These areas are crucial for the welfare state, providing essential services and support to the population.

Question 17

The marginal propensity to save (MPS) in a closed economy is 0.1. By how much will national output increase if autonomous expenditure increases by £200?

Accepted Answer

The marginal propensity to save (MPS) is 0.1, which means the marginal propensity to consume (MPC) is 1 - MPS = 0.9. The multiplier is 1/(1-MPC) = 1/(1-0.9) = 10. An increase in autonomous expenditure of £200 will increase national output by 10 * £200 = £2000.

Question 18

Suppose national output is £3500, autonomous consumption is £200 and the marginal propensity to consume (MPC) is 0.8 in a closed economy with no government sector. What is the level of investment in this economy?

Accepted Answer

In a closed economy with no government, the national output (Y) is equal to consumption (C) plus investment (I). The consumption function is C = autonomous consumption + MPC * Y. Here, C = 200 + 0.8 * 3500 = 200 + 2800 = 3000. Therefore, I = Y - C = 3500 - 3000 = 500.

Question 19

What does the balanced budget multiplier state?

Accepted Answer

The balanced budget multiplier concept states that if the government increases its spending and raises taxes by the same amount, the overall effect will lead to an increase in the equilibrium output. This is because the multiplier effect of an increase in government spending is typically larger than the negative effect of an equivalent tax increase.

Question 20

The value of the multiplier increases when _____.

Accepted Answer

The value of the multiplier increases when the marginal propensity to save decreases because the multiplier is inversely related to the marginal propensity to save. A lower marginal propensity to save means a higher marginal propensity to consume, which increases the multiplier effect in an economy.

Quiz 11: Expenditure and Fiscal Policy