Macro Sample MC Questions

Test Preparation AP Test Preparation
1

<p>In an economy with lump-sum taxes and no international trade, if the marginal
propensity to consume is 0.8, which of the following is true?
(a) When consumption increases by $5, investment increases by a maximum of $1.
(b) When consumption increases by $5, savings increase by a maximum of $1.
(c) When investment increases by $1, income increases by a maximum of $5.
(d) When investment increases by $1, consumption increases by a maximum of $5.
(e) When income increases by $1, investment increases by a maximum of $5.</p>

<p>Answer: C.
Can someone explain this? I know the "spending" multiplier is 5, but...</p>

<ol>
<li>If the government increases expenditures on goods and services and increases
taxation by the same amount, which of the following will occur?
(a) Aggregate demand will be unchanged.
(b) Aggregate demand will increase.
(c) Interest rates will decrease.
(d) The money supply will decrease.
(e) The money supply will increase.</li>
</ol>

<p>Answer: B.
G increases, but since tax increases, MS decreases doesn't it? So AD should remain unchanged...</p>

<p>Thanks. Also, the rest of the problems are here: <a href="http://apcentral.collegeboard.com/apc/public/repository/ap08_economics_coursedesc.pdf%5B/url%5D"&gt;http://apcentral.collegeboard.com/apc/public/repository/ap08_economics_coursedesc.pdf&lt;/a&gt;&lt;/p>

1 Like
2

<p>bump 10char</p>

3

<p>come on the test is soon. help me!!!</p>

4

<p>Hey dude,</p>

<p>the first one is c because income is a derivation of gdp. when the marginal propensity to consume is .8, the mps is .2. multiplier is 1/mps, or 5. so when investent increases by 1 dollar, (1 dollar)(5 = multiplier) = 5 dollar change in income, or gdp.</p>

<p>the second one is b because of the balanced budget multiplier:
1/1-mpc + -mpc/mps = 1 [where (1-mpc) = mps; 1/mps is the spending multiplier that applies to consumption, investment, and government spending; and -mpc/mps is the tax multiplier]
1/mps - mpc/mps = (1-mpc)/(1-mpc)
so overall, if taxes and government spending increase in equal increments, as will the gdp.</p>

5

<p>For 6, remember that we have the multiplier effect. So when government expenditures increase, it actually increases more than by the intended amount. Thus, the AD will shift, because the increase in taxes will not be enough to compensate for the multiplier effect.</p>

6

<p>i gave you the math reason for the balanced budget multiplier because i figured you’d like it considering your username :). there are more wordy and verbose ways to explain it but you can just look it up.</p>

7

<p>Thanks both!</p>

<p>I’m slightly annoyed @ GDP right now. It’s basically synonymous to output, income, whatever… :(</p>