1. The multiplier is smaller, other things equal, when: a. the mpe is larger b.

Question

1. The multiplier is smaller, other things equal, when:

a. the mpe is larger

b. the mpe is smaller

c. the mpe is the same

d. impossible to tell given the information

2. In the AP/AE Model (Multiplier Model), aggregate equilibrium income will most likely increase following:

a. an increase in imports

b. a decrease in aggregate expenditures

c. a decrease in business investment

d. a decrease in taxes

3. The effect of an increase in taxes on Business and household (without any accompanying changes in government expenditure) would most likely:

a. shift the AD curve out to the right

b. shift the AD curve in to the left

c. not to shift the AD curve at all

d. make it totally impossible to examine what happened because Ben Bernanke took a vacation

4. If the economy is in a short run and long run equilibrium and foreign income rises (assuming that the LAS curve remains stationary and does not shift) then the domestic price level will not rise in the long run

True/False?

Explanation / Answer

1. Multiplier = 1 / (1 - mpe)

When mpe = 0.2 then multiplier is 1/0.8 = 1.25

When mpe = 0.5 then multiplier is 1/0.5 = 2

So, increase in mpe leads to increase in multiplier.

So, answer is b) the smaller the mpe

2. d. a decrease in taxes

Decrease in taxes increases consumption expenditure of the consumer and increases Aggregate Equilibrium income.

3. b. shift the AD curve in to the left

Increase in taxes decreases disposable income of consumer which means decrease in consumption expenditure. Decrease in C shifts AD curve leftwards.

4. False

Increase in foreign income increases demand of domestic goods which increases exports and shifts AD curve rightwards causing increase in price level.

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