4.2.2.4 Aggregate demand and the level of economic activity Quiz: AQA Economics, Unit 2

The 20 questions

1. Which term describes the proportion of an extra pound of disposable income that households spend on consumption?

   • Average propensity to consume, which is the share of total household income spent on consumer goods and services
   • Marginal propensity to consume
   • Marginal propensity to save
   • Income elasticity of demand

2. Which set of components makes up aggregate demand in an open economy?

   • Consumption, saving, taxation and net exports, with investment and government spending excluded from the total
   • Consumption, investment, government spending and net exports
   • Consumption, investment, government spending and imports
   • Wages, rent, interest and profit

3. What is the multiplier process?

   • An initial change in spending leads to a larger final change in national income as the money is re-spent in successive rounds
   • A permanent rise in the rate of unemployment caused by a fall in demand
   • A rise in the exchange rate caused by higher interest rates, which reduces consumer spending and imports across the economy
   • A fall in the price level caused by an increase in the money supply

4. In a simple model with no taxes, savings or imports, which formula gives the size of the multiplier?

   • (1 - MPC)/MPC
   • 1/MPC
   • MPC/(1 - MPC)
   • 1/(1 - MPC)

5. If the marginal propensity to consume is 0.75, what is the value of the simple multiplier?

   • 0.75
   • 1.33
   • 3
   • 4

6. Which change would make the multiplier larger, all else equal?

   • A higher price level in the economy
   • A higher marginal propensity to consume
   • A lower marginal propensity to consume
   • A reduction in the money supply, which lowers the amount of spending that is passed on from one round to the next

7. Why might an initial change in expenditure lead to a larger change in national income?

   • Prices fall as spending increases, so real income rises by more
   • Exports always rise after any increase in consumer spending
   • Investment falls as income rises, so the same spending is repeated each year without any change in total income
   • Each round of spending becomes income for others, who spend part of it again

8. An economy has a marginal propensity to consume of 0.6. Government spending on road building rises by 200 million pounds. Assuming no other leakages, what is the approximate change in national income?

   • 333 million pounds
   • 120 million pounds
   • 500 million pounds
   • 800 million pounds

9. MPC is 0.8 and investment rises by 50 million pounds. What is the change in national income in this simple model?

   • 62.5 million pounds
   • 1000 million pounds
   • 250 million pounds
   • 40 million pounds

10. MPC is 0.9 and an initial injection of 30 million pounds occurs. What is the total change in national income?

    • 33 million pounds
    • 300 million pounds
    • 3 million pounds
    • 270 million pounds

11. Two economies each receive an injection of 100 million pounds. Economy A has an MPC of 0.9 and Economy B has an MPC of 0.5. Which statement is correct?

    • Both economies' national income rises by the same amount, because the injection is equal and each round of spending is identical in size
    • Neither economy's national income changes, because the multiplier only applies to tax changes
    • Economy B's national income rises by more, because a lower MPC means more saving to fund investment
    • Economy A's national income rises by more, because its multiplier of 10 is larger than B's multiplier of 2

12. MPC is 0.75. What change in national income results from a 20 million pound injection?

    • 60 million pounds
    • 26.7 million pounds
    • 80 million pounds
    • 15 million pounds

13. If the MPC falls from 0.8 to 0.6, by how much does the simple multiplier change?

    • It rises by 2.5, from 2.5 to 5
    • It falls by 1.25, from 2.5 to 1.25
    • It falls by 0.2, from 0.8 to 0.6
    • It falls by 2.5, from 5 to 2.5

14. Household consumption rises from 400 million pounds to 460 million pounds when disposable income rises from 1000 million pounds to 1100 million pounds. What is the MPC?

    • 0.4
    • 0.6
    • 1.5
    • 0.06

15. A government cuts income tax to boost spending. Why is the effect on national income smaller than an equal increase in government spending?

    • Part of the tax cut is saved, so the first round of extra spending is smaller than the full cut
    • Households spend tax cuts only on imported goods, which leaks from the economy
    • The multiplier is zero for any change in taxation in the long run, because taxes only shift money between households and firms
    • Tax cuts reduce prices in the shops, so real spending does not rise

16. An economy has an MPC of 0.7. Government spending rises by 60 million pounds. Which change in national income is closest to the simple multiplier estimate?

    • 200 million pounds
    • 60 million pounds
    • 420 million pounds
    • 42 million pounds

17. Why does a higher marginal propensity to consume produce a larger multiplier?

    • Less income leaks out of each round, so more is re-spent in the next round
    • Saving rises with consumption, so the money supply expands by more
    • Higher consumption always raises the price level, so real income falls
    • Higher consumption lowers the interest rate in the money market, so investment rises by more in each round of spending

18. Why might the actual multiplier be smaller than the simple value calculated from the MPC?

    • Taxes, savings and imports withdraw income from the circular flow in each round
    • Firms never respond to extra demand by increasing output
    • Prices always fall as spending rises, so real income rises by more than nominal income in every round of spending
    • Consumers always spend every extra pound they receive without delay

19. A government wants to close a negative output gap of 2 billion pounds. The MPC is 0.75 and the economy has no other leakages. Approximately what increase in government spending is needed?

    • 500 million pounds
    • 1.5 billion pounds
    • 8 billion pounds
    • 2 billion pounds

20. Which is the main limitation of relying on the multiplier for policy planning?

    • It applies only to exports, so it cannot be used to affect domestic demand, which is where most government spending is directed
    • It is set by the central bank and cannot be changed by government
    • Its size depends on uncertain future spending behaviour, and effects take time to work through
    • It always equals one in the long run, so it has no effect on output

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