2.4.4 The multiplier Quiz: Pearson Edexcel Economics A, Unit 2

The 20 questions

1. The multiplier ratio is best defined as:

   • the change in the price level divided by the change in real national output
   • the change in real national income divided by the initial change in an injection
   • the change in consumption divided by the change in disposable income only
   • the proportion of national income saved by households each year

2. The multiplier process means that:

   • an initial injection of spending creates income for recipients, who spend part of it, creating further rounds of income
   • an injection reduces income in later rounds as savings rise, so each round of spending is smaller than the one before
   • an injection has no effect on income if prices rise with it, because higher prices offset any increase in spending
   • an injection of spending has a one-off effect that never affects income again, because the money is spent once and then leaves

3. The marginal propensity to consume (MPC) is 0.75. The simple multiplier is:

   • 0.75
   • 4
   • 7.5
   • 1.33

4. The marginal propensity to withdraw (MPW) equals:

   • the sum of the marginal propensities to consume and save
   • the marginal propensity to consume minus the marginal propensity to save
   • the average propensity to save divided by the MPC
   • the sum of the marginal propensities to save, tax and import

5. With MPS = 0.1, MPT = 0.2 and MPM = 0.1, the multiplier is:

   • 2.5
   • 10
   • 0.4
   • 4

6. If the MPC is 0.8 with no tax or imports, a rise in investment of 50 million raises national income by:

   • 250 million
   • 400 million
   • 40 million
   • 62.5 million

7. An increase in the MPM, all else equal, is most likely to:

   • reduce the size of the multiplier, since more income leaks abroad each round
   • raise the MPC by the same amount
   • leave the multiplier unchanged, since imports do not affect income
   • increase the size of the multiplier, since imports add to domestic spending

8. Which factor would increase the size of the multiplier, all else equal?

   • a rise in the marginal propensity to import due to a stronger currency
   • a rise in the marginal rate of income tax on higher earners
   • a rise in the marginal propensity to save out of disposable income
   • a fall in the marginal propensity to tax as a result of a lower income tax rate

9. A government spending increase of 2 billion leads to a national income rise of 6 billion. What is the multiplier?

   • 2
   • 3
   • 4
   • 6

10. Income rises by 300 million after a 60 million rise in exports. What is the multiplier?

    • 3
    • 5
    • 0.2
    • 18

11. With an MPC of 0.6, a rise in AD of 40 billion will raise real national income by approximately:

    • 100 billion
    • 66.7 billion
    • 40 billion
    • 24 billion

12. A country has an MPC of 0.9 and MPM of 0.2. Which is the approximate multiplier if MPT is zero?

    • 1.1
    • 10
    • 3.3
    • 5

13. Why does the multiplier matter for shifts in AD?

    • A shift in AD has no effect on output, since the multiplier only affects prices, so changes in spending feed entirely into the price level
    • The multiplier means AD shifts always reduce output by the amount of the injection
    • A given shift in AD produces a larger change in equilibrium output than the initial injection, so policy effects can be amplified
    • The multiplier only applies in closed economies with no households

14. Which of the following is a reason that the multiplier effect may be smaller in practice than the simple formula suggests?

    • Spending always rises by exactly the full multiplier because all income is saved and passed on in full to the next round of spending
    • Consumers never spend any extra income, so the multiplier is zero in every case because households always save every extra pound received
    • Price rises and crowding out can reduce the real effect, and the economy may have limited spare capacity
    • The multiplier is unaffected by spare capacity or inflation in any case, so the simple formula always gives the correct answer for output

15. A government considers a 10 billion infrastructure programme. If the MPW is 0.4, what is the approximate increase in national income?

    • 40 billion
    • 25 billion
    • 4 billion
    • 100 billion

16. Which statement best evaluates the multiplier's significance for policy?

    • It shows that the multiplier is irrelevant because injections do not affect income, so fiscal policy has no effect on economic activity
    • It shows that policy always works exactly as the simple multiplier predicts
    • It shows that policy can only affect prices, never output, because the multiplier turns any spending change into an equal price change
    • It shows why fiscal policy can have large effects on output, but timing, leakages and capacity limits affect the outcome

17. Which is the best explanation for why a higher MPC makes the multiplier larger?

    • A higher MPC has no effect on the multiplier because it is a consumption measure
    • A higher MPC means imports fall, which adds to leakages, so spending leaves the economy more quickly and the multiplier is reduced in size
    • A higher MPC means more of each round of income is saved and withdrawn
    • A higher MPC means more of each round of income is re-spent, so the injection is repeated through more rounds

18. With MPS = 0.15, MPT = 0.25 and MPM = 0.10, the simple multiplier is:

    • 5
    • 2
    • 0.5
    • 1.67

19. A rise in government spending of 5 billion, with a multiplier of 1.5, will raise national income by:

    • 10 billion
    • 5 billion
    • 7.5 billion
    • 3.3 billion

20. Which statement about the multiplier and tax rates is correct?

    • A higher marginal rate of income tax lowers the multiplier by increasing withdrawals in each round
    • Taxes have no effect on the multiplier because tax revenue is spent by government
    • A higher marginal rate of income tax raises the multiplier by reducing saving
    • The multiplier is independent of all tax rates in every economy

Related quizzes

• Economic growth Quiz · 2.1.1 · 20 questions
• Inflation Quiz · 2.1.2 · 20 questions
• Employment and unemployment Quiz · 2.1.3 · 20 questions
• Balance of payments Quiz · 2.1.4 · 20 questions
• The characteristics of AD Quiz · 2.2.1 · 20 questions
• Consumption (C) Quiz · 2.2.2 · 20 questions
• Investment (I) Quiz · 2.2.3 · 20 questions
• Government expenditure (G) Quiz · 2.2.4 · 20 questions
• Net trade (X-M) Quiz · 2.2.5 · 20 questions
• The characteristics of AS Quiz · 2.3.1 · 20 questions