ECON 110 TEST 3 NEWEST COMPLETE 100 QUESTIONS AND CORRECT DETAILED ANSWERS|
ALREADY GRADED A+
Question 1
Which of the following functions of money would be most significantly violated if an economy
experienced extremely high inflation or hyperinflation?
A) Medium of exchange
B) Store of value
C) Unit of account
D) Standard of deferred payment
E) Measure of liquidity
Correct Answer: B) Store of value
Rationale: While high inflation affects all functions of money, the "store of value" function
is the first and most severely damaged. Money is intended to hold its purchasing power
from the time it is earned until the time it is spent. In a high-inflation environment, the
value of currency erodes rapidly, meaning that holding money as an asset results in a
significant loss of real wealth. Consequently, people rush to spend money as quickly as
possible or trade it for stable foreign currencies or physical assets.
Question 2
If an increase in autonomous consumption spending of $10 million results in a $50 million
increase in equilibrium real GDP, what is the marginal propensity to consume (MPC)?
A) 0.5
B) 0.75
C) 0.8
D) 0.9
E) 5.0
Correct Answer: C) the MPC is 0.8.
Rationale: The formula for the change in equilibrium GDP is: Change in GDP = Change in
Autonomous Spending × Multiplier. Here, $50 million = $10 million × Multiplier, which
means the Multiplier is 5. The formula for the multiplier is 1 / (1 - MPC). Setting 5 = 1 / (1 -
MPC), we solve for MPC: 5(1 - MPC) = 1; 5 - 5MPC = 1; 4 = 5MPC; MPC = 4/5 or 0.8.
Question 3
If disposable income increases by $100 million and household consumption increases by $90
million, what is the calculated marginal propensity to consume (MPC)?
A) 0.9
B) 0.1
C) 1.1
D) 0.95
E) 10.0
Correct Answer: A) 0.9.
Rationale: The marginal propensity to consume (MPC) is defined as the change in
consumption divided by the change in disposable income (ΔC / ΔYD). In this scenario, $90
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million / $100 million = 0.9. This indicates that for every additional dollar of income,
households spend 90 cents and save 10 cents.
Question 4
Which of the following describes the correct relationship between the marginal propensity to
consume (MPC) and the simple multiplier?
A) The multiplier rises as the MPC rises.
B) The multiplier falls as the MPC rises.
C) The multiplier is equal to the MPC.
D) The multiplier is independent of the MPC.
E) The multiplier rises as the MPS rises.
Correct Answer: A) The multiplier rises as the MPC rises.
Rationale: The multiplier formula is 1 / (1 - MPC). Because MPC represents the fraction of
an additional dollar that is re-spent in the economy, a higher MPC means more money
circulates back into the economy in each subsequent round of spending. As the
denominator (1 - MPC) gets smaller with a higher MPC, the total value of the multiplier
increases.
Question 5
What is the general mathematical formula for the simple expenditure multiplier?
A) 1 / (MPC)
B) MPC + MPS
C) 1 / (MPS)
D) 1 - MPC
E) ΔC / ΔY
Correct Answer: C) 1/(MPS)
Rationale: The multiplier is expressed as 1 / (1 - MPC). Since we know that MPC + MPS =
1, it follows that 1 - MPC is equal to MPS (Marginal Propensity to Save). Therefore, the
formula can be simplified to 1 / MPS. This illustrates that the "leakage" from the spending
stream (savings) determines the ultimate size of the multiplier.
Question 6
If actual inventories decline by significantly more than what economic analysts predicted, what
does this imply about the relationship between investment components?
A) Actual investment spending was greater than planned investment spending.
B) Actual investment spending was less than planned investment spending.
C) Planned investment spending was equal to actual investment spending.
D) Aggregate expenditure was less than GDP.
E) Consumption was lower than expected.
Correct Answer: B) actual investment spending was less than planned investment spending.
Rationale: Actual Investment = Planned Investment + Unplanned Changes in Inventories. If
inventories decline more than expected, it means sales were higher than production.
, Page 3
Because unplanned inventory depletion is a negative value in the investment calculation,
the "actual" investment total ends up being lower than the "planned" investment figure.
Question 7
Which component of aggregate expenditure usually increases when the U.S. economy enters a
recession and decreases during an expansion?
A) Consumption
B) Planned Investment
C) Net Exports
D) Government Purchases
E) Household Wealth
Correct Answer: C) Net Exports
Rationale: During a recession, U.S. real GDP and incomes fall, leading U.S. residents to buy
fewer imported goods. If exports to other countries remain stable while imports drop, Net
Exports (Exports - Imports) will rise. Conversely, during an expansion, rising incomes lead
to more import spending, which typically causes Net Exports to decrease.
Question 8
Which of the following is NOT a true statement regarding the multiplier effect in the aggregate
expenditure model?
A) The multiplier effect works for both increases and decreases in autonomous spending.
B) A larger MPC results in a larger multiplier.
C) The multiplier effect occurs because an initial change in spending triggers additional rounds
of income and spending.
D) The multiplier makes the economy less sensitive to changes in autonomous expenditure.
E) The multiplier is the ratio of the change in equilibrium GDP to the change in autonomous
spending.
Correct Answer: D) The multiplier makes the economy less sensitive to changes in
autonomous expenditure.
Rationale: The multiplier actually makes the economy more sensitive to changes in
autonomous expenditure. Because of the multiplier, a relatively small shift in planned
investment or government spending results in a much larger total shift in equilibrium real
GDP. This amplification is why shocks to autonomous spending can lead to significant
economic fluctuations.
Question 9
What term is used to describe the portion of consumption spending that does not depend on the
current level of GDP or income?
A) Autonomous consumption
B) Induced consumption
C) Discretionary consumption
D) Marginal consumption
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E) Transitional consumption
Correct Answer: A) Autonomous
Rationale: Autonomous consumption represents the level of spending that would occur even
if current disposable income were zero. This spending is typically financed through
drawing down savings (dissaving) or borrowing, and it is driven by factors other than
current income, such as wealth, expectations, or basic needs.
Question 10
At the point of macroeconomic equilibrium in the aggregate expenditure model, which condition
must be met?
A) Actual investment equals unplanned investment.
B) Total spending (Aggregate Expenditure) equals total production (GDP).
C) Net exports must be equal to zero.
D) The marginal propensity to consume must equal 1.0.
E) Inventories must be increasing.
Correct Answer: B) total spending equals total production.
Rationale: Macroeconomic equilibrium occurs when planned aggregate expenditure equals
real GDP (𝐴𝐸 = 𝑌). At this point, everything produced by firms is purchased by
households, other firms, the government, or foreign buyers, leaving no unplanned changes
in inventories. This is visually represented by the intersection of the AE line and the 45-
degree line.
Question 11
If the marginal propensity to save (MPS) is 0.25, how will a $10,000 decrease in disposable
income affect consumption spending?
A) Consumption will increase by $2,500.
B) Consumption will decrease by $10,000.
C) Consumption will decrease by $7,500.
D) Consumption will decrease by $2,500.
E) Consumption will remain unchanged.
Correct Answer: C) decrease consumption
by 7,500. 𝑹𝒂𝒕𝒊𝒐𝒏𝒂𝒍𝒆: 𝑭𝒊𝒓𝒔𝒕, 𝒇𝒊𝒏𝒅𝒕𝒉𝒆𝑴𝑷𝑪: 𝑴𝑷𝑪 = 𝟏 − 𝑴𝑷𝑺 = 𝟏 − 𝟎. 𝟐𝟓 =
𝟎. 𝟕𝟓. 𝑻𝒉𝒆𝒄𝒉𝒂𝒏𝒈𝒆𝒊𝒏𝒄𝒐𝒏𝒔𝒖𝒎𝒑𝒕𝒊𝒐𝒏𝒊𝒔𝒄𝒂𝒍𝒄𝒖𝒍𝒂𝒕𝒆𝒅𝒂𝒔𝚫𝑪 = 𝑴𝑷𝑪 ×
𝚫𝒀𝑫. 𝑺𝒖𝒃𝒔𝒕𝒊𝒕𝒖𝒕𝒊𝒏𝒈𝒕𝒉𝒆𝒗𝒂𝒍𝒖𝒆𝒔: 𝚫𝑪 = 𝟎. 𝟕𝟓 × (−10,000) = -$7,500. This reflects the theory
that when income falls, households reduce their consumption by a fraction determined by
the MPC.
Question 12
One of the most important benefits of the transition from a barter economy to a money economy
is that:
A) Money is easier to produce than goods.
B) Money eliminates the need for taxes.
ALREADY GRADED A+
Question 1
Which of the following functions of money would be most significantly violated if an economy
experienced extremely high inflation or hyperinflation?
A) Medium of exchange
B) Store of value
C) Unit of account
D) Standard of deferred payment
E) Measure of liquidity
Correct Answer: B) Store of value
Rationale: While high inflation affects all functions of money, the "store of value" function
is the first and most severely damaged. Money is intended to hold its purchasing power
from the time it is earned until the time it is spent. In a high-inflation environment, the
value of currency erodes rapidly, meaning that holding money as an asset results in a
significant loss of real wealth. Consequently, people rush to spend money as quickly as
possible or trade it for stable foreign currencies or physical assets.
Question 2
If an increase in autonomous consumption spending of $10 million results in a $50 million
increase in equilibrium real GDP, what is the marginal propensity to consume (MPC)?
A) 0.5
B) 0.75
C) 0.8
D) 0.9
E) 5.0
Correct Answer: C) the MPC is 0.8.
Rationale: The formula for the change in equilibrium GDP is: Change in GDP = Change in
Autonomous Spending × Multiplier. Here, $50 million = $10 million × Multiplier, which
means the Multiplier is 5. The formula for the multiplier is 1 / (1 - MPC). Setting 5 = 1 / (1 -
MPC), we solve for MPC: 5(1 - MPC) = 1; 5 - 5MPC = 1; 4 = 5MPC; MPC = 4/5 or 0.8.
Question 3
If disposable income increases by $100 million and household consumption increases by $90
million, what is the calculated marginal propensity to consume (MPC)?
A) 0.9
B) 0.1
C) 1.1
D) 0.95
E) 10.0
Correct Answer: A) 0.9.
Rationale: The marginal propensity to consume (MPC) is defined as the change in
consumption divided by the change in disposable income (ΔC / ΔYD). In this scenario, $90
, Page 2
million / $100 million = 0.9. This indicates that for every additional dollar of income,
households spend 90 cents and save 10 cents.
Question 4
Which of the following describes the correct relationship between the marginal propensity to
consume (MPC) and the simple multiplier?
A) The multiplier rises as the MPC rises.
B) The multiplier falls as the MPC rises.
C) The multiplier is equal to the MPC.
D) The multiplier is independent of the MPC.
E) The multiplier rises as the MPS rises.
Correct Answer: A) The multiplier rises as the MPC rises.
Rationale: The multiplier formula is 1 / (1 - MPC). Because MPC represents the fraction of
an additional dollar that is re-spent in the economy, a higher MPC means more money
circulates back into the economy in each subsequent round of spending. As the
denominator (1 - MPC) gets smaller with a higher MPC, the total value of the multiplier
increases.
Question 5
What is the general mathematical formula for the simple expenditure multiplier?
A) 1 / (MPC)
B) MPC + MPS
C) 1 / (MPS)
D) 1 - MPC
E) ΔC / ΔY
Correct Answer: C) 1/(MPS)
Rationale: The multiplier is expressed as 1 / (1 - MPC). Since we know that MPC + MPS =
1, it follows that 1 - MPC is equal to MPS (Marginal Propensity to Save). Therefore, the
formula can be simplified to 1 / MPS. This illustrates that the "leakage" from the spending
stream (savings) determines the ultimate size of the multiplier.
Question 6
If actual inventories decline by significantly more than what economic analysts predicted, what
does this imply about the relationship between investment components?
A) Actual investment spending was greater than planned investment spending.
B) Actual investment spending was less than planned investment spending.
C) Planned investment spending was equal to actual investment spending.
D) Aggregate expenditure was less than GDP.
E) Consumption was lower than expected.
Correct Answer: B) actual investment spending was less than planned investment spending.
Rationale: Actual Investment = Planned Investment + Unplanned Changes in Inventories. If
inventories decline more than expected, it means sales were higher than production.
, Page 3
Because unplanned inventory depletion is a negative value in the investment calculation,
the "actual" investment total ends up being lower than the "planned" investment figure.
Question 7
Which component of aggregate expenditure usually increases when the U.S. economy enters a
recession and decreases during an expansion?
A) Consumption
B) Planned Investment
C) Net Exports
D) Government Purchases
E) Household Wealth
Correct Answer: C) Net Exports
Rationale: During a recession, U.S. real GDP and incomes fall, leading U.S. residents to buy
fewer imported goods. If exports to other countries remain stable while imports drop, Net
Exports (Exports - Imports) will rise. Conversely, during an expansion, rising incomes lead
to more import spending, which typically causes Net Exports to decrease.
Question 8
Which of the following is NOT a true statement regarding the multiplier effect in the aggregate
expenditure model?
A) The multiplier effect works for both increases and decreases in autonomous spending.
B) A larger MPC results in a larger multiplier.
C) The multiplier effect occurs because an initial change in spending triggers additional rounds
of income and spending.
D) The multiplier makes the economy less sensitive to changes in autonomous expenditure.
E) The multiplier is the ratio of the change in equilibrium GDP to the change in autonomous
spending.
Correct Answer: D) The multiplier makes the economy less sensitive to changes in
autonomous expenditure.
Rationale: The multiplier actually makes the economy more sensitive to changes in
autonomous expenditure. Because of the multiplier, a relatively small shift in planned
investment or government spending results in a much larger total shift in equilibrium real
GDP. This amplification is why shocks to autonomous spending can lead to significant
economic fluctuations.
Question 9
What term is used to describe the portion of consumption spending that does not depend on the
current level of GDP or income?
A) Autonomous consumption
B) Induced consumption
C) Discretionary consumption
D) Marginal consumption
, Page 4
E) Transitional consumption
Correct Answer: A) Autonomous
Rationale: Autonomous consumption represents the level of spending that would occur even
if current disposable income were zero. This spending is typically financed through
drawing down savings (dissaving) or borrowing, and it is driven by factors other than
current income, such as wealth, expectations, or basic needs.
Question 10
At the point of macroeconomic equilibrium in the aggregate expenditure model, which condition
must be met?
A) Actual investment equals unplanned investment.
B) Total spending (Aggregate Expenditure) equals total production (GDP).
C) Net exports must be equal to zero.
D) The marginal propensity to consume must equal 1.0.
E) Inventories must be increasing.
Correct Answer: B) total spending equals total production.
Rationale: Macroeconomic equilibrium occurs when planned aggregate expenditure equals
real GDP (𝐴𝐸 = 𝑌). At this point, everything produced by firms is purchased by
households, other firms, the government, or foreign buyers, leaving no unplanned changes
in inventories. This is visually represented by the intersection of the AE line and the 45-
degree line.
Question 11
If the marginal propensity to save (MPS) is 0.25, how will a $10,000 decrease in disposable
income affect consumption spending?
A) Consumption will increase by $2,500.
B) Consumption will decrease by $10,000.
C) Consumption will decrease by $7,500.
D) Consumption will decrease by $2,500.
E) Consumption will remain unchanged.
Correct Answer: C) decrease consumption
by 7,500. 𝑹𝒂𝒕𝒊𝒐𝒏𝒂𝒍𝒆: 𝑭𝒊𝒓𝒔𝒕, 𝒇𝒊𝒏𝒅𝒕𝒉𝒆𝑴𝑷𝑪: 𝑴𝑷𝑪 = 𝟏 − 𝑴𝑷𝑺 = 𝟏 − 𝟎. 𝟐𝟓 =
𝟎. 𝟕𝟓. 𝑻𝒉𝒆𝒄𝒉𝒂𝒏𝒈𝒆𝒊𝒏𝒄𝒐𝒏𝒔𝒖𝒎𝒑𝒕𝒊𝒐𝒏𝒊𝒔𝒄𝒂𝒍𝒄𝒖𝒍𝒂𝒕𝒆𝒅𝒂𝒔𝚫𝑪 = 𝑴𝑷𝑪 ×
𝚫𝒀𝑫. 𝑺𝒖𝒃𝒔𝒕𝒊𝒕𝒖𝒕𝒊𝒏𝒈𝒕𝒉𝒆𝒗𝒂𝒍𝒖𝒆𝒔: 𝚫𝑪 = 𝟎. 𝟕𝟓 × (−10,000) = -$7,500. This reflects the theory
that when income falls, households reduce their consumption by a fraction determined by
the MPC.
Question 12
One of the most important benefits of the transition from a barter economy to a money economy
is that:
A) Money is easier to produce than goods.
B) Money eliminates the need for taxes.
