1. If country X has a much higher savings rate than country Y, which country wou
ID: 1213521 • Letter: 1
Question
1. If country X has a much higher savings rate than country Y, which country would you expect to have a smaller multiplier and why?
Country Y would have a smaller multiplier because more disposable income is saved and not spent.
Country Y would have a smaller multiplier because less disposable income is saved.
Country X would have the smaller multiplier because more disposable income is saved and not spent.
Country X would have the smaller multiplier because less disposable income is saved.
2. All of the statements regarding the causes of the Great Depression are correct EXCEPT:
It was driven by a collapse in investment spending.
Consumer spending also fell, which multiplied the effect on real GDP.
It is estimated that the multiplier was approximately 3 at this time.
Since taxes were higher at this time, it would have reduced the size of the multiplier as compared to today.
3. As taxes and government transfers both ________, their effect as automatic stabilizers on the economy is to ________ the multiplier.
increase; decrease
increase; increase
remain stable; decrease
remain stable; increase
4. The relationship between the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) will be which of the following?
MPC will always be larger than MPS.
MPC will always be smaller than MPS.
MPC and MPS will always be equal.
MPC + MPS will always equal 1.
Explanation / Answer
1.
Country X = Higher savings
Country Y = Smaller savings
Higher savings indicate smaller rolling of money, since money becomes ideal. Smaller rolling means smaller multiplier, because multiplier = {1 / (1 – MPC)}.
Answer: Country X would have the smaller multiplier because more disposable income is saved and not spent.
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