Skip to main content
Back

Deriving the Multiplier Algebraically quiz

Control buttons has been changed to "navigation" mode.
1/15
  • What does the multiplier effect in macroeconomics describe?
    It describes how an initial increase in autonomous consumption or investment leads to a multiplied increase in GDP.
  • In a private closed economy, what components make up aggregate expenditures (AE)?
    Aggregate expenditures are made up of consumption (C) and investment (I).
  • How is the consumption function typically expressed in the multiplier model?
    It is expressed as autonomous consumption plus the marginal propensity to consume (MPC) times income (Y), or C = A + MPC × Y.
  • At equilibrium in the aggregate expenditures model, what is the relationship between AE and GDP?
    At equilibrium, aggregate expenditures (AE) equal GDP (Y).
  • How do you rearrange the equilibrium equation Y = A + MPC × Y + I to solve for Y?
    You move MPC × Y to the left side, factor out Y, and solve to get Y = (A + I) / (1 - MPC).
  • What is the formula for the multiplier in terms of MPC?
    The multiplier is 1 divided by (1 minus MPC), or 1/(1 - MPC).
  • What does the multiplier tell us about changes in investment or autonomous consumption?
    It tells us that any change in investment or autonomous consumption will result in a multiplied change in equilibrium GDP.
  • Why is all income considered disposable in the private closed economy model used here?
    Because there are no taxes or government transfers in this simplified model.
  • What happens to GDP if there is an increase in investment according to the multiplier model?
    GDP increases by the amount of the investment times the multiplier.
  • How does the marginal propensity to consume (MPC) affect the size of the multiplier?
    A higher MPC increases the size of the multiplier, while a lower MPC decreases it.
  • What is autonomous consumption?
    Autonomous consumption is the level of consumption that occurs even if income is zero.
  • Why is the multiplier effect important during a recession?
    Because increasing investment spending can have a multiplied effect on boosting GDP.
  • What algebraic step allows you to factor Y out of Y - MPC × Y?
    You factor Y to get Y × (1 - MPC).
  • If MPC is 0.8, what is the value of the multiplier?
    The multiplier is 1/(1 - 0.8) = 5.
  • What does the equation Y = (A + I) / (1 - MPC) show about the relationship between spending and GDP?
    It shows that equilibrium GDP is a multiple of the sum of autonomous consumption and investment, determined by the multiplier.