Choose the best possible answer for each multiple choice question.

In year one, Adam earns $1,000 and saves $100. In year 2, Adam gets a raise of $500 so that he earns a total of $1,500. Out of that $1,500, he saves $200. What is Adam's MPC?

• 1.00
• 0.75
• 0.50
• 0.80

Irving owns a chain of movie theatres. He is considering whether he should build a new theatre downtown. The expected rate of return is 15 percent per year. He can borrow money at a 12 percent interest rate to finance the project. Should Irving proceed with this project?

• Yes.
• No.

If a $50 billion initial increase in spending leads to a $250 billion change in real GDP, how big is the multiplier?

• 2.5.
• 4.0.
• 5.0.
• 1.0.

a.The difference between the MPC and the APC is that the MPC is

• change in income divided by change in consumption, whereas the APC is total income divided by total consumption.
• total income divided by total consumption, whereas the APC is the change in income divided by change in consumption.
• change in consumption divided by change in income, whereas the APC is total consumption divided by total income.
• total consumption divided by total income, whereas the APC is the change in consumption divided by change in income.

b.The difference between the MPC and the MPS is that the MPC is

• the fraction of income spent and the MPS is the fraction of income saved.
• income spent and the MPS is income saved.
• the fraction of the change in income spent and the MPS is the fraction of the change in income saved.
• measured at a point in time and the MPS is measured over time.

c.The sum of MPC and the MPS must equal 1 because

• when they equal one the economy is in equilibrium.
• these are determined by macro policy makers.
• total income must be spent or saved.
• all additional income must be spent or saved.

a.A downshift of the consumption schedule typically involves an equal up shift of the saving schedule because

• income equals consumption divided by saving.
• income equals consumption minus saving.
• income plus saving equals consumption.
• all income must be consumed or saved.

b.A downshift of the consumption schedule typically involves an equal upshift of the saving schedule except when there is

• an increase in personal taxes; then they both shift downward.
• a decrease in personal taxes; then they both shift downward.
• an increase in personal taxes; then they both shift upward.
• a decrease in personal taxes; then consumption shifts upwards and the saving schedule shifts downward.

A reduction in the real interest rate will increase investment spending, other things equal, because firms will make an investment purchase if the expected return is

• greater than or equal to the real interest rate at which it can borrow.
• equal to or less than the real interest rate at which it can borrow.
• equal to the real interest rate at which it can lend.
• growing at the same rate as inflation.

In a period in which real interest rates are rising, it's possible for investment spending to increase if

• expected rates of return rise faster than real interest rates.
• expected rates of return rise slower than real interest rates.
• actual rates of return rise faster than real interest rates.
• average rates of return rise slower than real interest rates.