ECON 110 TEST 3 COMPLETE QUESTIONS WITH 100% VERIFIED ANSWERS AND EXAPLANATION

ECON 110 TEST 3 COMPLETE QUESTIONS
WITH 100% VERIFIED ANSWERS AND
EXAPLANATION


1. Which of the following functions of money would be violated if inflation
were high?
A) medium of exchange
B) store of value
C) unit of account
D) standard of deferred payment
Answer: B
Explanation: High inflation erodes the purchasing power of money over
time, so money fails to retain value — violating the store of value function.
2. Which of the following is included in M1?
A) savings deposits
B) money market mutual funds
C) checking account deposits
D) small-time deposits
Answer: C
Explanation: M1 includes currency, traveler's checks, and checking account
deposits. Savings deposits and money market funds are part of M2, not M1.
3. If an increase in autonomous consumption spending of $10 million results
in a $50 million increase in equilibrium real GDP, then
A) the MPC is 0.2
B) the MPC is 0.5
C) the MPC is 0.8
D) the MPC is 0.9
Answer: C

, Explanation: Multiplier = ΔGDP/ΔSpending = $50M/$10M = 5. Multiplier =
1/(1-MPC) → 5 = 1/(1-MPC) → 1-MPC = 0.2 → MPC = 0.8.
4. If disposable income increases by $100 million, and consumption increases
by $90 million, then the marginal propensity to consume is
A) 0.9
B) 0.8
C) 0.75
D) 0.5
Answer: A
Explanation: MPC = ΔConsumption/ΔDisposable Income = $90M/$100M =
0.9.
5. Which of the following is a true statement about the multiplier?
A) The multiplier rises as the MPC rises.
B) The multiplier rises as the MPS rises.
C) The multiplier is unaffected by the MPC.
D) The multiplier is always less than 1.
Answer: A
Explanation: Multiplier = 1/(1-MPC). As MPC increases, (1-MPC) decreases,
so the multiplier increases.
6. A general formula for the multiplier is
A) 1/(MPC)
B) 1/(1-MPS)
C) 1/(MPS)
D) 1 - MPC
Answer: C
Explanation: Since MPS = 1 - MPC, and multiplier = 1/(1-MPC), then
multiplier = 1/(MPS).
7. If inventories decline by more than analysts predict they will decline, this
implies that
A) actual investment spending was greater than planned investment
spending

, B) actual investment spending was less than planned investment spending
C) actual investment spending equaled planned investment spending
D) unplanned inventory investment was positive
Answer: B
Explanation: Inventories declining more than expected means firms sold
more than planned, so actual investment (which includes unplanned
inventory change) is less than planned investment.
8. ________ usually increase(s) when the U.S. economy is in a recession and
decrease(s) when the U.S. economy is expanding.
A) Consumption spending
B) Investment spending
C) Net exports
D) Government purchases
Answer: C
Explanation: During a U.S. recession, imports fall more than exports, so net
exports rise. During expansion, imports rise faster, reducing net exports.
9. The M2 measure of money includes all of the following EXCEPT
A) currency
B) checking account deposits
C) large time deposits over $100,000
D) money market mutual fund balances
Answer: C
Explanation: M2 includes currency, checking deposits, savings deposits,
small time deposits (under $100,000), and money market mutual funds.
Large time deposits over $100,000 are excluded from M2.
10.All of the following are true statements about the multiplier except
A) The multiplier magnifies changes in autonomous spending.
B) The multiplier is larger when the MPC is larger.
C) The multiplier effect takes time to fully occur.
D) The multiplier makes the economy less sensitive to changes in
autonomous expenditure.