During Normal Times, If the Marginal Propensity to Consumer Is

question 12

Multiple Choice

During normal times, if the marginal propensity to consumer is 3/4, and the government borrows $10 billion in order to increase spending by that amount, real output will expand by

• A) more than $40 billion, because both the additional borrowing and the additional spending will stimulate real output.
• B) $40 billion, because the net multiplier will be 4.
• C) less than $40 billion, because the additional borrowing will place upward pressure on real interest rates, weakening the impact of the multiplier.
• D) $10 billion, because during normal times, the government can borrow funds without any increase in interest rates.

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Definitions:

Predetermined Overhead Rate

A rate used to allocate manufacturing overhead costs to products, calculated before the period begins based on estimated costs and activity levels.

Direct Labour Hour

Direct labour hour is a measure of the amount of time workers spend on direct production activities, directly involved in manufacturing goods or providing services.

Manufacturing Overhead

Manufacturing expenses not directly linked to individual product units, encompassing indirect materials and labor.

Predetermined Overhead Rate

An estimated rate used to assign manufacturing overhead costs to products based on a specific activity base, like machine hours or labor hours.