Income Determination, Multiplier and Keynesian Model MCQs 2026

In the simple Keynesian model, equilibrium income is where

1. A aggregate demand equals aggregate output (Y = AD) ✓
2. B saving is zero always ✓
3. C interest rate is zero ✓
4. D prices are flexible always ✓

The consumption function is typically written as

1. A C = Y − T only ✓
2. B C = I + G ✓
3. C C = 1/Y ✓
4. D C = a + bY (with a > 0, 0 < b < 1) ✓

MPC (marginal propensity to consume) is

1. A C / Y ✓
2. B ΔC / ΔY ✓
3. C S / Y ✓
4. D ΔS / ΔC ✓

MPS (marginal propensity to save) is

1. A S / C ✓
2. B ΔC / ΔY ✓
3. C Y / S ✓
4. D ΔS / ΔY ✓

In a closed economy without taxes, MPC + MPS equals

1. A 1 ✓
2. B 0 ✓
3. C MPC/MPS ✓
4. D infinity ✓

The simple investment multiplier equals

1. A MPC only ✓
2. B 1 / (1 − MPC) or 1/MPS ✓
3. C MPS only ✓
4. D 1 − MPC ✓

If MPC = 0.8, the simple multiplier is

1. A 5 ✓
2. B 0.8 ✓
3. C 1.25 ✓
4. D 4 ✓

The multiplier process works through

1. A successive rounds of spending induced by an initial injection ✓
2. B only price flexibility ✓
3. C only wage cuts ✓
4. D only money neutrality ✓

Autonomous investment is

1. A investment independent of current income ✓
2. B always equal to saving ex ante ✓
3. C induced only by Y ✓
4. D zero by definition ✓

Induced investment depends on

1. A only weather ✓
2. B changes in income or output (and related variables) ✓
3. C only population age ✓
4. D only land rent ✓

The accelerator principle states that investment depends on

1. A the rate of change of income/output ✓
2. B the level of saving only ✓
3. C MPC only ✓
4. D money illusion only ✓

Keynesian cross diagram plots

1. A only LM curve ✓
2. B only Phillips curve ✓
3. C only production possibility frontier ✓
4. D AD against Y with 45-degree line as Y = AD reference ✓

If planned saving exceeds planned investment (simple model)

1. A income rises immediately ✓
2. B multiplier is negative always ✓
3. C prices must rise first ✓
4. D income tends to fall ✓

Paradox of thrift suggests that

1. A saving always raises Y ✓
2. B MPC must be zero ✓
3. C investment is autonomous forever ✓
4. D an attempt to save more may lower income and fail to raise saving in equilibrium ✓

Classical economists believed that

1. A demand deficiency can persist indefinitely ✓
2. B money is never neutral long run ✓
3. C flexible prices/wages and interest restore full employment ✓
4. D Say's law is false ✓

Say's Law asserts that

1. A demand creates supply only ✓
2. B saving never equals investment ✓
3. C money determines all real variables only ✓
4. D supply creates its own demand ✓

Keynes argued that equilibrium may occur with

1. A only full employment always ✓
2. B underemployment (involuntary unemployment) ✓
3. C zero consumption ✓
4. D infinite multiplier always ✓

Aggregate demand in a closed economy with government is

1. A C + S + T ✓
2. B only I + G ✓
3. C C + I + G ✓
4. D X − M only ✓

An increase in government spending raises equilibrium income by

1. A exactly ΔG only always ✓
2. B zero if MPC > 0 ✓
3. C the government spending multiplier times ΔG ✓
4. D MPS × ΔG only ✓

A lump-sum tax multiplier is

1. A −MPC / (1 − MPC) ✓
2. B 1/(1−MPC) ✓
3. C MPC only ✓
4. D 1/MPC ✓

Balanced budget multiplier (Haavelmo) in the simple model equals

1. A 0 ✓
2. B MPC ✓
3. C 1 ✓
4. D 1/MPS ✓

The tax multiplier is smaller in absolute value than the spending multiplier because

1. A part of a tax cut is saved (MPC < 1) ✓
2. B MPC = 1 always ✓
3. C taxes do not affect DI ✓
4. D G does not enter AD ✓

In an open economy, the multiplier is smaller because of

1. A zero exports ✓
2. B import leakages (MPM) ✓
3. C MPC = 1 ✓
4. D no saving ✓

Effective demand in Keynesian theory means

1. A the demand for output that is backed by purchasing power at a given price level ✓
2. B only notional demand ✓
3. C only barter demand ✓
4. D only foreign demand ✓

Liquidity trap refers to a situation where

1. A investment is infinite ✓
2. B money demand is perfectly elastic at a low interest rate so monetary expansion may not lower i further ✓
3. C MPC is zero ✓
4. D prices are rigid upward only ✓

Crowding out occurs when

1. A G always raises I ✓
2. B taxes fall automatically ✓
3. C higher government borrowing raises interest rates and reduces private investment ✓
4. D MPC rises to 1 ✓

The IS curve shows combinations of

1. A money supply and prices only ✓
2. B inflation and unemployment only ✓
3. C wage and rent only ✓
4. D interest rate and income where goods market is in equilibrium ✓

The LM curve shows combinations of

1. A saving and investment only ✓
2. B exports and imports only ✓
3. C rent and profit only ✓
4. D interest rate and income where money market is in equilibrium ✓

In the AD-AS model, the AD curve slopes downward partly because

1. A higher P always raises real balances ✓
2. B MPC rises with P ✓
3. C higher P reduces real money balances and raises interest (or wealth/net export effects) ✓
4. D multiplier becomes negative ✓

Short-run aggregate supply may slope upward because

1. A technology worsens with P ✓
2. B labour supply is zero ✓
3. C MPC depends on P only ✓
4. D wages/prices are sticky and firms supply more when P rises ✓

Long-run aggregate supply is vertical at

1. A zero output ✓
2. B whatever AD determines forever ✓
3. C the liquidity trap output only ✓
4. D potential (full-employment) output ✓

A demand shock that raises AD in the short run tends to

1. A lower both Y and P always ✓
2. B affect only wages of land ✓
3. C raise output and price level ✓
4. D leave Y unchanged always in SR ✓

Stagflation is associated with

1. A only demand boom ✓
2. B adverse supply shocks raising P while lowering Y ✓
3. C only liquidity trap with falling P ✓
4. D balanced budget multiplier ✓

Autonomous consumption (a) represents

1. A saving equal to Y ✓
2. B consumption independent of current income ✓
3. C MPC itself ✓
4. D the multiplier ✓

Average propensity to consume (APC) is

1. A ΔC / ΔY ✓
2. B S / Y ✓
3. C C / Y ✓
4. D ΔS / ΔY ✓

If the economy is below full employment in Keynesian view, an increase in AD mainly raises

1. A real output and employment ✓
2. B only prices with fixed Y ✓
3. C only interest with fixed Y ✓
4. D only imports with fixed C ✓

Classical dichotomy claims that

1. A money always changes real output permanently ✓
2. B prices never adjust ✓
3. C real variables are determined by real factors; money affects nominal variables ✓
4. D Say's law is false ✓

Wage rigidity in Keynesian models helps explain

1. A persistent involuntary unemployment ✓
2. B instant market clearing always ✓
3. C vertical SRAS always ✓
4. D zero MPC ✓

The marginal propensity to import (MPM) is

1. A M / Y only always ✓
2. B ΔX / ΔY ✓
3. C ΔM / ΔY ✓
4. D X − M ✓

Super-multiplier combines

1. A only MPC ✓
2. B only money demand ✓
3. C only Ricardian rent ✓
4. D multiplier and accelerator interactions ✓

Deflationary gap is the amount by which

1. A AD exceeds full-employment level ✓
2. B AD falls short of the level needed for full-employment output ✓
3. C MPS equals zero ✓
4. D LM is horizontal ✓

Inflationary gap exists when

1. A AD is below potential ✓
2. B AD exceeds full-employment output at current prices ✓
3. C multiplier is zero ✓
4. D saving exceeds planned I at full Y in a way that opens deflationary gap ✓

In the Keynesian consumption function, as income rises APC tends to

1. A fall (approaching MPC if linear with positive intercept) ✓
2. B rise without bound ✓
3. C equal MPS always ✓
4. D become negative ✓

Animal spirits in Keynes refer to

1. A only rational expectations ✓
2. B only MPC mathematics ✓
3. C spontaneous urge to action influencing investment under uncertainty ✓
4. D only wage contracts ✓

Fiscal policy multiplier is weakened by

1. A higher MPC only ✓
2. B liquidity trap making monetary policy weak while fiscal is strong ✓
3. C perfectly elastic AS only always ✓
4. D higher MPS, taxes, imports and possible crowding out ✓

Monetary policy is relatively ineffective in a liquidity trap because

1. A MPC is zero ✓
2. B interest rates cannot be pushed down further to stimulate I ✓
3. C AD does not include I ✓
4. D AS is horizontal forever without trap ✓

The 45-degree line in the Keynesian cross represents

1. A only saving functions ✓
2. B points where AD equals income (Y) ✓
3. C only money market ✓
4. D only labour demand ✓

An increase in MPC raises the multiplier because

1. A saving leakage rises ✓
2. B imports must rise first ✓
3. C a larger fraction of each income round is respent ✓
4. D prices become flexible ✓

Planned investment equals planned saving at equilibrium in the simple model; if inventories unexpectedly rise

1. A firms always raise production ✓
2. B MPC becomes 1 ✓
3. C multiplier turns negative ✓
4. D actual investment exceeds planned and firms cut production ✓

Keynes criticized the classical school for assuming that

1. A demand matters at all ✓
2. B interest flexibility alone ensures full-employment saving-investment balance and labour market clearing ✓
3. C money exists ✓
4. D investment can be autonomous ✓

Underemployment equilibrium means

1. A goods market clears at a Y below full employment ✓
2. B labour market always clears ✓
3. C AD is undefined ✓
4. D multiplier is zero ✓

The slope of the consumption function equals

1. A MPS ✓
2. B APC ✓
3. C MPC ✓
4. D multiplier ✓

Government spending is a more powerful injection than transfers of equal size because

1. A transfers have multiplier 1 always ✓
2. B G enters AD fully while transfers raise DI and only MPC is spent ✓
3. C G never enters AD ✓
4. D MPC = 0 for transfers only ✓

In AD-AS, a positive supply shock (lower costs) tends to

1. A raise output and lower the price level ✓
2. B lower Y and raise P ✓
3. C only shift AD ✓
4. D leave AS unchanged ✓

The Keynesian short-run AS is often drawn relatively flat to reflect

1. A instant full classical flexibility ✓
2. B vertical supply always ✓
3. C zero MPC ✓
4. D sticky prices/wages and quantity adjustment ✓

Investment demand is typically downward sloping in i because

1. A higher interest rates raise the cost of capital and reduce PV of projects ✓
2. B interest never affects I ✓
3. C MPC determines i ✓
4. D rent equals i ✓

Marginal efficiency of capital (MEC) is

1. A identical to MPC ✓
2. B the rate of discount that equates PV of expected yields to supply price of capital ✓
3. C the money wage ✓
4. D NFIA ✓

If actual income exceeds equilibrium income in the Keynesian cross

1. A output rises further always ✓
2. B AD shifts up automatically ✓
3. C MPS becomes negative ✓
4. D unplanned inventory accumulation occurs and output falls toward equilibrium ✓

Built-in (automatic) stabilizers reduce the multiplier because

1. A MPC becomes 1 ✓
2. B G is fixed forever ✓
3. C taxes and transfers vary with income, damping swings ✓
4. D LM is irrelevant always ✓

When the accelerator and multiplier interact, the economy may show

1. A only monotonic decline forever ✓
2. B zero investment always ✓
3. C cyclical fluctuations in income and investment ✓
4. D constant Y with no dynamics ✓