Income Determination, Multiplier and Keynesian Model MCQs 2026

In the simple Keynesian model, equilibrium income is where

1. Aaggregate demand equals aggregate output (Y = AD)✓
2. Bsaving is zero always✓
3. Cinterest rate is zero✓
4. Dprices are flexible always✓

The consumption function is typically written as

1. AC = Y − T only✓
2. BC = I + G✓
3. CC = 1/Y✓
4. DC = a + bY (with a > 0, 0 < b < 1)✓

MPC (marginal propensity to consume) is

1. AC / Y✓
2. BΔC / ΔY✓
3. CS / Y✓
4. DΔS / ΔC✓

MPS (marginal propensity to save) is

1. AS / C✓
2. BΔC / ΔY✓
3. CY / S✓
4. DΔS / ΔY✓

In a closed economy without taxes, MPC + MPS equals

1. A1✓
2. B0✓
3. CMPC/MPS✓
4. Dinfinity✓

The simple investment multiplier equals

1. AMPC only✓
2. B1 / (1 − MPC) or 1/MPS✓
3. CMPS only✓
4. D1 − MPC✓

If MPC = 0.8, the simple multiplier is

1. A5✓
2. B0.8✓
3. C1.25✓
4. D4✓

The multiplier process works through

1. Asuccessive rounds of spending induced by an initial injection✓
2. Bonly price flexibility✓
3. Conly wage cuts✓
4. Donly money neutrality✓

Autonomous investment is

1. Ainvestment independent of current income✓
2. Balways equal to saving ex ante✓
3. Cinduced only by Y✓
4. Dzero by definition✓

Induced investment depends on

1. Aonly weather✓
2. Bchanges in income or output (and related variables)✓
3. Conly population age✓
4. Donly land rent✓

The accelerator principle states that investment depends on

1. Athe rate of change of income/output✓
2. Bthe level of saving only✓
3. CMPC only✓
4. Dmoney illusion only✓

Keynesian cross diagram plots

1. Aonly LM curve✓
2. Bonly Phillips curve✓
3. Conly production possibility frontier✓
4. DAD against Y with 45-degree line as Y = AD reference✓

If planned saving exceeds planned investment (simple model)

1. Aincome rises immediately✓
2. Bmultiplier is negative always✓
3. Cprices must rise first✓
4. Dincome tends to fall✓

Paradox of thrift suggests that

1. Asaving always raises Y✓
2. BMPC must be zero✓
3. Cinvestment is autonomous forever✓
4. Dan attempt to save more may lower income and fail to raise saving in equilibrium✓

Classical economists believed that

1. Ademand deficiency can persist indefinitely✓
2. Bmoney is never neutral long run✓
3. Cflexible prices/wages and interest restore full employment✓
4. DSay's law is false✓

Say's Law asserts that

1. Ademand creates supply only✓
2. Bsaving never equals investment✓
3. Cmoney determines all real variables only✓
4. Dsupply creates its own demand✓

Keynes argued that equilibrium may occur with

1. Aonly full employment always✓
2. Bunderemployment (involuntary unemployment)✓
3. Czero consumption✓
4. Dinfinite multiplier always✓

Aggregate demand in a closed economy with government is

1. AC + S + T✓
2. Bonly I + G✓
3. CC + I + G✓
4. DX − M only✓

An increase in government spending raises equilibrium income by

1. Aexactly ΔG only always✓
2. Bzero if MPC > 0✓
3. Cthe government spending multiplier times ΔG✓
4. DMPS × ΔG only✓

A lump-sum tax multiplier is

1. A−MPC / (1 − MPC)✓
2. B1/(1−MPC)✓
3. CMPC only✓
4. D1/MPC✓

Balanced budget multiplier (Haavelmo) in the simple model equals

1. A0✓
2. BMPC✓
3. C1✓
4. D1/MPS✓

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

1. Apart of a tax cut is saved (MPC < 1)✓
2. BMPC = 1 always✓
3. Ctaxes do not affect DI✓
4. DG does not enter AD✓

In an open economy, the multiplier is smaller because of

1. Azero exports✓
2. Bimport leakages (MPM)✓
3. CMPC = 1✓
4. Dno saving✓

Effective demand in Keynesian theory means

1. Athe demand for output that is backed by purchasing power at a given price level✓
2. Bonly notional demand✓
3. Conly barter demand✓
4. Donly foreign demand✓

Liquidity trap refers to a situation where

1. Ainvestment is infinite✓
2. Bmoney demand is perfectly elastic at a low interest rate so monetary expansion may not lower i further✓
3. CMPC is zero✓
4. Dprices are rigid upward only✓

Crowding out occurs when

1. AG always raises I✓
2. Btaxes fall automatically✓
3. Chigher government borrowing raises interest rates and reduces private investment✓
4. DMPC rises to 1✓

The IS curve shows combinations of

1. Amoney supply and prices only✓
2. Binflation and unemployment only✓
3. Cwage and rent only✓
4. Dinterest rate and income where goods market is in equilibrium✓

The LM curve shows combinations of

1. Asaving and investment only✓
2. Bexports and imports only✓
3. Crent and profit only✓
4. Dinterest rate and income where money market is in equilibrium✓

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

1. Ahigher P always raises real balances✓
2. BMPC rises with P✓
3. Chigher P reduces real money balances and raises interest (or wealth/net export effects)✓
4. Dmultiplier becomes negative✓

Short-run aggregate supply may slope upward because

1. Atechnology worsens with P✓
2. Blabour supply is zero✓
3. CMPC depends on P only✓
4. Dwages/prices are sticky and firms supply more when P rises✓

Long-run aggregate supply is vertical at

1. Azero output✓
2. Bwhatever AD determines forever✓
3. Cthe liquidity trap output only✓
4. Dpotential (full-employment) output✓

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

1. Alower both Y and P always✓
2. Baffect only wages of land✓
3. Craise output and price level✓
4. Dleave Y unchanged always in SR✓

Stagflation is associated with

1. Aonly demand boom✓
2. Badverse supply shocks raising P while lowering Y✓
3. Conly liquidity trap with falling P✓
4. Dbalanced budget multiplier✓

Autonomous consumption (a) represents

1. Asaving equal to Y✓
2. Bconsumption independent of current income✓
3. CMPC itself✓
4. Dthe multiplier✓

Average propensity to consume (APC) is

1. AΔC / ΔY✓
2. BS / Y✓
3. CC / Y✓
4. DΔS / ΔY✓

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

1. Areal output and employment✓
2. Bonly prices with fixed Y✓
3. Conly interest with fixed Y✓
4. Donly imports with fixed C✓

Classical dichotomy claims that

1. Amoney always changes real output permanently✓
2. Bprices never adjust✓
3. Creal variables are determined by real factors; money affects nominal variables✓
4. DSay's law is false✓

Wage rigidity in Keynesian models helps explain

1. Apersistent involuntary unemployment✓
2. Binstant market clearing always✓
3. Cvertical SRAS always✓
4. Dzero MPC✓

The marginal propensity to import (MPM) is

1. AM / Y only always✓
2. BΔX / ΔY✓
3. CΔM / ΔY✓
4. DX − M✓

Super-multiplier combines

1. Aonly MPC✓
2. Bonly money demand✓
3. Conly Ricardian rent✓
4. Dmultiplier and accelerator interactions✓

Deflationary gap is the amount by which

1. AAD exceeds full-employment level✓
2. BAD falls short of the level needed for full-employment output✓
3. CMPS equals zero✓
4. DLM is horizontal✓

Inflationary gap exists when

1. AAD is below potential✓
2. BAD exceeds full-employment output at current prices✓
3. Cmultiplier is zero✓
4. Dsaving 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. Afall (approaching MPC if linear with positive intercept)✓
2. Brise without bound✓
3. Cequal MPS always✓
4. Dbecome negative✓

Animal spirits in Keynes refer to

1. Aonly rational expectations✓
2. Bonly MPC mathematics✓
3. Cspontaneous urge to action influencing investment under uncertainty✓
4. Donly wage contracts✓

Fiscal policy multiplier is weakened by

1. Ahigher MPC only✓
2. Bliquidity trap making monetary policy weak while fiscal is strong✓
3. Cperfectly elastic AS only always✓
4. Dhigher MPS, taxes, imports and possible crowding out✓

Monetary policy is relatively ineffective in a liquidity trap because

1. AMPC is zero✓
2. Binterest rates cannot be pushed down further to stimulate I✓
3. CAD does not include I✓
4. DAS is horizontal forever without trap✓

The 45-degree line in the Keynesian cross represents

1. Aonly saving functions✓
2. Bpoints where AD equals income (Y)✓
3. Conly money market✓
4. Donly labour demand✓

An increase in MPC raises the multiplier because

1. Asaving leakage rises✓
2. Bimports must rise first✓
3. Ca larger fraction of each income round is respent✓
4. Dprices become flexible✓

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

1. Afirms always raise production✓
2. BMPC becomes 1✓
3. Cmultiplier turns negative✓
4. Dactual investment exceeds planned and firms cut production✓

Keynes criticized the classical school for assuming that

1. Ademand matters at all✓
2. Binterest flexibility alone ensures full-employment saving-investment balance and labour market clearing✓
3. Cmoney exists✓
4. Dinvestment can be autonomous✓

Underemployment equilibrium means

1. Agoods market clears at a Y below full employment✓
2. Blabour market always clears✓
3. CAD is undefined✓
4. Dmultiplier is zero✓

The slope of the consumption function equals

1. AMPS✓
2. BAPC✓
3. CMPC✓
4. Dmultiplier✓

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

1. Atransfers have multiplier 1 always✓
2. BG enters AD fully while transfers raise DI and only MPC is spent✓
3. CG never enters AD✓
4. DMPC = 0 for transfers only✓

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

1. Araise output and lower the price level✓
2. Blower Y and raise P✓
3. Conly shift AD✓
4. Dleave AS unchanged✓

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

1. Ainstant full classical flexibility✓
2. Bvertical supply always✓
3. Czero MPC✓
4. Dsticky prices/wages and quantity adjustment✓

Investment demand is typically downward sloping in i because

1. Ahigher interest rates raise the cost of capital and reduce PV of projects✓
2. Binterest never affects I✓
3. CMPC determines i✓
4. Drent equals i✓

Marginal efficiency of capital (MEC) is

1. Aidentical to MPC✓
2. Bthe rate of discount that equates PV of expected yields to supply price of capital✓
3. Cthe money wage✓
4. DNFIA✓

If actual income exceeds equilibrium income in the Keynesian cross

1. Aoutput rises further always✓
2. BAD shifts up automatically✓
3. CMPS becomes negative✓
4. Dunplanned inventory accumulation occurs and output falls toward equilibrium✓

Built-in (automatic) stabilizers reduce the multiplier because

1. AMPC becomes 1✓
2. BG is fixed forever✓
3. Ctaxes and transfers vary with income, damping swings✓
4. DLM is irrelevant always✓

When the accelerator and multiplier interact, the economy may show

1. Aonly monotonic decline forever✓
2. Bzero investment always✓
3. Ccyclical fluctuations in income and investment✓
4. Dconstant Y with no dynamics✓