PRC-3 · Chapter 15
Multiplier and Accelerator MCQs with Answers
44 multiple-choice questions on Multiplier and Accelerator for PRC-3 Business & Economic Insights. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
The government injects Rs. 100 million into building new roads. Because the construction workers spend their new wages at local shops, and shop owners then spend that money elsewhere, the final increase in National Income is Rs. 400 million. This magnified effect is known as:
- A) The Accelerator Principle
- B) The Keynesian Investment Multiplier
- C) The Deflationary Gap
- D) The Paradox of Thrift
Show answer & explanation
Answer: B) The Keynesian Investment Multiplier
The multiplier effect occurs when an initial injection of spending (like investment or government spending) leads to a much greater, multiplied increase in final national income.
Question 2
In macroeconomic theory, while the Multiplier explains how Investment drives Consumption, the 'Accelerator' principle explains how:
- A) Changes in the money supply drive interest rates
- B) A change in the rate of Consumption induces a magnified change in future Investment
- C) Government taxation slows down economic growth
- D) Exchange rates affect inflation
Show answer & explanation
Answer: B) A change in the rate of Consumption induces a magnified change in future Investment
The accelerator principle posits that if consumer demand grows rapidly, firms must build new factories to meet it, meaning an increase in consumption accelerates capital investment.
Question 3
During a specific phase of the business cycle, consumer demand is exceptionally high, unemployment is extremely low, and factories are running at maximum capacity, often causing inflation. This phase is called the:
- A) Trough
- B) Recession
- C) Recovery
- D) Peak / Boom
Show answer & explanation
Answer: D) Peak / Boom
The Peak or Boom is the highest point of the economic cycle, characterized by full capacity, low unemployment, and rising inflationary pressures.
Question 4
An economy has experienced two consecutive quarters of negative GDP growth. Factories are laying off workers, consumer spending is dropping, and business pessimism is high. The economy has entered a:
- A) Recession
- B) Recovery
- C) Boom
- D) Supply shock
Show answer & explanation
Answer: A) Recession
A recession is a period of general economic decline, defined technically as two consecutive quarters of falling real GDP, marked by rising unemployment and falling demand.
Question 5
At the very bottom of the business cycle, an economy is plagued by massive, persistent unemployment, bankruptcies, and completely stagnant demand. This severe, prolonged trough is termed a:
- A) Boom
- B) Recovery
- C) Depression
- D) Soft landing
Show answer & explanation
Answer: C) Depression
A depression is an unusually severe and prolonged recession, representing the deep trough of a business cycle where economic activity is virtually stagnant.
Question 6
If the Marginal Propensity to Consume (MPC) in an economy is 0.8 (meaning citizens spend 80% of any new income), what is the value of the investment multiplier? (Multiplier = 1 / (1 - MPC))
- A) 2
- B) 4
- C) 5
- D) 0.8
Show answer & explanation
Answer: C) 5
Using the formula K = 1 / (1 - MPC). K = 1 / (1 - 0.8) = 1 / 0.2 = 5. Any new injection will be multiplied 5 times.
Question 7
Which of the following describes the correct chronological sequence of a standard business cycle?
- A) Recovery, Boom, Recession, Depression
- B) Recession, Recovery, Depression, Boom
- C) Boom, Recovery, Recession, Depression
- D) Depression, Recession, Boom, Recovery
Show answer & explanation
Answer: A) Recovery, Boom, Recession, Depression
A standard cycle starts with an upturn (Recovery) peaking at a Boom, turning downward into a Recession, hitting the bottom at a Depression/Trough, and then starting the Recovery again.
Question 8
A nation notices that it requires Rs. 4 worth of new heavy machinery (capital) to permanently produce Rs. 1 worth of extra annual output. The value '4' is known as the:
- A) Investment multiplier
- B) Marginal propensity to save
- C) Capital-Output ratio (v)
- D) Inflationary gap
Show answer & explanation
Answer: C) Capital-Output ratio (v)
The capital-output ratio (v) measures the amount of capital required to produce a single unit of output. It is a key variable in the accelerator model.
Question 9
The government spends Rs. 100 million building a hospital. The construction workers spend 80% of their new wages on food and clothes. The shopkeepers then spend 80% of that money on goods. This chain reaction resulting in a massive final boost to National Income is called:
- A) The Accelerator Principle
- B) The Keynesian Investment Multiplier
- C) The Paradox of Thrift
- D) The Price Deflator
Show answer & explanation
Answer: B) The Keynesian Investment Multiplier
The multiplier effect demonstrates how an initial injection of spending (like building a hospital) circulates through the economy, creating multiple rounds of income and a magnified final impact.
Question 10
While the Multiplier shows how Investment drives Consumption, the 'Accelerator Theory' focuses on the reverse relationship. It states that:
- A) A rise in consumer demand forces firms to aggressively increase Capital Investment to build new factories
- B) High taxes accelerate government debt
- C) Inflation accelerates when the money supply drops
- D) Savings accelerate during a boom
Show answer & explanation
Answer: A) A rise in consumer demand forces firms to aggressively increase Capital Investment to build new factories
The accelerator principle posits that if consumer demand grows rapidly, firms hit capacity limits and must 'accelerate' their capital investment to build new production facilities to meet the demand.
Question 11
If a nation's citizens decide to suddenly save a massive portion of their income out of fear of a recession, causing the Marginal Propensity to Consume (MPC) to drop significantly. What happens to the size of the Multiplier?
- A) It increases
- B) It decreases
- C) It becomes negative
- D) It remains unchanged
Show answer & explanation
Answer: B) It decreases
The formula for the multiplier is 1 / (1 - MPC). If the MPC drops (people spend less and save more), the multiplier effect weakens and the value of the multiplier decreases.
Question 12
During a specific phase of the business cycle, an economy experiences two consecutive quarters of declining GDP, rising unemployment, and falling consumer confidence. This phase is officially termed a:
- A) Boom
- B) Peak
- C) Recession
- D) Recovery
Show answer & explanation
Answer: C) Recession
A recession is technically defined as a general economic decline lasting for at least two consecutive quarters, characterized by falling output and rising unemployment.
Question 13
An economy is running at maximum capacity. Unemployment is virtually zero, factories are running 24/7, and intense demand is pushing prices up rapidly. Which phase of the business cycle is this?
- A) Trough
- B) Recovery
- C) Recession
- D) Peak / Boom
Show answer & explanation
Answer: D) Peak / Boom
The Peak (or Boom) is the highest point of the business cycle, marked by full resource utilization, high confidence, and often strong inflationary pressures.
Question 14
At the very bottom of a severe economic downturn, the economy suffers from prolonged, massive unemployment, widespread bankruptcies, and deeply stagnant demand lasting for years. This deep trough is historically termed a:
- A) Soft landing
- B) Depression
- C) Mild recession
- D) Deflationary boom
Show answer & explanation
Answer: B) Depression
A depression is an extreme, prolonged recession representing the absolute bottom (trough) of a severe business cycle where economic activity is paralyzed.
Question 15
Economist Paul Samuelson argued that the recurring, wave-like fluctuations of the business cycle (booms and recessions) are primarily driven by:
- A) Changes in the global gold standard
- B) The continuous interaction between the Multiplier and the Accelerator
- C) Sudden changes in birth rates
- D) Government taxation errors alone
Show answer & explanation
Answer: B) The continuous interaction between the Multiplier and the Accelerator
Samuelson's model explains business cycles as the dynamic interaction where multiplier-induced consumption triggers accelerator-induced investment, fueling booms until capacity constraints force a downturn.
Question 16
A factory requires Rs. 5 million worth of heavy machinery (capital) to permanently produce Rs. 1 million worth of extra output annually. In the accelerator model, the value '5' is known as the:
- A) Marginal propensity to save
- B) Multiplier coefficient
- C) Capital-Output ratio (v)
- D) Rate of depreciation
Show answer & explanation
Answer: C) Capital-Output ratio (v)
The capital-output ratio defines how much capital is required to produce one unit of output, a central variable in determining the strength of the accelerator effect.
Question 17
If the Marginal Propensity to Consume (MPC) is 0.75, meaning citizens spend 75% of any new income, what is the calculated value of the Keynesian Investment Multiplier?
- A) 1.33
- B) 2.5
- C) 4
- D) 7.5
Show answer & explanation
Answer: C) 4
Using the formula K = 1 / (1 - MPC). Here, K = 1 / (1 - 0.75) = 1 / 0.25 = 4. The initial investment will be multiplied fourfold.
Question 18
The government attempts to use the multiplier effect to pull the economy out of a recession by building roads. However, there is a severe shortage of cement and steel in the country. What limitation of the multiplier does this expose?
- A) The absolute limit of full employment
- B) Non-availability of consumer and capital goods to absorb the spending
- C) Excessive savings
- D) Time lags
Show answer & explanation
Answer: B) Non-availability of consumer and capital goods to absorb the spending
For the multiplier to work, the economy must have spare goods and resources available to buy. If goods are unavailable, the injected money just causes inflation, halting the real multiplier effect.
Question 19
If an economy is heavily dependent on imports, meaning a massive portion of any new consumer income is immediately spent on foreign goods (high marginal propensity to import). How does this specifically affect the domestic multiplier?
- A) It makes the multiplier infinitely large
- B) It significantly reduces the size of the domestic multiplier
- C) It has no effect on the multiplier
- D) It turns the multiplier into the accelerator
Show answer & explanation
Answer: B) It significantly reduces the size of the domestic multiplier
Imports are a leakage. If new income is heavily spent on imports, that money leaves the domestic circular flow immediately, significantly dampening and reducing the domestic multiplier effect.
Question 20
The government injects Rs. 1 billion to build a dam. The workers spend 80% of their wages, shopkeepers spend 80% of their new profits, creating a chain reaction. The final increase in National Income is Rs. 5 billion. This phenomenon is:
- A) The Accelerator Principle
- B) The Keynesian Investment Multiplier
- C) The Paradox of Thrift
- D) The Price Deflator
Show answer & explanation
Answer: B) The Keynesian Investment Multiplier
The multiplier effect occurs when an initial injection of autonomous spending leads to a much larger, magnified final increase in national income.
Question 21
If the citizens of a country spend 75% of any new income they receive (Marginal Propensity to Consume = 0.75), what is the exact value of the Keynesian Investment Multiplier?
- A) 2
- B) 3
- C) 4
- D) 7.5
Show answer & explanation
Answer: C) 4
Using the formula K = 1 / (1 - MPC). K = 1 / (1 - 0.75) = 1 / 0.25 = 4. The initial investment will multiply four times.
Question 22
While the Multiplier explains how Investment drives Consumption, the 'Accelerator Theory' focuses on the reverse. It states that:
- A) High taxes accelerate government debt
- B) Inflation accelerates when the money supply drops
- C) A rapid rise in consumer demand forces firms to aggressively increase Capital Investment to build new factories
- D) Savings accelerate during a boom
Show answer & explanation
Answer: C) A rapid rise in consumer demand forces firms to aggressively increase Capital Investment to build new factories
The accelerator principle states that an increase in the rate of consumption induces a disproportionately larger increase in capital investment to expand production capacity.
Question 23
During a specific phase of the business cycle, an economy experiences maximum capacity utilization, massive consumer confidence, practically zero unemployment, and severe inflationary pressures. This phase is the:
- A) Trough
- B) Recession
- C) Recovery
- D) Peak / Boom
Show answer & explanation
Answer: D) Peak / Boom
The Peak or Boom is the highest point of economic activity in the business cycle, characterized by full employment and overheating.
Question 24
An economy is officially diagnosed as having two consecutive quarters of falling real GDP, accompanied by rising unemployment and bankruptcies. The economy has entered a:
- A) Boom
- B) Recovery
- C) Recession
- D) Soft landing
Show answer & explanation
Answer: C) Recession
A recession is a widespread economic decline officially defined by at least two consecutive quarters of negative GDP growth.
Question 25
Economist Paul Samuelson proposed that the constant, wave-like fluctuations of the business cycle (booms followed by recessions) are primarily driven by the dynamic interaction between:
- A) Inflation and deflation
- B) The Multiplier and the Accelerator
- C) Imports and exports
- D) Monetary and fiscal policy
Show answer & explanation
Answer: B) The Multiplier and the Accelerator
Samuelson's model explains business cycles through the interplay of the multiplier (consumption) and accelerator (investment) fueling growth until capacity limits cause a collapse.
Question 26
A factory realizes it requires Rs. 6 million worth of heavy capital machinery to permanently generate Rs. 1 million worth of extra annual output. In the accelerator model, the value '6' represents the:
- A) Multiplier coefficient
- B) Marginal propensity to save
- C) Capital-Output ratio (v)
- D) Interest rate
Show answer & explanation
Answer: C) Capital-Output ratio (v)
The capital-output ratio (v) indicates the amount of capital required to produce one unit of output, a key determinant of the accelerator effect's strength.
Question 27
If a country has a very high 'Marginal Propensity to Import', meaning citizens spend most of their new income on foreign goods, how does this affect the domestic multiplier?
- A) It makes the multiplier infinitely large
- B) It significantly reduces the size of the domestic multiplier
- C) It perfectly stabilizes the economy
- D) It has no effect at all
Show answer & explanation
Answer: B) It significantly reduces the size of the domestic multiplier
Imports are a leakage. When new income is spent on imports, it immediately leaves the domestic circular flow, severely weakening the multiplier effect.
Question 28
At the very bottom of the business cycle, economic activity is completely stagnant, unemployment is exceptionally high, and it remains this way for years. This deep, prolonged trough is a:
- A) Depression
- B) Recovery
- C) Boom
- D) Mild recession
Show answer & explanation
Answer: A) Depression
A depression is an unusually severe and prolonged recession, representing the lowest point (trough) of a major economic cycle.
Question 29
Which of the following is the correct chronological sequence of a standard business cycle?
- A) Recession, Recovery, Depression, Boom
- B) Boom, Recovery, Recession, Depression
- C) Recovery, Boom, Recession, Depression
- D) Depression, Recession, Boom, Recovery
Show answer & explanation
Answer: C) Recovery, Boom, Recession, Depression
A standard cycle starts with an expansion (Recovery), hits a peak (Boom), declines (Recession), bottoms out (Depression/Trough), and begins Recovery again.
Question 30
In a closed economy, the full employment output is Rs. 25 million, but actual output is only Rs. 20 million. The Marginal Propensity to Consume (MPC) is 0.8. What size of initial investment is needed to close this Rs. 5 million gap?
- A) Rs. 1 million
- B) Rs. 4 million
- C) Rs. 5 million
- D) Rs. 16 million
Show answer & explanation
Answer: A) Rs. 1 million
With an MPC of 0.8, the multiplier is 1/(1-0.8) = 5. To achieve a final growth of 5 million, the required initial injection is 5m / 5 = Rs. 1 million.
Question 31
If the marginal propensity to consume (MPC) in a highly spending-oriented country is 0.9, what is the mathematical value of the Keynesian multiplier?
- A) 1.1
- B) 1.25
- C) 5
- D) 10
Show answer & explanation
Answer: D) 10
The formula for the multiplier (K) is 1 / (1 - MPC). Thus, K = 1 / (1 - 0.9) = 1 / 0.1 = 10.
Question 32
The 'Accelerator Theory' differs from the Multiplier by focusing on investment. It states that:
- A) Net investment is positive and rising when consumer demand/output is rising at an increasing rate
- B) High interest rates accelerate saving
- C) Government taxes accelerate debt
- D) Inflation accelerates when the money supply drops
Show answer & explanation
Answer: A) Net investment is positive and rising when consumer demand/output is rising at an increasing rate
The accelerator principle posits that firms are induced to radically accelerate their capital investment (build new factories) when they see consumer demand growing rapidly.
Question 33
Economist Paul Samuelson argued that the recurring, wave-like fluctuations of the business cycle are not random, but are actively driven by the dynamic interaction between:
- A) The Multiplier and the Accelerator
- B) Rising imports and falling exports
- C) Government taxation and central bank printing
- D) Fiat money and gold reserves
Show answer & explanation
Answer: A) The Multiplier and the Accelerator
Samuelson's model explains business cycles as the interaction where multiplier-induced consumption triggers accelerator-induced investment, feeding a boom until capacity halts it.
Question 34
If a country has a very high Marginal Propensity to Import (citizens spend most new money on foreign goods), how will this specific leakage affect the domestic Investment Multiplier?
- A) It makes the multiplier infinitely large
- B) It severely reduces the size and power of the domestic multiplier
- C) It perfectly stabilizes the exchange rate
- D) It turns the multiplier into the accelerator
Show answer & explanation
Answer: B) It severely reduces the size and power of the domestic multiplier
Imports represent money leaving the domestic economy. If new income immediately leaks abroad, it cannot circulate domestically, severely weakening the multiplier effect.
Question 35
Certain economic statistics, like the number of new building permits issued, change direction before the broader economy does. These are used to forecast future phases and are known as:
- A) Leading indicators
- B) Lagging indicators
- C) Coincident indicators
- D) Static indicators
Show answer & explanation
Answer: A) Leading indicators
Leading indicators are metrics that typically shift before the rest of the economy, providing advance warning of upcoming business cycle changes.
Question 36
The topmost point of a business cycle, characterized by factories operating at maximum capacity, practically zero unemployment, and severe inflationary pressure, is called the:
- A) Trough
- B) Peak / Boom
- C) Recession
- D) Recovery
Show answer & explanation
Answer: B) Peak / Boom
The peak is the zenith of the business cycle expansion, where the economy is overheating and fully utilizing all resources.
Question 37
When an economy suffers from at least two consecutive quarters of falling real GDP, rising bankruptcies, and increasing unemployment, it has officially entered a:
- A) Golden age
- B) Recovery
- C) Recession
- D) Price ceiling
Show answer & explanation
Answer: C) Recession
A recession is technically defined as a general economic contraction spanning two or more consecutive quarters of negative growth.
Question 38
An unusually deep and prolonged trough in the business cycle, where economic activity remains severely paralyzed with massive unemployment for years, is historically termed a:
- A) Depression
- B) Soft landing
- C) Stagflation
- D) Correction
Show answer & explanation
Answer: A) Depression
A depression is an extreme, severe, and long-lasting form of a recession, representing the absolute bottom of a major cycle.
Question 39
If the government decides to suddenly raise income taxes, leaving households with much less disposable income, what will happen to the size of the Multiplier?
- A) It will become infinite
- B) It will decrease, as the marginal propensity to consume out of gross income falls
- C) It will heavily increase
- D) It will remain unchanged
Show answer & explanation
Answer: B) It will decrease, as the marginal propensity to consume out of gross income falls
Taxes are a leakage. Higher taxes reduce the disposable income passed on in each round of spending, thus shrinking the strength of the multiplier.
Question 40
In a closed economy with no government, actual output is Rs. 20 million while full-employment potential is Rs. 25 million. If the Marginal Propensity to Consume (MPC) is 0.8, what size of new investment is needed to close the gap?
- A) Rs. 1 million
- B) Rs. 4 million
- C) Rs. 5 million
- D) Rs. 16 million
Show answer & explanation
Answer: A) Rs. 1 million
The gap is 5 million. The multiplier (K) is 1 / (1 - 0.8) = 5. To generate 5 million in final output, the initial investment must be 1 million (1m x 5 = 5m).
Question 41
If the marginal propensity to consume (MPC) in an overheating economy is 0.9, what is the exact mathematical value of the Keynesian multiplier?
- A) 1.1
- B) 1.25
- C) 5
- D) 10
Show answer & explanation
Answer: D) 10
The formula for the multiplier is 1 / (1 - MPC). Therefore, K = 1 / (1 - 0.9) = 1 / 0.1 = 10.
Question 42
The 'Accelerator Theory' differs from the Multiplier by focusing on capital investment behavior. It explicitly states that:
- A) Net investment is positive only if consumer output is rising at an increasing rate
- B) High interest rates accelerate saving
- C) Government taxes accelerate debt
- D) Inflation accelerates when the money supply drops
Show answer & explanation
Answer: A) Net investment is positive only if consumer output is rising at an increasing rate
The accelerator principle argues that firms are only induced to undertake massive new capital investment (like building factories) when they see an accelerating growth in consumer demand.
Question 43
If the government decides to aggressively increase direct income taxes on citizens, what is the mathematical effect on the value of the national output multiplier?
- A) It will become infinite
- B) It will definitively decrease
- C) It will heavily increase
- D) It will remain completely unchanged
Show answer & explanation
Answer: B) It will definitively decrease
Taxes act as a withdrawal from the circular flow. Higher taxes reduce citizens' disposable income, meaning they pass on less money in each spending round, weakening the multiplier.
Question 44
During which specific phase of the business cycle does the economy experience a steady, optimistic rise in output, incomes, and business confidence following a trough?
- A) Depression
- B) Recovery
- C) Peak
- D) Recession
Show answer & explanation
Answer: B) Recovery
Recovery (or expansion) is the phase where stagnant economic activity begins to consistently grow again, characterized by rising employment, production, and consumer confidence.