Question 1

Which of the following best explains why a $10 billion increase in transfer payments has a smaller impact on aggregate demand than a $10 billion increase in government purchases?

Accepted Answer

When households receive transfer payments, they tend to save part of the increase in income. Therefore, not all of the increase in transfer payments will be spent, and hence, the overall impact on aggregate demand will be smaller compared to an increase in government purchases, which represent additional spending.

Question 2

Suppose a country decreases government purchases by $400 billion. Suppose the government spending multiplier is 1.5 and the economy's real GDP is $8,000 billion. This contractionary policy action shifts the aggregate demand curve to the left by

Accepted Answer

The government spending multiplier is given as 1.5. To find the total shift in the aggregate demand curve, multiply the decrease in government purchases ($400 billion) by the multiplier (1.5). This gives $400 billion * 1.5 = $600 billion.

Question 3

Figure 12-3 -Refer to Figure 12-3. If the aggregate demand curve is AD₀, which of the following is the most Appropriate discretionary fiscal policy to pursue?

Accepted Answer

The answer of Figure 12-3 
-Refer to Figure 12-3. If...

Question 4

Suppose a country increases government purchases by $700 billion. Suppose the government spending multiplier is 2 and the economy's real GDP is $6,000 billion. This policy action shifts the aggregate demand curve to the right by

Accepted Answer

The increase in government purchases of $700 billion will result in an increase in aggregate demand by 2 times that amount, which is $1,400 billion. This shift in aggregate demand is less than 25% of the current real GDP of $6,000 billion, so the correct answer is C.

Question 5

A change in government purchases shifts the aggregate demand curve by an amount equal to the

Accepted Answer

The equation for the spending multiplier is 1/(1-MPC), where MPC is the marginal propensity to consume. A change in government purchases will have a multiplier effect on aggregate demand equal to the spending multiplier, which is equal to 1/(1-MPC). Therefore, the correct answer is C.

Question 6

Suppose the government increases the corporate income tax rate. This is

Accepted Answer

Increasing the corporate income tax rate is a contractionary fiscal policy because it reduces the amount of money businesses have to invest and spend. This decrease in investment can lead to a decrease in aggregate demand, shifting the aggregate demand curve to the left. The effect is magnified by the spending multiplier, which amplifies the initial change in investment.

Question 7

Suppose the government institutes a new investment tax credit. This is likely to

Accepted Answer

An investment tax credit increases the incentive for firms to invest. This leads to an initial increase in investment spending, which then gets multiplied throughout the economy due to the spending multiplier effect. This process increases overall demand for goods and services, shifting the aggregate demand curve to the right. The shift is not directly related to the short-run aggregate supply curve or equal to the tax credit itself but is related to the change in investment behavior multiplied through the economy.

Question 8

An increase in government transfer payments will shift the aggregate demand curve to the right

Accepted Answer

The correct answer is A because an increase in government transfer payments increases consumers' disposable income, leading to an initial change in consumption. This initial change, when multiplied by the spending multiplier, reflects the total impact on aggregate demand, shifting the curve to the right.

Question 9

Figure 12-2 -Refer to Figure 12-2. Assume that the economy is initially at Y_r. A nonintervention policy Would return the economy to its potential output by

Accepted Answer

The answer of Figure 12-2 
-Refer to Figure 12-2. Assume...

Question 10

Suppose a country repeals an investment tax credit and that leads to a decrease in investment spending of $100 billion. Suppose the multiplier is 1.2 and the economy's real GDP is $5,000 billion. This contractionary action

Accepted Answer

Based on the information given, the decrease in investment spending of $100 billion will lead to a decrease in aggregate demand. The multiplier of 1.2 means that the overall decrease in aggregate demand will be 1.2 times the initial decrease in investment spending, or $120 billion. Therefore, the correct answer is A, as the contractionary action will shift the aggregate demand curve to the left by $120 billion.

Question 11

Figure 12-2 
-Refer to Figure 12-2. If discretionary fiscal policy is used to eliminate the gap, policy actions
Will

Accepted Answer

Discretionary fiscal policy to eliminate a gap typically involves adjusting government spending and taxation to influence the level of aggregate demand. Shifting the aggregate demand curve to the left is a common method to reduce inflationary pressure and restore long-run equilibrium, without directly altering the short-run aggregate supply curve.

Question 12

Consider two fiscal policy actions.
I. a $400 billion reduction in income taxes
II. a $400 billion increase in government purchases
Which policy will have a bigger impact on aggregate demand?

Accepted Answer

Policy II will have a bigger impact on aggregate demand because it directly increases government purchases, which is a component of aggregate demand, whereas Policy I only affects disposable income and works through consumption, which is only one component of aggregate demand.

Question 13

Suppose the economy is in long-run equilibrium. If the federal government cuts government
Spending, which of the following is likely to result?

Accepted Answer

If the federal government cuts government spending, it will lead to a decreased demand for goods and services in the economy. This will lead to a decrease in the price level, as supply exceeds demand. However, this decrease in demand will also lead firms to produce less, which in turn will lead to a decrease in employment and an increase in unemployment. Therefore, the correct choice is D, a decrease in the price level and an increase in unemployment.

Question 14

Figure 12-3 -Refer to Figure 12-3. If the aggregate demand curve is AD₁, which of the following is the most Appropriate discretionary fiscal policy to pursue?

Accepted Answer

Given that the aggregate demand curve is positioned as AD₁, the most appropriate fiscal policy would be an expansionary one to stimulate economic growth. This involves increasing government spending and providing incentives for investment, such as increasing investment tax credits.

Question 15

Suppose that income taxes are increased by $600 billion. If the marginal propensity to consume is 0.75 and the spending multiplier is 4, by how much will the aggregate demand curve shift at a given price level?

Accepted Answer

The formula for calculating the change in aggregate demand is: change in AD = spending multiplier x change in spending. Since the marginal propensity to consume is 0.75, the change in spending will be 75% of the change in income taxes, which is $450 billion (0.75 x $600 billion). Therefore, the change in aggregate demand will be 4 times this amount, which is $1,800 billion.

Question 16

The impact of instituting investment tax credits is

Accepted Answer

Instituting investment tax credits provides an incentive for businesses to invest in new capital equipment or undertake research and development, leading to an increase in private sector investments. This, in turn, increases aggregate demand as businesses ramp up production to meet the demand for their goods and services.

Question 17

Suppose a country institutes an investment tax credit and that leads to an initial increase in investment spending of $100 billion. Suppose the multiplier is 1.5 and the economy's real GDP is $5,000 billion. This action is

Accepted Answer

The initial increase in investment spending of $100 billion will lead to a multiplied increase in GDP of $150 billion (multiplier of 1.5). This increase in GDP will shift the aggregate demand curve to the right by the same amount, so the correct answer is B. Choices A, C, and D are incorrect because they do not accurately reflect the effects of the investment tax credit on the aggregate demand curve.

Question 18

Suppose that when income taxes are reduced by $400 billion, households increase consumption
By 80% of the resulting change in disposable income. Suppose also that the multiplier is 2. At a given price level, the aggregate demand curve shifts to the right by

Accepted Answer

The initial reduction in income taxes results in an increase in disposable income of $400 billion. Assuming the households increase their consumption by 80% of this change, then their consumption increases by $320 billion. The multiplier of 2 means that the increase in consumption leads to an additional increase in aggregate demand of $640 billion (i.e. $320 billion x 2). Therefore, the aggregate demand curve shifts to the right by $640 billion.

Question 19

Figure 12-3 -Refer to Figure 12-3. Suppose the aggregate demand curve is AD₁.All of the following events Would more likely bring the economy back to the natural rate of unemployment except

Accepted Answer

A one-time surcharge on income tax liabilities would decrease disposable income and reduce consumption, leading to a decrease in aggregate demand and potentially prolonging the economy's deviation from the natural rate of unemployment. The other events, such as increased investment, bond purchases by the Fed, and a cut in withholding rates, would increase aggregate demand and potentially bring the economy back to the natural rate of unemployment.

Question 20

Suppose that income taxes are reduced by $400 billion and households increase consumption by
80% of the resulting change in disposable income. Suppose also that the multiplier is 2.
What is the marginal propensity to consume?

Accepted Answer

The marginal propensity to consume (MPC) is the fraction of a change in income that is spent on consumption. From the given information, we know that households increase consumption by 80% of the resulting change in disposable income. This means that the MPC is 0.8, as 80% is equal to 0.8. The multiplier tells us how much total spending will increase from the initial increase in consumption. In this case, the multiplier is 2, which means that total spending will increase by twice the initial increase in consumption.

Quiz 27: Money and Banking

Which of the following best explains why a $10 billion increase in transfer payments has a smaller impact on aggregate demand than a $10 billion increase in government purchases?

Suppose a country decreases government purchases by $400 billion. Suppose the government spending multiplier is 1.5 and the economy's real GDP is $8,000 billion. This contractionary policy action shifts the aggregate demand curve to the left by

Figure 12-3 -Refer to Figure 12-3. If the aggregate demand curve is AD0, which of the following is the most Appropriate discretionary fiscal policy to pursue?

Suppose a country increases government purchases by $700 billion. Suppose the government spending multiplier is 2 and the economy's real GDP is $6,000 billion. This policy action shifts the aggregate demand curve to the right by

A change in government purchases shifts the aggregate demand curve by an amount equal to the

Suppose the government increases the corporate income tax rate. This is

Suppose the government institutes a new investment tax credit. This is likely to

An increase in government transfer payments will shift the aggregate demand curve to the right

Figure 12-2 -Refer to Figure 12-2. Assume that the economy is initially at Yr. A nonintervention policy Would return the economy to its potential output by

Suppose a country repeals an investment tax credit and that leads to a decrease in investment spending of $100 billion. Suppose the multiplier is 1.2 and the economy's real GDP is $5,000 billion. This contractionary action

Figure 12-2 -Refer to Figure 12-2. If discretionary fiscal policy is used to eliminate the gap, policy actions Will

Consider two fiscal policy actions. I. a $400 billion reduction in income taxes II. a $400 billion increase in government purchases Which policy will have a bigger impact on aggregate demand?

Suppose the economy is in long-run equilibrium. If the federal government cuts government Spending, which of the following is likely to result?

Figure 12-3 -Refer to Figure 12-3. If the aggregate demand curve is AD1, which of the following is the most Appropriate discretionary fiscal policy to pursue?