Question 1

Imagine that the government increases its spending by $75 billion.Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?

Accepted Answer

The multiplier effect would tend to amplify the change in aggregate demand, while the crowding-out effect would tend to partially offset it. Therefore, the overall change in aggregate demand would be affected by both effects, making the change different from the initial $75 billion.

Question 2

If the MPC is 0.75 and there are no crowding-out or accelerator effects,then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by

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Question 3

If the MPC is 2/3 then the multiplier is

Accepted Answer

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Question 4

If the marginal propensity to consume is 5/6,and there is no investment accelerator or crowding out,a $20 billion increase in government expenditures would shift the aggregate demand curve right by

Accepted Answer

The formula to calculate the shift in aggregate demand with a change in government expenditures is:

ΔY = (1/(1-MPC)) * ΔG

Where MPC is the marginal propensity to consume and ΔG is the change in government expenditures.

Plugging in the given values:

ΔY = (1/(1-5/6)) * $20 billion
ΔY = (1/0.16667) * $20 billion
ΔY = $120 billion

Therefore, the aggregate demand curve would shift right by $120 billion. The presence or absence of investment accelerator or crowding out does not affect this calculation as they do not directly impact the MPC.

Question 5

Assume the MPC is 0.80.The multiplier is

Accepted Answer

The answer of Assume the MPC is 0.80.The multiplier is
...

Question 6

When the government reduces taxes,which of the following decreases?

Accepted Answer

When the government reduces taxes, people have more take-home pay and disposable income, which can lead to an increase in consumption and household saving. Therefore, A, B, and C are not correct answers.

Question 7

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax cut smaller than it otherwise would be?

Accepted Answer

The crowding-out effect tends to reduce the size of the shift in aggregate demand resulting from a tax cut because the increase in government spending that may result from the tax cut can lead to higher interest rates and less private investment, thus offsetting some of the initial increase in consumer spending. The multiplier effect (A) tends to amplify the initial shift in aggregate demand resulting from a tax cut by generating additional rounds of spending. The accelerator effect (C) refers to the positive relationship between the level of investment and the rate of change of output and would not directly affect the size of the shift in aggregate demand resulting from a tax cut.

Question 8

Tax cuts

Accepted Answer

Tax cuts increase disposable income for consumers and businesses, leading to increased spending and investment. This increase in spending and investment shifts aggregate demand to the right. Increases in government expenditures also shift aggregate demand to the right, but through a different mechanism, as government spending directly contributes to the total demand in the economy.

Question 9

An increase in government purchases is likely to

Accepted Answer

An increase in government purchases can lead to crowding out, which occurs when the government's increased spending causes interest rates to rise, making it more expensive for businesses to borrow money for investment spending. As a result, businesses may decrease their investment spending, resulting in a net decrease in aggregate demand.

Question 10

Assume the multiplier is 5 and that the crowding-out effect is $20 billion.An increase in government purchases of $10 billion will shift the aggregate-demand curve to the

Accepted Answer

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Question 11

The multiplier effect

Accepted Answer

The multiplier effect amplifies the effects of an increase in government expenditures by leading to a further increase in overall spending through increased income and consumption. In contrast, the crowding-out effect occurs when increased government spending leads to decreased private spending, diminishing the overall impact of the government expenditure. Therefore, D is the correct choice as it correctly describes the contrasting effects of the multiplier effect and the crowding-out effect.

Question 12

Assume the MPC is 0.75.Assuming only the multiplier effect matters,a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), which in this case is 1/(1-0.75) = 4. This means that a decrease in government purchases of $100 billion will result in a decrease in aggregate demand of $400 billion (4 times the initial change). Therefore, the aggregate demand curve will shift to the left by $400 billion.

Question 13

Assume the MPC is 0.75.Assume there is a multiplier effect and that the total crowding-out effect is $6 billion.An increase in government purchases of $10 billion will shift aggregate demand to the

Accepted Answer

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Question 14

Assume the MPC is 0.625.Assuming only the multiplier effect matters,a decrease in government purchases of $10 billion will shift the aggregate demand curve to the

Accepted Answer

The multiplier effect equals 1/ (1-MPC). Therefore, the multiplier is 1/ (1-0.625) = 2.67. A decrease in government purchases of $10 billion will be multiplied by the multiplier, resulting in a decrease in real GDP of $26.7 billion. This shift will be to the left of the aggregate demand curve.

Question 15

Suppose that the MPC is 0.60;there is no investment accelerator;and there are no crowding-out effects.If government expenditures increase by $25 billion,then aggregate demand

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Question 16

When there is an increase in government expenditures,which of the following raises investment spending?

Accepted Answer

The investment accelerator theory suggests that when there is an increase in government expenditures, it can increase investment spending by creating demand for capital goods. On the other hand, crowding out theory suggests that when government expenditures increase, it leads to a decrease in private investment due to increased interest rates. However, in this case, the question asks which of the following increases investment spending, and the investment accelerator theory is the only option that does so. Therefore, the answer is B - the investment accelerator but not crowding out.

Question 17

If the multiplier is 6 and if there is no crowding-out effect,then a $60 billion increase in government expenditures causes aggregate demand to

Accepted Answer

The formula for calculating the change in aggregate demand due to a change in government expenditures is given by:

Change in AD = Multiplier x Change in Government Expenditures

In this case, the multiplier is 6 and the change in government expenditures is $60 billion. Therefore, the change in aggregate demand will be:

Change in AD = 6 x $60 billion = $360 billion

Therefore, the correct answer is (C).

Question 18

If taxes

Accepted Answer

When taxes increase, people have less disposable income, which leads to a decrease in consumption. As a result, aggregate demand shifts leftward.

Question 19

An increase in the MPC

Accepted Answer

The MPC (marginal propensity to consume) is the proportion of additional income that consumers spend, rather than save. If the MPC increases, this means that consumers are more likely to spend any additional income they receive, rather than save it. As a result, a higher MPC leads to a higher multiplier effect, since each dollar of government spending will circulate through the economy more times. Therefore, changes in government expenditures will have a larger effect on aggregate demand.

Question 20

If the MPC is 3/4 then the multiplier is

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Quiz 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand