Question 1

Fiscal policy refers to the idea that aggregate demand is affected by changes in
A)the money supply.
B)government spending and taxes.
C)trade policy.
D)interest rates.

Accepted Answer

Fiscal policy involves government decisions on taxation and spending to influence the economy. Changes in government spending and taxes directly affect aggregate demand, as they alter consumers' disposable income and incentives to spend or save.

Question 2

Figure 34-5 -Refer to Figure 34-5. An increase in taxes will A)shift aggregate demand from AD₁ to AD₃. B)shift aggregate demand from AD₁ to AD₂. C)cause movement from point C to point D along AD₁. D)have no effect on aggregate demand.

Accepted Answer

An increase in taxes reduces consumers' disposable income, leading to a decrease in consumer spending. This decrease in spending shifts the aggregate demand curve to the left, from its initial position to a new position, indicating a reduction in the total demand for goods and services in the economy at every price level.

Question 3

Scenario 34-1. Take the following information as given for a small economy:
• When income is $10,000, consumption spending is $6,500.
• When income is $11,000, consumption spending is $7,250.
-Refer to Scenario 34-1. The multiplier for this economy is
A)2.85.
B)1.53.
C)4.00.
D)7.00.

Accepted Answer

The answer of Scenario 34-1. Take the following information as...

Question 4

The process of the investment accelerator involves
A)positive feedback from aggregate demand to investment.
B)negative feedback from aggregate demand to investment.
C)positive feedback from aggregate supply to investment.
D)negative feedback from aggregate supply to investment.

Accepted Answer

The investment accelerator concept involves a positive feedback loop from aggregate demand to investment, meaning that an increase in aggregate demand leads to increased investment in the economy, as businesses invest more to meet the higher demand.

Question 5

Which of the following illustrates how the investment accelerator works?
A)An increase in government expenditures increases the interest rate so that the Hair City chain of hair salons decides to build fewer new salons.
B)An increase in government expenditures increases aggregate spending so that Hair City finds it profitable to build more new salons.
C)An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by Hair City increases.
D)An increase in government expenditures decreases the interest rate so that Hair City decides to build more new salons.

Accepted Answer

The investment accelerator concept suggests that an increase in aggregate demand (for example, through increased government spending) can make additional investments more profitable due to higher expected returns. In this scenario, Hair City finds it profitable to build more new salons as a result of increased aggregate spending, illustrating the investment accelerator effect.

Question 6

Scenario 34-1. Take the following information as given for a small economy:
• When income is $10,000, consumption spending is $6,500.
• When income is $11,000, consumption spending is $7,250.
-Refer to Scenario 34-1. The marginal propensity to consume for this economy is
A)0.650.
B)0.750.
C)0.650 or 0.664, depending on whether income is $10,000 or $11,000.
D)0.800.

Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income. From the given data, when income increases from $10,000 to $11,000 (a change of $1,000), consumption spending increases from $6,500 to $7,250 (a change of $750). Therefore, MPC = $750 / $1,000 = 0.750.

Question 7

If the MPC = 4/5, then the government purchases multiplier is
A)5/4.
B)4/5.
C)5.
D)20.

Accepted Answer

The government purchases multiplier is calculated as 1/(1-MPC). With MPC = 4/5, the multiplier is 1/(1-4/5) = 1/(1/5) = 5.

Question 8

Which of the following events shifts aggregate demand rightward?
A)An increase in government expenditures or a decrease in the price level
B)A decrease in government expenditures or an increase in the price level
C)An increase in government expenditures, but not a change in the price level
D)A decrease in the price level, but not a change in government expenditures

Accepted Answer

An increase in government expenditures directly increases aggregate demand, shifting it rightward. Changes in the price level do not shift the aggregate demand curve; they cause movement along the curve.

Question 9

Scenario 34-1. Take the following information as given for a small economy:
• When income is $10,000, consumption spending is $6,500.
• When income is $11,000, consumption spending is $7,250.
-Refer to Scenario 34-1. For this economy, an initial increase of $200 in net exports translates into a(n)
A)$570 increase in aggregate demand when the crowding-out effect is taken into account.
B)$800 increase in aggregate demand when the crowding-out effect is taken into account.
C)$1,400 increase in aggregate demand in the absence of the crowding-out effect.
D)$800 increase in aggregate demand in the absence of the crowding-out effect.

Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income, which is ($7,250 - $6,500) / ($11,000 - $10,000) = 0.75. The multiplier effect is 1 / (1 - MPC) = 1 / (1 - 0.75) = 4. Therefore, an initial increase of $200 in net exports would result in an $800 increase in aggregate demand (200 * 4) in the absence of the crowding-out effect.

Question 10

Figure 34-6 -Refer to Figure 34-6. A shift of the money-demand curve from MD₂ to MD₁ is consistent with which of the following sets of events? A)The government cuts taxes, resulting in an increase in people's incomes. B)The government reduces government spending, resulting in a decrease in people's incomes. C)The Federal Reserve increases the supply of money, which decreases the interest rate. D)The Federal Reserve decreases the supply of money, which increases the interest rate.

Accepted Answer

A decrease in people's incomes would lead to a decrease in the demand for money, shifting the money-demand curve from MD2 to MD1.

Question 11

Which of the following correctly explains the crowding-out effect?
A)An increase in government expenditures decreases the interest rate and so increases investment spending.
B)An increase in government expenditures increases the interest rate and so reduces investment spending.
C)A decrease in government expenditures increases the interest rate and so increases investment spending.
D)A decrease in government expenditures decreases the interest rate and so reduces investment spending.

Accepted Answer

The crowding-out effect occurs when increased government spending leads to higher interest rates, which in turn reduces investment spending by the private sector. This is because government borrowing to finance its expenditures can lead to a decrease in the supply of savings available for private investment, pushing interest rates up.

Question 12

The multiplier effect states that there are additional shifts in aggregate demand from expansionary fiscal policy, because it
A)reduces investment and thereby increases consumer spending.
B)increases the money supply and thereby reduces interest rates.
C)increases income and thereby increases consumer spending.
D)decreases income and thereby increases consumer spending.

Accepted Answer

The multiplier effect refers to the phenomenon where an initial increase in spending (such as through expansionary fiscal policy) leads to additional increases in income and hence consumer spending, further boosting aggregate demand. This cycle continues with diminishing effects, but overall, it amplifies the initial increase in spending.

Question 13

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then 1 + MPC + MPC² + MPC³ = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of A)1.96. B)3. C)1.67. D)2.5.

Accepted Answer

The multiplier is calculated as 1/(1-MPC), so with an MPC of 0.6, the multiplier is 1/(1-0.6) = 2.5. This is because the formula for the multiplier in Keynesian economics is based on the marginal propensity to consume, indicating how much additional economic activity is generated from an additional unit of spending.

Question 14

If the multiplier is 3, then the MPC is
A)1/3.
B)3/4.
C)4/3.
D)2/3.

Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income. The multiplier is given by 1/(1-MPC). If the multiplier is 3, then 3 = 1/(1-MPC), solving for MPC gives MPC = 2/3.

Question 15

The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates
A)the multiplier effect.
B)the crowding-out effect.
C)the Fisher effect.
D)the wealth effect.

Accepted Answer

The multiplier effect describes how an initial increase in spending (such as the construction of a new water-treatment plant and the subsequent payment to workers) leads to further increases in spending (workers spending their earnings), which amplifies the initial impact on the economy.

Question 16

Which of the following is an example of crowding out?
A)An increase in government spending increases interest rates, causing investment to fall.
B)A decrease in private savings increases interest rates, causing investment to fall.
C)A decrease in the money supply increases interest rates, causing investment to fall.
D)An increase in taxes increases interest rates, causing investment to fall.

Accepted Answer

Crowding out occurs when increased government spending leads to higher interest rates, which in turn reduces investment spending by the private sector.

Question 17

Figure 34-5 -Refer to Figure 34-5. An increase in government purchases will A)shift aggregate demand from AD₁ to AD₃. B)shift aggregate demand from AD₁ to AD₂. C)cause movement from point C to point D along AD₁. D)have no effect on aggregate demand.

Accepted Answer

An increase in government purchases is a fiscal policy action that directly increases aggregate demand, shifting the aggregate demand curve to the right, from its initial position to a new position reflecting higher demand.

Question 18

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is
A)$60.25.
B)$60.75.
C)$61.33.
D)$64.00.

Accepted Answer

The marginal propensity to consume (MPC) can be calculated using the multiplier formula: Multiplier = 1/(1-MPC). Given the multiplier is 4, MPC = 0.75. Therefore, when income increases by $1 (from $100 to $101), consumer spending increases by $0.75 (0.75 * $1), making it $60.75.

Question 19

Suppose there are both multiplier and crowding out effects but without any accelerator effects. An increase in government expenditures would
A)always shift aggregate demand right by a larger amount than the increase in government expenditures.
B)always shift aggregate demand right by the same amount as the increase in government expenditures.
C)always shift aggregate demand right by a smaller amount than the increase in government expenditures.
D)shift aggregate demand right by a larger, equal, or smaller amount than the increase in government expenditures.

Accepted Answer

The presence of both multiplier and crowding out effects means that the net impact on aggregate demand could vary. The multiplier effect tends to increase aggregate demand more than the initial government expenditure, while the crowding out effect reduces this impact by increasing interest rates and decreasing investment. Without the accelerator effect, the final impact on aggregate demand could be larger, equal, or smaller than the initial increase in government expenditures, depending on the relative strengths of the multiplier and crowding out effects.

Question 20

Figure 34-7 (a) The Money Market (b) The Aggregate Demand Curve -Refer to Figure 34-7. Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD₁ to AD₂ if there were no crowding out; the AD curve actually shifts from AD₁ to AD₃ with crowding out. Also, suppose the horizontal distance between the curves AD₁ and AD₃ is $55 billion. The extent of crowding out, for any particular level of the price level, is A)$75 billion. B)$40 billion. C)$30 billion. D)$20 billion.

Accepted Answer

The answer of Figure 34-7
(a) The Money Market
(b) The Aggregate...

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

Fiscal policy refers to the idea that aggregate demand is affected by changes in

Figure 34-5 ​ ​ ​ -Refer to Figure 34-5. An increase in taxes will

Scenario 34-1. Take the following information as given for a small economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. -Refer to Scenario 34-1. The multiplier for this economy is

The process of the investment accelerator involves

Which of the following illustrates how the investment accelerator works?

Scenario 34-1. Take the following information as given for a small economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. -Refer to Scenario 34-1. The marginal propensity to consume for this economy is

If the MPC = 4/5, then the government purchases multiplier is

Which of the following events shifts aggregate demand rightward?

Figure 34-6 -Refer to Figure 34-6. A shift of the money-demand curve from MD2 to MD1 is consistent with which of the following sets of events?

Which of the following correctly explains the crowding-out effect?

The multiplier effect states that there are additional shifts in aggregate demand from expansionary fiscal policy, because it

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then 1 + MPC + MPC2 + MPC3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of

If the multiplier is 3, then the MPC is

The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates

Which of the following is an example of crowding out?

Figure 34-5 ​ ​ ​ -Refer to Figure 34-5. An increase in government purchases will

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is

Suppose there are both multiplier and crowding out effects but without any accelerator effects. An increase in government expenditures would

Figure 34-5 -Refer to Figure 34-5. An increase in taxes will

Figure 34-6 -Refer to Figure 34-6. A shift of the money-demand curve from MD₂ to MD₁ is consistent with which of the following sets of events?

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then 1 + MPC + MPC² + MPC³ = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of

Figure 34-5 -Refer to Figure 34-5. An increase in government purchases will