Question 1

Consider the following sequence of events: price level $\uparrow \Rightarrow$demand for money $\uparrow \Rightarrow$equilibrium interest rate $\uparrow$
$\Rightarrow$ quantity of goods and services demanded $\darr$

This sequence explains why the

Accepted Answer

The sequence describes the interest rate effect, which is one reason why the aggregate-demand curve slopes downward. As the price level rises, the demand for money increases, leading to higher interest rates, which in turn reduces the quantity of goods and services demanded.

Question 2

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 3. It follows that, when income is $101, consumer spending is

Accepted Answer

The multiplier is the reciprocal of the marginal propensity to save (MPS). MPS = 1 - MPC, where MPC is the marginal propensity to consume. In this case, MPC = 60/100 = 0.6, so MPS = 1 - 0.6 = 0.4. Therefore, the multiplier is 1/MPS = 1/0.4 = 2.5. When income increases by $1, consumer spending increases by $2.5. Therefore, when income is $101, consumer spending is $60 + $2.5 = $60.67.

Question 3

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

Accepted Answer

Fiscal policy refers to the use of government spending and taxes to influence the economy. Changes in government spending and taxes affect people's disposable income and thus their ability to spend, which in turn affects aggregate demand. The money supply and trade policy are not directly related to fiscal policy.

Question 4

The multiplier for changes in government spending is calculated as

Accepted Answer

The multiplier for changes in government spending is calculated as 1/(1 - MPC), where MPC is the marginal propensity to consume. This is because when the government increases its spending, it injects money into the economy, which leads to an increase in consumption and investment spending, and in turn, further increases in aggregate demand. The multiplier captures this ripple effect of government spending through the economy. A higher MPC leads to a higher multiplier, as a larger fraction of the money injected into the economy is spent on goods and services, rather than saved.

Question 5

Paul Samuelson, a famous economist, said that

Accepted Answer

The answer of Paul Samuelson, a famous economist, said that
...

Question 6

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

Accepted Answer

The answer of Which of the following sequences best explains...

Question 7

In a certain economy, when income is $200, consumer spending is $145. The value of the multiplier for this economy is 6.25. It follows that, when income is $230, consumer spending is

Accepted Answer

To find out consumer spending when income is $230, we can use the income-expenditure equation with the multiplier:

Y = C + I
where Y is income, C is consumer spending, and I is investment.

We know that:

Y = $200 (initial income)
C = $145 (initial consumer spending)
Multiplier = 6.25

Using the multiplier, we can find out the total spending (C + I) when income is $200:

C + I = Multiplier x Y
C + I = 6.25 x $200
C + I = $1250

We know that investment is zero (since it's not given), so we can find out the consumer spending when income is $230 by rearranging the equation:

Y = C + I
C = Y - I

Substituting the values of Y and I, we get:

C = $230 - 0.8($230)
C = $170.20

Therefore, the answer is C) $170.20.

Question 8

If the MPC = 0.85, then the government purchases multiplier is about

Accepted Answer

The government purchases multiplier is calculated as 1/(1-MPC). With an MPC of 0.85, the multiplier is 1/(1-0.85) = 1/0.15 = 6.67.

Question 9

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

Accepted Answer

In a liquidity trap, the Fed's target interest rate has reached its lowest level and further monetary policy actions to lower interest rates are ineffective because interest rates cannot go below zero. In this situation, consumers and businesses are not willing to borrow or invest even though the cost of borrowing is very low because they expect deflation and further economic contraction. Therefore, the economy remains stagnant and monetary policy cannot stimulate economic growth.

Question 10

Economists who are skeptical about the relevance of "liquidity traps" argue that

Accepted Answer

Economists who are skeptical about the relevance of "liquidity traps" argue that a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero. This means that the central bank can still use unconventional monetary policy tools, such as quantitative easing, to stimulate the economy and combat deflationary pressures. Thus, the idea of a "liquidity trap" where monetary policy becomes ineffective is not considered relevant by these economists.

Question 11

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

Accepted Answer

The answer of Which of the following sequences best explains...

Question 12

In the long run, fiscal policy influences

Accepted Answer

Fiscal policy influences the economy by affecting the level of aggregate demand for goods and services in the short run, which can lead to changes in prices and output. This can be done through changes in government spending or taxation. In the long run, fiscal policy can influence saving, investment, and growth by affecting incentives for economic activity and the level of government debt. However, the short-run effects of fiscal policy primarily focus on the aggregate demand for goods and services.

Question 13

The marginal propensity to consume (MPC) is defined as the fraction of

Accepted Answer

The MPC is specifically referring to the fraction of additional income that is consumed, not total income. Therefore, choices B, C, and D are incorrect.

Question 14

In the long run, fiscal policy primarily affects

Accepted Answer

The answer of In the long run, fiscal policy primarily...

Question 15

If the multiplier is 2.5, then the MPC is

Accepted Answer

The answer of If the multiplier is 2.5, then the...

Question 16

During the economic downturn of 2008-2009, the Federal Reserve

Accepted Answer

During the economic downturn of 2008-2009, the Federal Reserve took an unusual step of using open-market operations to purchase mortgages and corporate debt. This was done to inject liquidity into the financial system and stimulate lending.

Question 17

If the inflation rate is zero, then

Accepted Answer

When the inflation rate is zero, there is no adjustment needed to the nominal interest rate to calculate the real interest rate. Therefore, neither the nominal nor the real interest rate can fall below zero.

Question 18

The multiplier for changes in government spending is calculated as

Accepted Answer

The multiplier for changes in government spending is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. This is because an increase in government spending will lead to an increase in income, which will then lead to an increase in consumption. The size of this increase will depend on the MPC, which is the fraction of the increase in income that is spent on consumption. Therefore, the multiplier is the inverse of 1 minus the MPC.

Question 19

If the multiplier is 5, then the MPC is

Accepted Answer

The multiplier (k) is calculated as 1/(1-MPC). If the multiplier is 5, then 1/(1-MPC) = 5. Solving for MPC gives MPC = 0.8.

Question 20

If the multiplier is 6.25, then the MPC is

Accepted Answer

The answer of If the multiplier is 6.25, then the...

Quiz 21: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Consider the following sequence of events: price level $\uparrow \Rightarrow$ demand for money $\uparrow \Rightarrow$ equilibrium interest rate $\uparrow$ $\Rightarrow$ quantity of goods and services demanded $\darr$ This sequence explains why the

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 3. It follows that, when income is $101, consumer spending is

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

The multiplier for changes in government spending is calculated as

Paul Samuelson, a famous economist, said that

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

In a certain economy, when income is $200, consumer spending is $145. The value of the multiplier for this economy is 6.25. It follows that, when income is $230, consumer spending is

If the MPC = 0.85, then the government purchases multiplier is about

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

Economists who are skeptical about the relevance of "liquidity traps" argue that

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

In the long run, fiscal policy influences

The marginal propensity to consume (MPC) is defined as the fraction of

In the long run, fiscal policy primarily affects

If the multiplier is 2.5, then the MPC is

During the economic downturn of 2008-2009, the Federal Reserve

If the inflation rate is zero, then

The multiplier for changes in government spending is calculated as

If the multiplier is 5, then the MPC is

If the multiplier is 6.25, then the MPC is

Quiz 21: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Consider the following sequence of events: price level ↑⇒\uparrow \Rightarrow↑⇒ demand for money ↑⇒\uparrow \Rightarrow↑⇒ equilibrium interest rate ↑\uparrow↑ ⇒\Rightarrow⇒ quantity of goods and services demanded ↓\darr↓ This sequence explains why the

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 3. It follows that, when income is $101, consumer spending is

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

The multiplier for changes in government spending is calculated as

Paul Samuelson, a famous economist, said that

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

In a certain economy, when income is $200, consumer spending is $145. The value of the multiplier for this economy is 6.25. It follows that, when income is $230, consumer spending is

If the MPC = 0.85, then the government purchases multiplier is about

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

Economists who are skeptical about the relevance of "liquidity traps" argue that

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

In the long run, fiscal policy influences

The marginal propensity to consume (MPC) is defined as the fraction of

In the long run, fiscal policy primarily affects

If the multiplier is 2.5, then the MPC is

During the economic downturn of 2008-2009, the Federal Reserve

If the inflation rate is zero, then

The multiplier for changes in government spending is calculated as

If the multiplier is 5, then the MPC is

If the multiplier is 6.25, then the MPC is

Consider the following sequence of events: price level $\uparrow \Rightarrow$ demand for money $\uparrow \Rightarrow$ equilibrium interest rate $\uparrow$ $\Rightarrow$ quantity of goods and services demanded $\darr$ This sequence explains why the