Question 1

The logic of the multiplier effect applies

Accepted Answer

The multiplier effect refers to the idea that a change in spending on any component of GDP (consumption, investment, government spending, or net exports) will have a larger overall impact on the economy due to the subsequent rounds of spending and income it generates. Therefore, the logic of the multiplier effect applies to any change in spending on any component of GDP.

Question 2

Figure 21-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. -Refer to Figure 21-6. Suppose the multiplier is 3 and the government increases its purchases by $25 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. Finally, assume the horizontal distance between the curves AD₁ and AD₃ is $30 billion. The extent of crowding out, for any particular level of the price level, is

Accepted Answer

The initial shift in the AD curve due to the government's increased purchases is given by the multiplier (3) multiplied by the change in government purchases ($25 billion), which equals $75 billion. However, because of crowding out, the actual shift in the AD curve is only $30 billion. Therefore, crowding out must have reduced the AD shift by $75 billion - $30 billion = $45 billion. This means that $45 billion of the increase in government purchases was offset by the decrease in investment spending (due to higher interest rates) caused by the increase in government borrowing. Hence, the extent of crowding out is $45 billion.

Question 3

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

Accepted Answer

The multiplier effect states that an initial increase in government spending leads to a larger increase in aggregate demand as the increased income and consumption by recipients of the government spending adds to the overall demand in the economy. Therefore, the aggregate demand shift is greater than the initial increase in government expenditures. The other choices (A, C, and D) all tend to either offset the initial increase in government spending or have a limited impact on aggregate demand.

Question 4

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. A shift of the money-demand curve from MD₁ to MD₂ could be a result of

Accepted Answer

An increase in government spending, a decrease in taxes, and an increase in the price level can all lead to a shift of the money-demand curve from MD1 to MD2.

Question 5

Figure 21-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. -Refer to Figure 21-6. Suppose the multiplier is 5 and the government increases its purchases by $10 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 $20 billion. The extent of crowding out, for any particular level of the price level, is

Accepted Answer

The initial increase in government purchases of $10 billion with a multiplier of 5 would shift the AD curve by $50 billion without crowding out. Since the actual shift is $20 billion, the extent of crowding out is $50 billion - $20 billion = $30 billion.

Question 6

In a certain economy, when income is $400, consumer spending is $350. The value of the multiplier for this economy is 3.125. It follows that, when income is $450, consumer spending is

Accepted Answer

The answer of In a certain economy, when income is...

Question 7

Which of the following events shifts aggregate demand rightward?

Accepted Answer

The answer of Which of the following events shifts aggregate...

Question 8

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

The formula for calculating the change in consumer spending is given by:
ΔC = MPC × ΔY
where ΔC is the change in consumer spending, MPC is the marginal propensity to consume, and ΔY is the change in income.

Given that the value of the multiplier (k) is 6.25, we can find the MPC as:
k = 1/(1 - MPC)
6.25 = 1/(1 - MPC)
1 - MPC = 1/6.25
1 - MPC = 0.16
MPC = 0.84

Substituting the values of MPC and ΔY into the formula, we get:
ΔC = MPC × ΔY
ΔC = 0.84 × (230 - 200)
ΔC = 0.84 × 30
ΔC ≈ $25.20

Therefore, the total consumer spending when income is $230 is:
$145 + $25.20 ≈ $170.20

Hence, the answer is C, and the other choices are incorrect.

Question 9

Government purchases are said to have a

Accepted Answer

Government purchases have a multiplier effect on aggregate demand because they increase the demand for goods and services in the economy. As a result, firms increase their production and hire more workers, leading to an overall increase in economic activity. This multiplier effect is well-known in Keynesian economics, where increased government spending is seen as a way to stimulate economic growth during times of low demand.

Question 10

An increase in government spending initially and primarily shifts

Accepted Answer

When the government increases spending, it injects more money into the economy. This increased spending leads to an increase in demand for goods and services in the economy, which shifts the aggregate demand curve to the right.

Question 11

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 21-5. What is measured along the vertical axis of the graph?

Accepted Answer

The vertical axis of the graph measures the interest rate. This is indicated by the label "i" on the axis.

Question 12

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

Accepted Answer

The fact that the multiplier effect is represented by an infinite geometric series allows us to simplify the equation for the multiplier to a relatively simple form. This is because the geometric series enables us to sum up an infinite number of terms using a finite formula, resulting in a manageable expression for the multiplier.

Question 13

Scenario 21-1. Take the following information as given for a small, imaginary economy:
 - When income is $\$ 10,000$, consingtion spending is $\$ 6,500$
- Whan income is $\$ 11,000$, cansumption spending is $\$ 7,300$
-Refer to Scenario 21-1. The marginal propensity to consume for this economy is

Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income. Here, the change in consumption is $ \$ 7,300 - \$ 6,500 = \$ 800 $ and the change in income is $ \$ 11,000 - \$ 10,000 = \$ 1,000 $. Thus, MPC = $ \$ 800 / \$ 1,000 = 0.800 $.

Question 14

Which of the following policy actions shifts the aggregate-demand curve?

Accepted Answer

All of the given policy actions can shift the aggregate-demand curve. 
An increase in the money supply would lower interest rates and increase consumer and investment spending, thereby shifting the aggregate-demand curve to the right. 
An increase in government spending would increase aggregate demand, as the government would be spending more money on goods and services, creating a multiplier effect that would shift the aggregate-demand curve to the right. 
An increase in taxes would reduce disposable income and decrease consumer spending, which would shift the aggregate-demand curve to the left.

Question 15

A decrease in government spending initially and primarily shifts

Accepted Answer

A decrease in government spending will reduce aggregate demand, as there will be less spending in the economy. As a result, businesses will produce less, causing a shift to the left in the aggregate demand curve.

Question 16

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then

Accepted Answer

The answer of Suppose an economy's marginal propensity to consume...

Question 17

Figure 21-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. -Refer to Figure 21-6. Suppose the graphs are drawn to show the effects of an increase in government purchases. If it were not for the increase in r from r₁ to r₂, then

Accepted Answer

An increase in government purchases would lead to a full multiplier effect without the rise in interest rates (r), resulting in no crowding out and the AD curves being separated by the multiplier times the change in government purchases.

Question 18

Scenario 21-1. Take the following information as given for a small, imaginary economy:
 - When income is $\$ 10,000$, consingtion spending is $\$ 6,500$
- Whan income is $\$ 11,000$, cansumption spending is $\$ 7,300$
-Refer to Scenario 21-1. For this economy, an initial increase of $500 in net exports translates into a

Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income, which is $(7,300 - 6,500) / (11,000 - 10,000) = 0.8$. The multiplier is $1 / (1 - MPC) = 1 / (1 - 0.8) = 5$. Therefore, a $500 increase in net exports would increase aggregate demand by $500 \times 5 = 2,500$ in the absence of the crowding-out effect.

Question 19

Scenario 21-1. Take the following information as given for a small, imaginary economy:
 - When income is $\$ 10,000$, consingtion spending is $\$ 6,500$
- Whan income is $\$ 11,000$, cansumption spending is $\$ 7,300$
-Refer to Scenario 21-1. The multiplier for this economy is

Accepted Answer

The answer of Scenario 21-1. Take the following information as...

Question 20

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. A shift of the money-demand curve from MD₂ to MD₁ is consistent with which of the following sets of events?

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.

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

The logic of the multiplier effect applies

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. A shift of the money-demand curve from MD₁ to MD₂ could be a result of

In a certain economy, when income is $400, consumer spending is $350. The value of the multiplier for this economy is 3.125. It follows that, when income is $450, consumer spending is

Which of the following events shifts aggregate demand rightward?

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

Government purchases are said to have a

An increase in government spending initially and primarily shifts

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. What is measured along the vertical axis of the graph?

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

Scenario 21-1. Take the following information as given for a small, imaginary economy: - When income is $\$ 10,000$ , consingtion spending is $\$ 6,500$ - Whan income is $\$ 11,000$ , cansumption spending is $\$ 7,300$ -Refer to Scenario 21-1. The marginal propensity to consume for this economy is

Which of the following policy actions shifts the aggregate-demand curve?

A decrease in government spending initially and primarily shifts

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then

Scenario 21-1. Take the following information as given for a small, imaginary economy: - When income is $\$ 10,000$ , consingtion spending is $\$ 6,500$ - Whan income is $\$ 11,000$ , cansumption spending is $\$ 7,300$ -Refer to Scenario 21-1. The multiplier for this economy is

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. A shift of the money-demand curve from MD₂ to MD₁ is consistent with which of the following sets of events?

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

The logic of the multiplier effect applies

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. A shift of the money-demand curve from MD1 to MD2 could be a result of

In a certain economy, when income is $400, consumer spending is $350. The value of the multiplier for this economy is 3.125. It follows that, when income is $450, consumer spending is

Which of the following events shifts aggregate demand rightward?

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

Government purchases are said to have a

An increase in government spending initially and primarily shifts

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. What is measured along the vertical axis of the graph?

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

Which of the following policy actions shifts the aggregate-demand curve?

A decrease in government spending initially and primarily shifts

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. A shift of the money-demand curve from MD2 to MD1 is consistent with which of the following sets of events?

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. A shift of the money-demand curve from MD₁ to MD₂ could be a result of

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. A shift of the money-demand curve from MD₂ to MD₁ is consistent with which of the following sets of events?