Question 1

If the MPC is 2/3 then the multiplier is
A)3/2, so a $100 increase in government spending increases aggregate demand by $150.
B)3/2, so a $100 increase in government spending increases aggregate supply by $150.
C)3, so a $100 increase in government spending increases aggregate demand by $300.
D)3, so a $100 increase in government spending increases aggregate supply by $300.

Accepted Answer

The multiplier is calculated as 1/(1-MPC). With an MPC of 2/3, the multiplier is 3. Therefore, a $100 increase in government spending increases aggregate demand by $300.

Question 2

Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400.
-Refer to Scenario 21-2. For this economy, an initial increase of $500 in government purchases translates into a
A)$1,428.57 increase in aggregate demand in the absence of the crowding-out effect.
B)$3,125.00 increase in aggregate demand in the absence of the crowding-out effect.
C)$1,428.57 increase in aggregate demand when the crowding-out effect is taken into account.
D)$3,125.00 increase in aggregate demand when the crowding-out effect is taken into account.

Accepted Answer

The answer of Scenario 21-2. The following facts apply to...

Question 3

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
A)left by about $13.3 billion.
B)left by about $26.7 billion.
C)right by about $36.7 billion.
D)None of the above is correct.

Accepted Answer

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

Question 4

An increase in the MPC
A)increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
B)increases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.
C)decreases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
D)decreases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.

Accepted Answer

An increase in the MPC (marginal propensity to consume) means that consumers will spend a greater proportion of any additional income they receive. This leads to a larger multiplier effect, as each increase in government expenditures will result in a larger increase in aggregate demand. Therefore, option A is the best choice.

Question 5

If taxes
A)increase, then consumption increases, and aggregate demand shifts rightward.
B)increase, then consumption decreases, and aggregate demand shifts leftward.
C)decrease, then consumption increases, and aggregate demand shifts leftward.
D)decrease, then consumption decreases, and aggregate demand shifts rightward.

Accepted Answer

When taxes increase, people have less disposable income to spend on goods and services, resulting in a decrease in consumption. As a result, aggregate demand shifts leftward.

Question 6

Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400.
-Refer to Scenario 21-2. In response to which of the following events could aggregate demand increase by $1,500?
A)A stock-market boom stimulates consumer spending by $300, and there is an operative crowding-out effect.
B)A stock-market boom stimulates consumer spending by $225, and there is an operative crowding-out effect.
C)An economic boom overseas increases the demand for U.S. net exports by $300, and there is no crowding-out effect.
D)An economic boom overseas increases the demand for U.S. net exports by $225, and there is no crowding-out effect.

Accepted Answer

The answer of Scenario 21-2. The following facts apply to...

Question 7

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
A)left by $200 billion.
B)left by $400 billion.
C)right by $800 billion.
D)None of the above is correct.

Accepted Answer

The multiplier effect is 1/(1-MPC) = 1/(1-0.75) = 4. Therefore, the decrease in government purchases of $100 billion would lead to a decrease in aggregate demand by $100 billion x 4 = $400 billion, shifting the AD curve to the left.

Question 8

If the MPC is 3/4 then the multiplier is
A)4, so a $100 increase in government spending increases aggregate demand by $400.
B)4, so a $100 increase in government spending increases output by $400.
C)4/3, so a $100 increase in government spending increases aggregate demand by $400/3.
D)4/3, so a $100 increase in government spending increases output by $400/3.

Accepted Answer

The answer of If the MPC is 3/4 then the...

Question 9

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
A)right by $150 billion.
B)right by $70 billion.
C)right by $30 billion.
D)None of the above is correct.

Accepted Answer

The initial increase in government purchases of $10 billion, with a multiplier of 5, would increase aggregate demand by $50 billion. However, the crowding-out effect reduces this increase by $20 billion, resulting in a net shift to the right of $30 billion.

Question 10

An increase in government purchases is likely to
A)decrease interest rates.
B)result in a net decrease in aggregate demand.
C)crowd out investment spending by business firms.
D)decrease money demand.

Accepted Answer

An increase in government purchases will increase aggregate demand, which may lead to higher interest rates due to increased demand for loanable funds. This may crowd out investment spending by business firms as they face higher borrowing costs.

Question 11

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
A)shifts rightward by $62.5 billion.
B)shifts rightward by $50.0 billion.
C)shifts rightward by $32.5 billion.
D)None of the above is correct.

Accepted Answer

The multiplier is 1/(1-MPC) = 1/(1-0.60) = 2.5. So, a $25 billion increase in government spending will increase aggregate demand by $25 billion x 2.5 = $62.5 billion.

Question 12

The multiplier effect
A)and the crowding-out effect both amplify the effects of an increase in government expenditures.
B)and the crowding-out effect both diminish the effects of an increase in government expenditures.
C)diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects.
D)amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.

Accepted Answer

The multiplier effect refers to the idea that an increase in government expenditures will stimulate additional spending in the economy, leading to an overall increase in economic activity. This amplifies the effects of the initial increase in government expenditures. On the other hand, the crowding-out effect occurs when an increase in government expenditures leads to higher interest rates, which can discourage private investment and borrowing. This diminishes the effects of the initial increase in government expenditures. Therefore, choice D is the correct answer.

Question 13

Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400.
-Refer to Scenario 21-2. The marginal propensity to consume for this economy is
A)0.650.
B)0.659.
C)0.650 or 0.659, depending on whether income is $8,000 or $8,400.
D)0.840.

Accepted Answer

The answer of Scenario 21-2. The following facts apply to...

Question 14

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
A)$60 billion, but the effect would be larger if there were an investment accelerator.
B)$60 billion, but the effect would be smaller if there were an investment accelerator.
C)$120 billion, but the effect would be larger if there were an investment accelerator.
D)$120 billion, but the effect would be smaller if there were an investment accelerator.

Accepted Answer

The multiplier effect for government expenditures is equal to 1/(1-MPC) which in this case is equal to 1/(1-5/6) = 6. Since the increase in government expenditures is $20 billion, the total increase in aggregate demand would be 6 times the initial change, so the answer is $20 billion x 6 = $120 billion. Investment accelerator and crowding out do not affect the multiplier effect for government expenditures.

Question 15

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
A)$80 billion.
B)$125 billion.
C)$400 billion.
D)$500 billion.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.75, the multiplier is 1/(1-0.75) = 4. Therefore, an initial increase in aggregate demand of $100 billion will eventually increase aggregate demand by $100 billion * 4 = $400 billion.

Question 16

Assume the MPC is 0.80. The multiplier is
A)0.80.
B)1.25.
C)4.25.
D)5.00.

Accepted Answer

The multiplier is calculated as 1/(1-MPC). With an MPC of 0.80, the multiplier is 1/(1-0.80) = 5.00.

Question 17

Tax cuts
A)and increases in government expenditures shift aggregate demand right.
B)and increases in government expenditures shift aggregate demand left.
C)shift aggregate demand right while increases in government expenditures shift aggregate demand left.
D)shift aggregate demand left while increases in government expenditures shift aggregate demand right.

Accepted Answer

Tax cuts increase disposable income, leading to an increase in consumer spending. This increase in consumption expenditure leads to an increase in aggregate demand. Therefore, tax cuts shift aggregate demand to the right. Similarly, an increase in government expenditures also increases aggregate demand and shifts it to the right.

Question 18

Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400.
-Refer to Scenario 21-2. In response to which of the following events could aggregate demand increase by $1,500?
A)A stock-market boom increases households' wealth by $300, and there is an operative crowding-out effect.
B)A stock-market boom increases households' wealth by $275, and there is an operative crowding-out effect.
C)An economic boom overseas increases the demand for U.S. net exports by $240, and there is no crowding-out effect.
D)Aggregate demand could increase by $1,500 in response to any of these events.

Accepted Answer

The answer of Scenario 21-2. The following facts apply to...

Question 19

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
A)left by $24 billion.
B)left by $36 billion.
C)right by $34 billion.
D)right by $36 billion.

Accepted Answer

The spending multiplier is calculated as 1/(1-MPC) = 1/(1-0.75) = 4. The initial increase in government spending of $10 billion will increase aggregate demand by 10 * 4 = $40 billion. However, considering the crowding-out effect of $6 billion, the net shift in aggregate demand will be $40 billion - $6 billion = $34 billion to the right.

Question 20

Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400.
-Refer to Scenario 21-2. The multiplier for this economy is
A)6.00.
B)6.25.
C)8.40
D)9.00.

Accepted Answer

The formula for calculating the multiplier is:
Multiplier = 1/(1-MPC)
where MPC is the marginal propensity to consume.
MPC can be calculated by the change in consumption over the change in income:
MPC = (ΔC/ΔY)
In this case, the change in consumption is:
ΔC = $5,536 - $5,200 = $336
The change in income is:
ΔY = $8,400 - $8,000 = $400
Therefore, MPC = $336/$400 = 0.84
Using the formula for the multiplier, we get:
Multiplier = 1/(1-0.84) = 6.25
So, the answer is B.

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

If the MPC is 2/3 then the multiplier is

Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400. -Refer to Scenario 21-2. For this economy, an initial increase of $500 in government purchases translates into a

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

An increase in the MPC

If taxes

Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400. -Refer to Scenario 21-2. In response to which of the following events could aggregate demand increase by $1,500?

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

If the MPC is 3/4 then the multiplier is

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

An increase in government purchases is likely to

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

The multiplier effect

Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400. -Refer to Scenario 21-2. The marginal propensity to consume for this economy is

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

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

Assume the MPC is 0.80. The multiplier is

Tax cuts

Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400. -Refer to Scenario 21-2. In response to which of the following events could aggregate demand increase by $1,500?

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

Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400. -Refer to Scenario 21-2. The multiplier for this economy is