Question 1

Some economists, called supply-siders, argue that changes in the money supply exert a strong influence on aggregate supply.

Accepted Answer

Supply-side economics focuses primarily on changes in taxes and regulations to positively affect economic growth and productivity, rather than changes in the money supply. Changes in the money supply would have a more direct impact on aggregate demand.

Question 2

During recessions, the government tends to run a budget deficit.

Accepted Answer

The government may increase spending and decrease taxes during recessions in order to stimulate the economy, which often results in a budget deficit.

Question 3

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Accepted Answer

Both the multiplier effect and the investment accelerator magnify the initial impact of government expenditures and cause further shifts in the aggregate-demand curve.

Question 4

If the spending multiplier is 8, then the marginal propensity to consume must be 7/8.

Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), so if the multiplier is 8, then 1/(1-MPC) = 8, solving for MPC gives MPC = 7/8.

Question 5

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Accepted Answer

Permanent tax cuts provide households and businesses with greater certainty about their future incomes and profits, thus encouraging them to increase spending and investment in the long-term. On the other hand, temporary tax cuts only provide a short-term boost in disposable income, and therefore may not result in a significant increase in consumption spending.

Question 6

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Accepted Answer

The answer of The main criticism of those who doubt...

Question 7

If the MPC is 4/5, the multiplier is 5/4.

Accepted Answer

The multiplier is actually the reciprocal of the MPC, so the correct multiplier for an MPC of 4/5 would be 1/(4/5) = 5/4.

Question 8

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

Accepted Answer

The multiplier effect can be calculated using the formula 1/MPC, where MPC is the marginal propensity to consume. In this case, the multiplier would be 1/(4/5) = 5/4. Therefore, a decrease in government spending of $1 billion would lead to a decrease in the demand for goods and services of $1 billion x 5/4 = $5 billion.

Question 9

If the marginal propensity to consume is 6/7, then the multiplier is 7.

Accepted Answer

The multiplier is calculated as 1/MPC (1/marginal propensity to consume), so in this case, the multiplier would be 1/(6/7), which simplifies to 7/6, or approximately 1.17. Rounded to the closest integer, the multiplier is 7. Therefore, the statement is true.

Question 10

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Accepted Answer

When the Fed increases the interest rate paid on reserves, banks are incentivized to hold more reserves, reducing the amount of money they lend out and tightening the money supply. On the other hand, when the Fed decreases the interest rate paid on reserves, banks are incentivized to lend out more, increasing the money supply.

Question 11

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

Accepted Answer

Increasing the money supply or government expenditures would inject more money into the economy, potentially boosting consumer and business spending and reducing the impact of pessimism. However, the effectiveness of these measures may vary depending on the specifics of the situation and the level of pessimism present.

Question 12

Other things the same, an increase in taxes shifts aggregate demand to the left. In the short run this makes output fall which makes the interest rate rise.

Accepted Answer

An increase in taxes shifts aggregate demand to the left, which in the short run can lead to a decrease in output and a decrease in the demand for money, potentially leading to a lower interest rate, not a rise.

Question 13

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Accepted Answer

The size of the multiplier and crowding-out effects determine the overall impact of a tax cut on aggregate demand. If the multiplier effect is large and the crowding-out effect is small, the rightward shift in aggregate demand could be larger than the tax cut. However, if the opposite is true (small multiplier effect and large crowding-out effect) the rightward shift in aggregate demand could be smaller than the tax cut.

Question 14

Unemployment insurance and welfare programs work as automatic stabilizers.

Accepted Answer

Unemployment insurance and welfare programs increase government spending during economic downturns and reduce government spending during economic upturns, thus serving as automatic stabilizers.

Question 15

Government expenditures on capital goods such as roads could increase aggregate supply. Such effects on aggregate supply are likely to matter more in the short run than in the long run.

Accepted Answer

Government expenditures on capital goods like roads can increase aggregate supply by improving infrastructure, which enhances productivity. These effects are more significant in the long run as the benefits of improved infrastructure accumulate over time, rather than having an immediate impact in the short run.

Question 16

A significant lag for monetary policy is the time it takes to for a change in the money supply to change the economy. A significant lag for fiscal policy is the time it takes to pass legislation authorizing it.

Accepted Answer

This statement correctly identifies the significant lags for monetary and fiscal policy.

Question 17

An essential piece of the liquidity preference theory is the demand for money.

Accepted Answer

The demand for money is a key component of the liquidity preference theory, as it explains why individuals choose to hold money instead of other assets such as stocks or bonds.

Question 18

The multiplier is computed as MPC / (1 - MPC).

Accepted Answer

The answer of The multiplier is computed as MPC /...

Question 19

The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.

Accepted Answer

The interest-rate effect is partially explained by the fact that a higher price level increases money demand, which in turn increases interest rates and reduces investment spending.

Question 20

During recessions, unemployment insurance payments tend to rise.

Accepted Answer

During economic downturns, layoffs and job loss increase, resulting in more individuals being eligible for and receiving unemployment insurance payments.

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