Question 1

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 formula for calculating the change in equilibrium real GDP due to a change in government expenditures is given by the formula:
ΔY = (1/(1-MPC))*(ΔG)
Substituting the given values, we get:
ΔY = (1/(1-5/6))*(20) = 120
Therefore, the aggregate demand curve will shift right by $120 billion without considering any investment accelerator or crowding out effects.

Question 2

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

Given MPC (marginal propensity to consume) = 0.75, the government purchases of $100 billion will lead to a decrease in consumer spending by $75 billion (0.75*100). So the total decrease in aggregate demand will be $100 billion (government purchases) + $75 billion (decrease in consumer spending) = $175 billion.

However, the multiplier effect needs to be considered. The formula for the multiplier effect is 1/(1-MPC). Therefore, in this case, the multiplier will be 1/(1-0.75) = 4.

So the total shift in aggregate demand will be $175 billion * 4 = $700 billion. But the question asks for the direction of the shift. Since government purchases are being decreased, the aggregate demand curve will shift to the left.

Therefore, the correct answer is B) left by $400 billion.

Question 3

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 answer of Assume the multiplier is 5 and that...

Question 4

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 5

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax cut smaller than it otherwise would be?
A) the multiplier effect
B) the crowding-out effect
C) the accelerator effect
D) None of the above is correct.

Accepted Answer

The crowding-out effect tends to make the size of a shift in aggregate demand resulting from a tax cut smaller than it otherwise would be. When there is a tax cut, people have more disposable income, which leads to an increase in consumption and therefore, an increase in aggregate demand. However, this increase in demand may lead to an increase in interest rates as firms borrow more to expand their production. This increase in interest rates may lead to a decrease in investment spending as it becomes more expensive for firms to borrow money. This decrease in investment spending reduces the overall increase in aggregate demand, leading to a smaller shift than the initial tax cut would suggest.

Question 6

If net exports fall $20 billion and the MPC is 7/10 and there is a multiplier effect,but no crowding out and no investment accelerator,then
A) aggregate demand falls by 10/3 x $20 billion.
B) aggregate demand falls by 7/3 x $20 billion.
C) aggregate demand falls by 7/10 x $20 billion.
D) None of the above is correct.

Accepted Answer

The multiplier is calculated as 1/(1-MPC), which is 1/(1-0.7) = 10/3. Therefore, the change in aggregate demand is the change in net exports multiplied by the multiplier: $20 billion x 10/3.

Question 7

Assuming a multiplier effect,but no crowding-out or investment-accelerator effects,a $100 billion increase in government expenditures shifts aggregate
A) demand rightward by more than $100 billion.
B) demand rightward by less than $100 billion.
C) supply leftward by more than $100 billion.
D) supply leftward by less than $100 billion.

Accepted Answer

The multiplier effect is based on the idea that an increase in government spending will lead to further increases in spending throughout the economy. In other words, the initial $100 billion increase in government spending will lead to additional spending by households and businesses, which will then lead to even more spending. As a result, the overall increase in aggregate demand will be greater than the initial $100 billion.

Question 8

Assume the MPC is 0.75.The multiplier is
A) 0.75.
B) 1.25.
C) 4.00.
D) 6.25.

Accepted Answer

The multiplier is calculated as 1/(1-MPC). With an MPC of 0.75, the multiplier is 1/(1-0.75) = 4.00.

Question 9

Assuming no crowding-out,investment-accelerator,or multiplier effects,a $100 billion increase in government expenditures shifts aggregate demand
A) right by more than $100 billion.
B) right by $100 billion.
C) left by more than $100 billion.
D) left by $100 billion.

Accepted Answer

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures will directly increase the aggregate demand by $100 billion. Therefore, the correct answer is B.

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 may lead to higher interest rates which can crowd out investment spending by business firms. This is because an increase in government spending usually leads to an increase in borrowing, and an increase in borrowing places upward pressure on interest rates. As a result, the cost of borrowing becomes higher for businesses, which reduces their incentive to invest. Therefore, an increase in government purchases may lead to a decrease in private investment and potentially result in a net decrease in aggregate demand.

Question 11

When the government reduces taxes,which of the following decreases?
A) consumption
B) take-home pay
C) household saving
D) None of the above is correct.

Accepted Answer

When the government reduces taxes, people have more take-home pay and disposable income, which can lead to an increase in consumption and household saving. Therefore, A, B, and C are not correct answers.

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 how an increase in government spending leads to an increase in national income and consumption beyond the initial amount of spending. This amplifies the effects of government expenditures. On the other hand, the crowding-out effect refers to how increased government spending can lead to higher interest rates and reduced private investment, which diminishes the effects of government expenditures. Therefore, the best choice is D, as the multiplier effect amplifies the effects of an increase in government expenditures while the crowding-out effect diminishes those effects.

Question 13

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

The multiplier is the formula used to determine the total impact of a change in government spending on aggregate demand. The formula for the multiplier is 1/(1-MPC) where MPC is the marginal propensity to consume. An increase in the MPC means that consumers are more likely to spend a larger portion of any additional income they receive, which increases the multiplier. Therefore, changes in government expenditures have a larger effect on aggregate demand.

Question 14

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, which decreases consumption. As a result, aggregate demand shifts leftward. Conversely, when taxes decrease, people have more disposable income, which increases consumption, and aggregate demand shifts rightward.

Question 15

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 answer of Suppose that the MPC is 0.60;there is...

Question 16

Imagine that the government increases its spending by $20 billion.Which of the following by itself would tend to make the change in aggregate demand different from $20 billion?
A) both the multiplier effect and the crowding-out effect
B) the multiplier effect,but not the crowding-out effect
C) the crowding-out effect,but not the multiplier effect
D) neither the crowding out effect nor the multiplier effect

Accepted Answer

The multiplier effect would tend to amplify the initial increase in government spending, resulting in a larger increase in aggregate demand than just $20 billion. However, the crowding-out effect would tend to offset this increase by reducing private investment due to higher interest rates, resulting in a smaller increase in aggregate demand than $20 billion. Therefore, both effects together would make the change in aggregate demand different from $20 billion.

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 increased consumption and investment, thereby increasing aggregate demand. Similarly, increases in government expenditures also increase aggregate demand. Combining these two policies would result in a rightward shift of the aggregate demand curve.

Question 18

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 formula for the total effect of an increase in government purchases is: 
Total Effect = Initial change in government purchases x Multiplier - Crowding-out effect

Plugging in the given numbers: 
Total Effect = $10 billion x (1 / (1 - 0.75)) - $6 billion 
Total Effect = $40 billion - $6 billion 
Total Effect = $34 billion

Since the increase in government purchases causes an increase in aggregate demand, we know that the answer must involve a rightward shift. Therefore, the correct answer is C) right by $34 billion.

Question 19

Assume there is a multiplier effect,some crowding out,and no accelerator effect.An increase in government expenditures changes aggregate demand more,
A) the smaller the MPC and the stronger the influence of income on money demand.
B) the smaller the MPC and the weaker the influence of income on money demand.
C) the larger the MPC and the stronger the influence of income on money demand.
D) the larger the MPC and the weaker the influence of income on money demand.

Accepted Answer

The answer of Assume there is a multiplier effect,some crowding...

Question 20

If the MPC is 0.80 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) $500 billion.
D) $800 billion.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.80, the multiplier is 1/(1-0.80) = 5. Therefore, an initial increase in aggregate demand of $100 billion will eventually increase aggregate demand by $100 billion * 5 = $500 billion.

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

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

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

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

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

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax cut smaller than it otherwise would be?

If net exports fall $20 billion and the MPC is 7/10 and there is a multiplier effect,but no crowding out and no investment accelerator,then

Assuming a multiplier effect,but no crowding-out or investment-accelerator effects,a $100 billion increase in government expenditures shifts aggregate

Assume the MPC is 0.75.The multiplier is

Assuming no crowding-out,investment-accelerator,or multiplier effects,a $100 billion increase in government expenditures shifts aggregate demand

An increase in government purchases is likely to

When the government reduces taxes,which of the following decreases?

The multiplier effect

An increase in the MPC

If taxes

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

Imagine that the government increases its spending by $20 billion.Which of the following by itself would tend to make the change in aggregate demand different from $20 billion?

Tax cuts

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

Assume there is a multiplier effect,some crowding out,and no accelerator effect.An increase in government expenditures changes aggregate demand more,

If the MPC is 0.80 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