Question 1

Suppose the MPC is 0.9.There are no crowding out or investment accelerator effects.If the government increases its expenditures by $30 billion,then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion,then by how far does aggregate demand shift to the right?
A) $283 billion and $254.7 billion
B) $283 billion and $283 billion
C) $300 billion and $270 billion
D) $300 billion and $300 billion

Accepted Answer

The answer of Suppose the MPC is 0.9.There are no...

Question 2

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 consumption, causing consumption to decrease. This leads to a leftward shift in the aggregate demand curve.

Question 3

If households view a tax cut as temporary,then the tax cut
A) has no affect on aggregate demand.
B) has more of an affect on aggregate demand than if households view it as permanent.
C) has the same affect as when households view the cut as permanent.
D) has less of an affect on aggregate demand than if households view it as permanent.

Accepted Answer

If households view a tax cut as temporary, they are less likely to alter their spending behavior in response to the cut. This means that the tax cut will have less of an effect on aggregate demand than if households view it as permanent.

Question 4

When there is an increase in government expenditures,which of the following raises investment spending?
A) the investment accelerator and crowding out
B) the investment accelerator but not crowding out
C) crowding out but not the investment accelerator
D) neither the investment accelerator or crowding out

Accepted Answer

An increase in government expenditures will increase income and output, which will in turn increase investment spending through the investment accelerator effect. Crowding out occurs when the increase in government expenditures leads to a decrease in private investment due to higher interest rates, but it does not necessarily negate the positive impact of the investment accelerator effect. Therefore, the correct choice is B - the investment accelerator but not crowding out.

Question 5

Initially,the economy is in long-run equilibrium.Aggregate demand then shifts leftward by $50 billion.The government wants to increase its spending in order to avoid a recession.If the crowding-out effect is always half as strong as the multiplier effect,and if the MPC equals 0.8,then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?
A) by $5 billion
B) by $10 billion
C) by $20 billion
D) by $50 billion

Accepted Answer

We know that the initial shift in aggregate demand is $50 billion, and the multiplier effect for government spending is:

Multiplier effect = 1 / (1 - MPC) = 1 / (1 - 0.8) = 5

If government spending increases by $X, then the total increase in aggregate demand will be:

$X * 5 = $5X

However, we also know that there will be a crowding-out effect that will reduce the impact of government spending. The crowding-out effect is always half as strong as the multiplier effect, so it will reduce the impact of government spending by:

$5X * 0.5 = $2.5X

The government wants to offset the initial leftward shift of $50 billion, so we need to solve for X such that:

$5X - $2.5X = $50 billion

Simplifying this equation, we get:

$2.5X = $50 billion

X = $20 billion

Therefore, the government would need to increase its spending by $20 billion in order to offset the $50 billion leftward shift in aggregate demand. The answer is C.

Question 6

A tax cut shifts aggregate demand
A) by more than the amount of the tax cut.
B) by the same amount as the tax cut.
C) by less than the tax cut.
D) None of the above is necessarily correct.

Accepted Answer

The answer of A tax cut shifts aggregate demand
A) by...

Question 7

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 8

If the multiplier is 6 and if there is no crowding-out effect,then a $60 billion increase in government expenditures causes aggregate demand to
A) increase by $250 billion.
B) increase by $333 billion.
C) increase by $360 billion.
D) None of the above are correct.

Accepted Answer

With a multiplier of 6, a $60 billion increase in government expenditures will lead to a $360 billion increase in aggregate demand. This is because the multiplier effect reflects the fact that an initial increase in spending leads to a series of subsequent rounds of spending as the new income generated by the initial spending is spent again and again. The absence of a crowding-out effect means that the increase in government spending does not lead to a decrease in private spending, which can cause the multiplier effect to be weakened or offset. Therefore, the full multiplier effect occurs in this case, leading to a larger increase in aggregate demand.

Question 9

Imagine that the government increases its spending by $75 billion.Which of the following by itself would tend to make the change in aggregate demand different from $75 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

Both the multiplier effect and the crowding-out effect can impact the change in aggregate demand. The multiplier effect suggests that an initial increase in spending will lead to a greater overall increase in demand due to the subsequent rounds of spending and income. However, the crowding-out effect suggests that an increase in government spending may lead to a decrease in private spending and investment, potentially offsetting some of the initial increase in aggregate demand. Therefore, both of these factors could make the change in aggregate demand different from the initial $75 billion increase in government spending.

Question 10

A tax increase has
A) a multiplier effect but not a crowding out effect
B) a crowding out effect but not a multiplier effect
C) both a crowding out and multiplier effect
D) neither a multiplier or crowding out effect

Accepted Answer

The answer of A tax increase has
A) a multiplier effect...

Question 11

An aide to a U.S.Congressman computes the effect on aggregate demand of a $20 billion tax cut.The actual increase in aggregate demand is less than the aide expected.Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand?
A) The actual MPC was larger than the MPC the aide used to compute the multiplier.
B) The aide thought the tax cut would be permanent,but the actual tax cut was temporary.
C) The increase in income shifted money demand less than the aide had anticipated.
D) The increase in income resulted in investment rising more than the aide had anticipated.

Accepted Answer

The answer of An aide to a U.S.Congressman computes the...

Question 12

Initially,the economy is in long-run equilibrium.The aggregate demand curve then shifts $80 billion to the left.The government wants to change spending to offset this decrease in demand.The MPC is 0.75.Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure.There is no crowding out and no accelerator effect.What should the government do if it wants to offset the decrease in real GDP?
A) Raise both taxes and expenditures by $80 billion dollars.
B) Raise both taxes and expenditures by $10 billion dollars.
C) Reduce both taxes and expenditures by $80 billion dollars.
D) Reduce both taxes and expenditures by $10 billion dollars.

Accepted Answer

The answer of Initially,the economy is in long-run equilibrium.The aggregate...

Question 13

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. This is because the increase in demand from the tax cut leads to higher interest rates, which in turn leads to a decrease in private investment spending. Therefore, the overall increase in aggregate demand is reduced by the decrease in private investment spending. The multiplier effect (A) tends to amplify the size of the shift in aggregate demand resulting from a tax cut. The accelerator effect (C) refers to the relationship between investment and the rate of change of aggregate output, and is not directly related to the impact of a tax cut on aggregate demand.

Question 14

Suppose the MPC is 0.60.Assume there are no crowding out or investment accelerator effects.If the government increases expenditures by $200 billion,then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion,then by how much does aggregate demand shift to the right?
A) $300 billion and $180 billion
B) $300 billion and $300 billion
C) $500 billion and $300 billion
D) $500 billion and $500 billion

Accepted Answer

The answer of Suppose the MPC is 0.60.Assume there are...

Question 15

Which of the following sequences best represents the crowding-out effect?
A) government purchases $\uparrow\implies$GDP $\uparrow\implies$supply of money $\downarrow\implies$equilibrium interest rate $\uparrow\implies$quantity of goods and services demanded $\downarrow$
B) government purchases $\downarrow\implies$GDP $\downarrow\implies$demand for money $\downarrow\implies$equilibrium interest rate $\downarrow\implies$quantity of goods and services demanded $\downarrow$
C) government purchases $\uparrow\implies$GDP $\uparrow\implies$demand for money $\uparrow\implies$equilibrium interest rate $\uparrow\implies$quantity of goods and services demanded $\downarrow$
D) taxes$\uparrow\implies$GDP $\downarrow\implies$demand for money $\downarrow\implies$equilibrium interest rate $\uparrow\implies$quantity of goods and services demanded  $\downarrow$

Accepted Answer

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

Question 16

As income rises
A) money demand rises,so the interest rate rises.
B) money demand rises,so the interest rate falls
C) money demand falls,so the interest rate rises.
D) money demand falls,so the interest rate falls.

Accepted Answer

As income rises, individuals tend to demand more money for consumption and investment. This increase in money demand leads to an increase in demand for loans, which drives up the interest rate. Therefore, the correct answer is option A.

Question 17

If a $1,000 increase in income leads to a $750 increase in consumption expenditures,then the marginal propensity to consume is
A) 0.75 and the multiplier is 1 1/3.
B) 0.75 and the multiplier is 4.
C) 0.25 and the multiplier is 1 1/3.
D) 0.25 and the multiplier is 4.

Accepted Answer

The answer of If a $1,000 increase in income leads...

Question 18

Initially,the economy is in long-run equilibrium.The aggregate demand curve then shifts $40 billion to the left.The government wants to change its spending to offset this decrease in demand.The MPC is 0.60.Suppose the effect on aggregate demand from a change in taxes is 3/5 the size of the change from government expenditures.There is no crowding out and no accelerator effect.What should the government do if it wants to offset the decrease in real GDP?
A) Raise both taxes and expenditures by $40 billion dollars.
B) Raise both taxes and expenditures by $40 billion dollars
C) Reduce both taxes and expenditures by $10 billion dollars
D) Reduce both taxes and expenditures by $10 billion dollars.

Accepted Answer

The answer of Initially,the economy is in long-run equilibrium.The aggregate...

Question 19

Permanent tax cuts shift the AD curve
A) farther to the right than do temporary tax cuts.
B) not as far to the right as do temporary tax cuts.
C) farther to the left than do temporary tax cuts.
D) not as far to the left as do temporary tax cuts.

Accepted Answer

Permanent tax cuts provide individuals and businesses with a sense of certainty about their future tax burdens, which encourages them to increase their spending and investment activities. As a result, permanent tax cuts have a greater impact on aggregate demand than do temporary tax cuts, shifting the AD curve farther to the right.

Question 20

A significant example of a temporary tax cut was the one announced in 1992 by President George H.W.Bush.The effect of that tax cut on consumer spending and aggregate demand was
A) zero.
B) likely smaller than if the cut had been permanent.
C) likely about the same as if the cut had been permanent.
D) likely larger than if the cut had been permanent.

Accepted Answer

A temporary tax cut is unlikely to have as large of an impact on consumer spending and aggregate demand as a permanent tax cut would, as individuals may save rather than spend any additional income gained from the temporary tax cut, knowing that it will eventually expire. Therefore, the effect of the temporary tax cut announced by President George H.W. Bush in 1992 was likely smaller than if the cut had been permanent.

Quiz 24: The Influence of Monetary and Fiscal Policy on Aggregate Demand

If taxes

If households view a tax cut as temporary,then the tax cut

When there is an increase in government expenditures,which of the following raises investment spending?

A tax cut shifts aggregate demand

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

If the multiplier is 6 and if there is no crowding-out effect,then a $60 billion increase in government expenditures causes aggregate demand to

Imagine that the government increases its spending by $75 billion.Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?

A tax increase has

An aide to a U.S.Congressman computes the effect on aggregate demand of a $20 billion tax cut.The actual increase in aggregate demand is less than the aide expected.Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand?

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?

Which of the following sequences best represents the crowding-out effect?

As income rises

If a $1,000 increase in income leads to a $750 increase in consumption expenditures,then the marginal propensity to consume is

Permanent tax cuts shift the AD curve

A significant example of a temporary tax cut was the one announced in 1992 by President George H.W.Bush.The effect of that tax cut on consumer spending and aggregate demand was