Question 1

Assuming the crowding-out effect but no multiplier or investment-accelerator effects,what is the effect of a $600 billion increase in government expenditures on the aggregate demand or supply?
A) It shifts the aggregate demand right by more than $600 billion.
B) It shifts the aggregate demand right by less than $600 billion.
C) It shifts the aggregate supply left by more than $600 billion.
D) It shifts the aggregate supply left by less than $600 billion.

Accepted Answer

According to the crowding-out effect, an increase in government expenditures will lead to a decrease in private investment, limiting the overall increase in aggregate demand. However, without considering multiplier or investment-accelerator effects, the shift in aggregate demand will still be to the right, but by less than the initial $600 billion increase in government expenditures. Therefore, the best answer is B.

Question 2

Which term refers to the reduction in demand that results when a fiscal expansion raises the interest rate?
A) multiplier effect
B) crowding-out effect
C) accelerator effect
D) catch-up effect

Accepted Answer

The crowding-out effect occurs when a fiscal expansion (increase in government spending or decrease in taxes) leads to an increase in the interest rate, which reduces private investment and consumption, therefore decreasing demand. The multiplier effect refers to the initial increase in aggregate demand from a fiscal expansion, while the accelerator effect refers to the influence of changes in aggregate demand on investment. The catch-up effect is not directly related to fiscal policy.

Question 3

If the multiplier is 10,what is the MPC?
A) 1 / 9
B) 1 / 5
C) 4 / 5
D) 9 / 10

Accepted Answer

The multiplier is given as 10, which can be expressed as:

Multiplier = 1 / (1 - MPC)

10 = 1 / (1 - MPC)

1 - MPC = 1 / 10

MPC = 9 / 10

Therefore, the MPC is 9/10 or 0.9. The best choice is D.

Question 4

If there is crowding out,which of the following might decrease as government expenditures increase?
A) the overall change in real GDP
B) the demand for money curve
C) interest rates
D) the demand for capital goods

Accepted Answer

Crowding out occurs when increased government spending leads to higher interest rates, which in turn reduces investment spending by businesses on capital goods. As the government borrows more to finance its spending, it competes with the private sector for available funds in the financial markets, leading to higher interest rates. This makes borrowing more expensive for businesses, which can reduce their investment in capital goods.

Question 5

If the MPC is 0,what is the multiplier?
A) 0
B) 1
C) 10
D) 100

Accepted Answer

The multiplier is defined as 1/MPC, so if MPC is 0, then the denominator of 1/MPC is 0, which is undefined. Therefore, the multiplier does not exist and the answer is B) 1, indicating that there is no multiplier effect.

Question 6

Which of the following defines the government purchases multiplier?
A) 1 / MPC+ MPI
B) 1 / (1 - MPC)
C) MPC / (1 - MPC)
D) (1 - MPC) / MPC

Accepted Answer

The government purchases multiplier is the ratio of the change in equilibrium output to the change in government purchases. It is calculated as 1/(1-MPC), where MPC (marginal propensity to consume) is the fraction of additional income that is spent on consumption. This formula shows that an increase in government purchases will increase aggregate demand by a multiple of the initial increase, with the exact multiplier depending on the MPC.

Question 7

Suppose that the MPC is 0.5 and there is no investment accelerator or crowding-out effects.If government expenditures increase by $200 billion,what happens to aggregate demand?
A) It shifts right by $200 billion.
B) It shifts left by $200 billion.
C) It shifts right by $400 billion.
D) It shifts left by $400 billion.

Accepted Answer

The MPC (marginal propensity to consume) is 0.5, which means that for every additional dollar of income, consumers will spend 50 cents. Therefore, if government expenditures increase by $200 billion, the initial effect will be an increase in income of $200 billion, which will lead to a subsequent increase in consumption of $100 billion (0.5 multiplied by $200 billion). Thus, the aggregate demand will shift to the right by $300 billion ($200 billion + $100 billion). Therefore, the correct answer is C- it shifts right by $400 billion.

Question 8

If the MPC = 3 / 4,what is the government purchases multiplier?
A) 1 / 4
B) 3 / 4
C) 4 / 3
D) 4

Accepted Answer

The government purchases multiplier is calculated as 1/(1-MPC). With an MPC of 3/4, the multiplier is 1/(1-3/4) = 1/(1/4) = 4.

Question 9

How does the multiplier change when the MPC increases,and what is the effect on aggregate demand?
A) Higher MPC increases the multiplier so that changes in government expenditures have a larger effect on aggregate demand.
B) Higher MPC increases the multiplier so that changes in government expenditures have a smaller effect on aggregate demand.
C) Higher MPC decreases the multiplier so that changes in government expenditures have a larger effect on aggregate demand.
D) Higher MPC decreases the multiplier so that changes in government expenditures have a smaller effect on aggregate demand.

Accepted Answer

The multiplier is calculated as 1/(1-MPC), and as the MPC (Marginal Propensity to Consume) increases, the denominator decreases. This leads to an increase in the multiplier, meaning that changes in government expenditures have a larger effect on aggregate demand.

Question 10

According to the crowding-out effect,how do the interest rate and investment spending change when government spending increases?
A) The interest rate and investment spending both increase.
B) The interest rate increases and investment spending decreases.
C) The interest rate decreases and investment spending increases.
D) The interest rate and investment spending both decrease.

Accepted Answer

According to the crowding-out effect, when government spending increases, it leads to an increase in demand for loanable funds, which in turn leads to an increase in the interest rate. The higher interest rate then reduces investment spending, as firms find it more expensive to borrow funds for investment purposes. Therefore, the best choice is B, as it correctly captures the positive relationship between interest rate and government spending, and the negative relationship between investment spending and interest rate.

Question 11

According to the crowding-out effect,how does a decrease in government spending affect the interest rate and investment spending?
A) It increases the interest rate and so increases investment spending.
B) It increases the interest rate and so decreases investment spending.
C) It decreases the interest rate and so increases investment spending.
D) It decreases the interest rate and so decreases investment spending.

Accepted Answer

A decrease in government spending reduces the demand for loanable funds, which leads to a decrease in the interest rate. Lower interest rates make borrowing cheaper, which encourages more investment spending.

Question 12

What is an effect of an increase in government purchases?
A) It decreases interest rates.
B) It results in a decrease in the government deficit.
C) It crowds out investment spending by business.
D) It decreases money demand.

Accepted Answer

An increase in government purchases leads to an increase in demand for goods and services, which may cause higher prices and interest rates. This in turn may reduce private investment spending by businesses, because they will have to compete for the same resources with the government. Therefore, government purchases may crowd out private investment and hinder economic growth in the long run. Neither A, B, nor D is a direct effect of an increase in government purchases.

Question 13

As the MPC gets close to 1,what does the value of the multiplier approach?
A) 0
B) 1
C) 10
D) infinity

Accepted Answer

As the MPC (marginal propensity to consume) gets close to 1, the value of the multiplier approaches infinity. This is because as people consume more, it leads to an increase in aggregate demand, which leads to producers increasing production, which leads to further increases in income and consumption. This cycle continues and leads to a large increase in overall spending and GDP.

Question 14

If the multiplier is 5,what is the MPC?
A) 0.20
B) 0.50
C) 0.80
D) 1.00

Accepted Answer

The Marginal Propensity to Consume (MPC) can be calculated from the multiplier using the formula: Multiplier = 1 / (1 - MPC). Given a multiplier of 5, solving for MPC gives 0.80.

Question 15

Assuming the multiplier effect but no crowding-out or investment-accelerator effects,what is the effect of a $400 billion increase in government expenditures on the aggregate demand?
A) It shifts the aggregate demand right by more than $400 billion.
B) It shifts the aggregate demand right by less than $400 billion.
C) It shifts the aggregate demand left by more than $400 billion
D) It shifts the aggregate demand left by less than $400 billion.

Accepted Answer

The multiplier effect states that an increase in government spending will lead to a more than proportionate increase in aggregate demand. This is because the initial increase in spending will lead to an increase in income, which will then lead to an increase in consumption, which will then lead to an increase in investment, and so on.

Question 16

Assume that the MPC is 0.75.What is the multiplier?
A) 0.25
B) 1.33
C) 4
D) 7.5

Accepted Answer

The multiplier is calculated as 1/(1-MPC). With an MPC of 0.75, the multiplier is 1/(1-0.75) = 4.

Question 17

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

Accepted Answer

Assuming no crowding-out, investment-accelerator or multiplier effects, a $100 billion increase in government expenditures will directly inject $100 billion into the economy, shifting aggregate demand right by the same amount. This is because government spending is a component of aggregate demand.

Question 18

If the MPC is 0.75 and there are no crowding-out or accelerator effects,an initial increase in AD of $100 billion will eventually shift the AD curve to the right by how much?
A) $40 billion
B) $133.33 billion
C) $250 billion
D) $400 billion

Accepted Answer

The answer of If the MPC is 0.75 and there...

Question 19

If the MPC = 0.8,what is the government purchases multiplier?
A) 0.20
B) 0.50
C) 2
D) 5

Accepted Answer

The government purchases multiplier is calculated as 1/(1-MPC). With an MPC of 0.8, the multiplier is 1/(1-0.8) = 1/0.2 = 5.

Question 20

Which statement best explains the crowding-out effect?
A) An increase in government expenditures decreases the interest rate and so increases investment spending.
B) An increase in government expenditures increases the interest rate and so reduces investment spending.
C) A decrease in government expenditures increases the interest rate and so increases investment spending.
D) A decrease in government expenditures decreases the interest rate and so reduces investment spending.

Accepted Answer

The crowding-out effect suggests that an increase in government expenditures increases the demand for loanable funds, which leads to an increase in interest rates. This increase in interest rates can make it more expensive for firms to borrow money, reducing investment spending. Therefore, choice B is the best statement that explains the crowding-out effect.

Quiz 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Assuming the crowding-out effect but no multiplier or investment-accelerator effects,what is the effect of a $600 billion increase in government expenditures on the aggregate demand or supply?

Which term refers to the reduction in demand that results when a fiscal expansion raises the interest rate?

If the multiplier is 10,what is the MPC?

If there is crowding out,which of the following might decrease as government expenditures increase?

If the MPC is 0,what is the multiplier?

Which of the following defines the government purchases multiplier?

Suppose that the MPC is 0.5 and there is no investment accelerator or crowding-out effects.If government expenditures increase by $200 billion,what happens to aggregate demand?

If the MPC = 3 / 4,what is the government purchases multiplier?

How does the multiplier change when the MPC increases,and what is the effect on aggregate demand?

According to the crowding-out effect,how do the interest rate and investment spending change when government spending increases?

According to the crowding-out effect,how does a decrease in government spending affect the interest rate and investment spending?

What is an effect of an increase in government purchases?

As the MPC gets close to 1,what does the value of the multiplier approach?

If the multiplier is 5,what is the MPC?

Assuming the multiplier effect but no crowding-out or investment-accelerator effects,what is the effect of a $400 billion increase in government expenditures on the aggregate demand?

Assume that the MPC is 0.75.What is the multiplier?

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

If the MPC is 0.75 and there are no crowding-out or accelerator effects,an initial increase in AD of $100 billion will eventually shift the AD curve to the right by how much?

If the MPC = 0.8,what is the government purchases multiplier?

Which statement best explains the crowding-out effect?