Question 1

Scenario 16-2. 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 16-2. The multiplier for this economy is

Accepted Answer

The multiplier can be calculated as the change in output divided by the change in spending, which is (($5,536 - $5,200)/($8,400 - $8,000)) = $336/$400 = 0.84. To convert this to a multiplier, we take the reciprocal, which is approximately 1.19. Therefore, the multiplier is 1/(1 - 0.84) = 6.25.

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

Accepted Answer

The multiplier effect states that a change in autonomous spending (in this case, a decrease in government purchases) will have a magnified effect on aggregate demand. The formula for the multiplier effect is 1/(1-MPC), which in this case is 1/(1-0.75) = 4. Thus, the overall decrease in aggregate demand will be $100 billion x 4 = $400 billion. This means the aggregate demand curve will shift to the left by $400 billion. Therefore, option B is correct.

Question 3

An increase in government purchases is likely to

Accepted Answer

An increase in government purchases will increase the demand for goods and services, leading to an increase in the price level and a decrease in the real interest rate. This decrease in real interest rates will likely reduce investment spending by business firms, because it becomes more expensive to borrow to invest, ultimately leading to a decrease in aggregate demand due to the crowding out of investment.

Question 4

Tax cuts

Accepted Answer

Tax cuts increase disposable income and thereby stimulate consumption spending, which increases aggregate demand. Increases in government expenditures also directly increase aggregate demand. Therefore, both tax cuts and increases in government expenditures shift aggregate demand to the right.

Question 5

Assume the MPC is 0.80. The multiplier is

Accepted Answer

The answer of Assume the MPC is 0.80. The multiplier...

Question 6

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

Accepted Answer

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

Question 7

If the MPC is 2/3 then the multiplier is

Accepted Answer

The answer of If the MPC is 2/3 then the...

Question 8

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

Accepted Answer

The answer of Assume the MPC is 0.75. Assume there...

Question 9

If the MPC is 3/4 then the multiplier is

Accepted Answer

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

Question 10

If taxes

Accepted Answer

When taxes increase, people have less disposable income, which means they have less money available for spending on goods and services. This leads to a decrease in consumption and a leftward shift in the aggregate demand curve. Conversely, when taxes decrease, people have more disposable income, which can lead to an increase in consumption and a rightward shift in the aggregate demand curve.

Question 11

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

Accepted Answer

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

Question 12

Scenario 16-2. 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 16-2. The marginal propensity to consume for this economy is

Accepted Answer

The answer of Scenario 16-2. The following facts apply to...

Question 13

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

Accepted Answer

The multiplier effect of government spending is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, the multiplier would be 1/(1-5/6) = 6. With a $20 billion increase in government spending, the aggregate demand would shift right by 6 times that amount, or $120 billion. Since there is no investment accelerator or crowding out, the effect would not be affected by these factors.

Question 14

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

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 15

The multiplier effect

Accepted Answer

The multiplier effect amplifies the effects of an increase in government expenditures because it leads to a chain reaction of increased spending and economic activity, while the crowding-out effect diminishes the effects by reducing private sector spending due to increased government borrowing and higher interest rates.

Question 16

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

Accepted Answer

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

Question 17

Scenario 16-2. 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 16-2. In response to which of the following events could aggregate demand increase by $1,500?

Accepted Answer

The answer of Scenario 16-2. The following facts apply to...

Question 18

An increase in the MPC

Accepted Answer

The MPC, or marginal propensity to consume, represents the portion of additional income that households will spend on consumption. As the MPC increases, the multiplier effect also increases. This means that a given change in government spending will have a larger effect on aggregate demand. Therefore, an increase in the MPC leads to a larger multiplier and a larger effect of changes in government expenditures on aggregate demand.

Question 19

Scenario 16-2. 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 16-2. For this economy, an initial increase of $500 in government purchases translates into a

Accepted Answer

The marginal propensity to consume (MPC) can be calculated as the change in consumption divided by the change in income. In this case, the MPC is ($5,536 - $5,200) / ($8,400 - $8,000) = 0.092. Given an initial increase in government purchases of $500, the total increase in aggregate demand would be $500 * (1 / (1 - MPC)) = $3,125.00 in the absence of the crowding-out effect.

Question 20

Scenario 16-2. 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 16-2. In response to which of the following events could aggregate demand increase by $1,500?

Accepted Answer

The answer of Scenario 16-2. The following facts apply to...

Quiz 16: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Scenario 16-2. 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 16-2. The multiplier for this economy is

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

An increase in government purchases is likely to

Tax cuts

Assume the MPC is 0.80. The multiplier is

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

If the MPC is 2/3 then the multiplier is

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

If the MPC is 3/4 then the multiplier is

If taxes

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

Scenario 16-2. 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 16-2. 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

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

The multiplier effect

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 the MPC