Question 1

Figure 34-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.
 
-Refer to Figure 34-6. Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. The extent of crowding out, for any particular level of the price level, is
A) $75 billion.
B) $40 billion.
C) $30 billion.
D) $20 billion.

Accepted Answer

The answer of Figure 34-6. On the left-hand graph, MS...

Question 2

Scenario 34-1. Take the following information as given for a small, imaginary economy:
• When income is $10,000, consumption spending is $6,500.
• When income is $11,000, consumption spending is $7,250.
-Refer to Scenario 34-1. For this economy, an initial increase of $200 in net exports translates into an)
A) $570 increase in aggregate demand when the crowding-out effect is taken into account.
B) $800 increase in aggregate demand when the crowding-out effect is taken into account.
C) $1,400 increase in aggregate demand in the absence of the crowding-out effect.
D) $800 increase in aggregate demand in the absence of the crowding-out effect.

Accepted Answer

To calculate the increase in aggregate demand, we need to use the formula AD = C + I + G + (X-M). Since we are only given information about consumption and net exports, we can assume that investment and government spending remain constant.

Using the given information, we can calculate the marginal propensity to consume (MPC) as the change in consumption over the change in income:
MPC = (7,250 - 6,500) / (11,000 - 10,000) = 0.75

Now, we can calculate the initial increase in consumption spending from the increase in net exports:
ΔC = 0.75 x ΔNX
ΔC = 0.75 x $200 = $150

Finally, we can use the formula for aggregate demand to calculate the total increase:
ΔAD = ΔC + ΔNX
ΔAD = $150 + $200 = $350

Since the question asks for the increase in aggregate demand in the absence of the crowding-out effect, we can assume that there is no reduction in other components of aggregate demand (i.e. investment or government spending) as a result of the increase in net exports. Therefore, the answer is D) $800 increase in aggregate demand in the absence of the crowding-out effect.

Question 3

If the multiplier is 5.25, then the MPC is
A) 0.19.
B) 0.68.
C) 0.81.
D) 0.84.

Accepted Answer

The answer of If the multiplier is 5.25, then the...

Question 4

Scenario 34-1. Take the following information as given for a small, imaginary economy:
• When income is $10,000, consumption spending is $6,500.
• When income is $11,000, consumption spending is $7,250.
-Refer to Scenario 34-1. The multiplier for this economy is
A) 2.85.
B) 1.53.
C) 4.00.
D) 7.00.

Accepted Answer

The answer of Scenario 34-1. Take the following information as...

Question 5

In a certain economy, when income is $500, consumer spending is $375. The value of the multiplier for this economy is 5. It follows that, when income is $510, consumer spending is
A) $381.67.
B) $378.
C) $383.
D) $383.33.

Accepted Answer

The answer of In a certain economy, when income is...

Question 6

Figure 34-5. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-5. What is measured along the vertical axis of the graph?
A) the quantity of output
B) the amount of crowding out
C) the interest rate
D) the price level

Accepted Answer

Along the vertical axis of the graph, the interest rate is measured, as indicated by the label "Interest Rate" on the axis.

Question 7

Figure 34-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.
 
-Refer to Figure 34-6. Suppose the multiplier is 3 and the government increases its purchases by $25 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Finally, assume the horizontal distance between the curves AD1 and AD3 is $40 billion. The extent of crowding out, for any particular level of the price level, is
A) $15 billion.
B) $40 billion.
C) $35 billion.
D) $95 billion.

Accepted Answer

The initial shift in AD from AD1 to AD2 would have been $75 billion (multiplier of 3 times the $25 billion increase in government purchases). However, due to crowding out, the actual shift in AD is only $35 billion (horizontal distance between AD1 and AD3). Therefore, the extent of crowding out is $40 billion ($75 billion - $35 billion).

Question 8

The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it
A) reduces investment and thereby increases consumer spending.
B) increases the money supply and thereby reduces interest rates.
C) increases income and thereby increases consumer spending.
D) decreases income and thereby increases consumer spending.

Accepted Answer

The multiplier effect occurs when an initial increase in spending leads to a more than proportionate increase in overall economic activity. In the case of fiscal policy, government spending or tax cuts lead to an increase in disposable income, which in turn leads to an increase in consumer spending. This increase in consumer spending generates more demand for goods and services, which then leads to higher production and income for firms, who in turn hire more workers and increase investment. This cycle continues, leading to a larger increase in output and income than the initial increase in government spending or tax cuts. Therefore, the correct answer is C, as fiscal policy increases income and thereby increases consumer spending, leading to a multiplier effect on aggregate demand.

Question 9

If the multiplier is 6, then the MPC is
A) 0.16.
B) 0.83.
C) 0.71.
D) 0.86.

Accepted Answer

The multiplier is defined as 1/MPC. Therefore, if the multiplier is 6, then MPC = 1/6 = 0.1667, which rounds to 0.83 when expressed as a percentage. Therefore, the correct choice is B.

Question 10

The logic of the multiplier effect applies
A) only to changes in government spending.
B) to any change in spending on any component of GDP.
C) only to changes in the money supply.
D) only when the crowding-out effect is sufficiently strong.

Accepted Answer

The multiplier effect applies to any change in spending on any component of GDP. When there is an increase in spending, it leads to an increase in income and subsequently an increase in consumption, leading to further increases in income and so on. This cycle of spending and income continues, leading to a multiplier effect on the overall economy. The multiplier effect can also occur in reverse, leading to a decrease in spending, income, and GDP.

Question 11

Government purchases are said to have a
A) multiplier effect on aggregate supply.
B) multiplier effect on aggregate demand.
C) liquidity-enhancing effect on aggregate supply.
D) liquidity-enhancing effect on aggregate demand.

Accepted Answer

Government purchases increase aggregate demand because they are a component of government spending, which is one of the four components of aggregate demand (the others are consumption, investment, and net exports). The multiplier effect refers to the idea that government purchases can have a larger overall impact on the economy than just their initial spending amount, because the spending can create ripple effects throughout the economy.

Question 12

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the
A) assumption that increases in government purchases have no effect on consumer spending.
B) assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred.
C) empirical evidence that points to a value of about 3/4 for the MPC.
D) fact that the multiplier effect is represented by an infinite geometric series.

Accepted Answer

The fact that the multiplier effect is represented by an infinite geometric series allows us to simplify the equation for the multiplier into the familiar form of 1/(1-MPC), where MPC represents the marginal propensity to consume. This is a relatively simple and well-known form that is frequently used in macroeconomic analysis. Choices A and B are not accurate assumptions, as increases in government purchases can and often do have an effect on consumer spending, and feedback effects from changes in government spending can persist beyond two or three rounds of spending. Choice C is not applicable to the simplification of the multiplier equation.

Question 13

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is
A) $60.25.
B) $60.75.
C) $61.33.
D) $64.00.

Accepted Answer

The value of the multiplier is 4, which means that a $1 increase in income leads to a $4 increase in consumer spending. Therefore, when income increases by $1 from $100 to $101, consumer spending will increase by $4, resulting in a new consumer spending level of $64. However, the question asks for the consumer spending level specifically, so we need to subtract the initial consumer spending level of $60 from the new level of $64 to get the answer. Thus, consumer spending when income is $101 is $60 + ($4) = $60.75.

Question 14

In a certain economy, when income is $1000, consumer spending is $800. The value of the multiplier for this economy is 2.5. It follows that, when income is $1020, consumer spending is
A) $816. For this economy, an initial increase of $100 in consumer spending translates into a $250 increase in aggregate demand.
B) $816. For this economy, an initial increase of $100 in consumer spending translates into a $400 increase in aggregate demand.
C) $812. For this economy, an initial increase of $100 in consumer spending translates into a $250 increase in aggregate demand.
D) $812. For this economy, an initial increase of $100 in consumer spending translates into an $800 increase in aggregate demand.

Accepted Answer

The value of the multiplier indicates that a change in income will result in a change in aggregate demand that is 2.5 times the size of the initial change in income. Therefore, an increase in income from $1000 to $1020 represents a $20 increase, which would lead to a $50 increase in aggregate demand (20 x 2.5 = 50). Since consumer spending is a component of aggregate demand, we can solve for the change in consumer spending by setting up the equation:
Change in consumer spending = Multiplier x Change in income
Change in consumer spending = 2.5 x $20
Change in consumer spending = $50
Therefore, when income is $1020, consumer spending would be $800 + $50 = $812. Choice C is the only option that matches this calculation.

Question 15

Scenario 34-1. Take the following information as given for a small, imaginary economy:
• When income is $10,000, consumption spending is $6,500.
• When income is $11,000, consumption spending is $7,250.
-Refer to Scenario 34-1. The marginal propensity to consume for this economy is
A) 0.650.
B) 0.750.
C) 0.650 or 0.664, depending on whether income is $10,000 or $11,000.
D) 0.800.

Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income. From the given data, when income increases from $10,000 to $11,000 (a change of $1,000), consumption spending increases from $6,500 to $7,250 (a change of $750). Therefore, MPC = $750 / $1,000 = 0.750.

Question 16

In a certain economy, when income is $400, consumer spending is $325. The value of the multiplier for this economy is 3.33. It follows that, when income is $450, consumer spending is
A) $360. For this economy, an initial increase of $50 in consumer spending translates into a $266.67 increase in aggregate demand.
B) $360. For this economy, an initial increase of $50 in consumer spending translates into a $166.50 increase in aggregate demand.
C) $341.67. For this economy, an initial increase of $50 in consumer spending translates into a $266.67 increase in aggregate demand.
D) $341.67. For this economy, an initial increase of $50 in consumer spending translates into a $166.25 increase in aggregate demand.

Accepted Answer

The answer of In a certain economy, when income is...

Question 17

Figure 34-5. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-5. A shift of the money-demand curve from MD2 to MD1 is consistent with which of the following sets of events?
A) The government cuts taxes, resulting in an increase in people's incomes.
B) The government reduces government spending, resulting in a decrease in people's incomes.
C) The Federal Reserve increases the supply of money, which decreases the interest rate.
D) All of the above are correct.

Accepted Answer

A decrease in people's incomes would lead to a decrease in the demand for money, shifting the money-demand curve from MD2 to MD1.

Question 18

Which of the following policy actions shifts the aggregate-demand curve?
A) an increase in the money supply
B) an increase in taxes
C) an increase in government spending
D) All of the above are correct.

Accepted Answer

An increase in the money supply shifts the aggregate demand curve to the right, as it increases consumption and investment spending. An increase in government spending also shifts the aggregate demand curve to the right, as it increases overall spending in the economy. An increase in taxes has the opposite effect and shifts the aggregate demand curve to the left, as it reduces consumers' disposable income and decreases spending. Therefore, all three policy actions - increasing the money supply, increasing government spending, and increasing taxes - can shift the aggregate demand curve.

Question 19

Suppose an economy's marginal propensity to consume MPC) is 0.6. Then
A) 1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 1.96.
B) 1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3.
C) 1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3.
D) 1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 2.5.

Accepted Answer

The multiplier is calculated as 1/(1-MPC). With an MPC of 0.6, the multiplier is 1/(1-0.6) = 2.5. The series 1 + MPC + MPC^2 + MPC^3 = 2.176, and as more terms are added, it approaches the multiplier value of 2.5.

Question 20

Figure 34-5. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-5. A shift of the money-demand curve from MD1 to MD2 could be a result of
A) a decrease in taxes.
B) an increase in government spending.
C) an increase in the price level.
D) All of the above are correct.

Accepted Answer

An increase in government spending, a decrease in taxes, and an increase in the price level can all lead to a shift of the money-demand curve from MD1 to MD2.

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

If the multiplier is 5.25, then the MPC is

Scenario 34-1. Take the following information as given for a small, imaginary economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. -Refer to Scenario 34-1. The multiplier for this economy is

In a certain economy, when income is $500, consumer spending is $375. The value of the multiplier for this economy is 5. It follows that, when income is $510, consumer spending is

Figure 34-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-5. What is measured along the vertical axis of the graph?

The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it

If the multiplier is 6, then the MPC is

The logic of the multiplier effect applies

Government purchases are said to have a

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is

In a certain economy, when income is $1000, consumer spending is $800. The value of the multiplier for this economy is 2.5. It follows that, when income is $1020, consumer spending is

Scenario 34-1. Take the following information as given for a small, imaginary economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. -Refer to Scenario 34-1. The marginal propensity to consume for this economy is

In a certain economy, when income is $400, consumer spending is $325. The value of the multiplier for this economy is 3.33. It follows that, when income is $450, consumer spending is

Figure 34-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-5. A shift of the money-demand curve from MD2 to MD1 is consistent with which of the following sets of events?

Which of the following policy actions shifts the aggregate-demand curve?

Suppose an economy's marginal propensity to consume MPC) is 0.6. Then

Figure 34-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-5. A shift of the money-demand curve from MD1 to MD2 could be a result of