Question 1

If the MPC is 5/6 then the multiplier is

Accepted Answer

The multiplier is the inverse of the MPC, so the multiplier would be 1/MPC or 1/(5/6) = 6/5. Therefore, a $200 increase in government spending would increase aggregate demand by 6/5*200 = $240.

Question 2

Assume the MPC is 0.72. The multiplier is

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The answer of Assume the MPC is 0.72. The multiplier...

Question 3

To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could

Accepted Answer

When the government increases its spending, it may lead to a decrease in investment in the private sector as resources are diverted towards government projects. This is known as crowding out. To counteract this effect, the Federal Reserve can increase the money supply by buying bonds. This increases liquidity in the market and lowers interest rates, making it easier and cheaper for firms to borrow and invest, thus offsetting the crowding out effect. Selling bonds would have the opposite effect of reducing money supply and increasing interest rates, which would exacerbate the crowding out effect. Decreasing the money supply by buying bonds would also be counterproductive in this scenario.

Question 4

Suppose there are both multiplier and crowding out effects but without any accelerator effects. An increase in government expenditures would definitely

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The answer of Suppose there are both multiplier and crowding...

Question 5

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

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

Question 6

Assume the MPC is 0.625. Assume there is a multiplier effect and that the total crowding-out effect is $12 billion.
An increase in government purchases of $30 billion will shift aggregate demand to the

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The answer of Assume the MPC is 0.625. Assume there...

Question 7

Assume the MPC is 0.8. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

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The answer of Assume the MPC is 0.8. Assuming only...

Question 8

Suppose that the MPC is 0.7, there is no investment accelerator, and there are no crowding-out effects. If government expenditures increase by $30 billion, then aggregate demand

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The answer of Suppose that the MPC is 0.7, there...

Question 9

If the MPC is 0.8 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $120 billion will eventually shift the aggregate demand curve to the right by

Accepted Answer

The answer of If the MPC is 0.8 and there...

Question 10

If the investment accelerator from an increase in government purchases is larger than the crowding-out effect, then

Accepted Answer

If the investment accelerator effect is larger than the crowding-out effect, then the increase in government purchases leads to a larger increase in investment, which in turn leads to a larger increase in output. This implies that the multiplier effect is greater than one.

Question 11

If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then

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The answer of If net exports fall $40 billion, the...

Question 12

If the MPC is 3/5 then the multiplier is

Accepted Answer

The multiplier is calculated as 1/(1-MPC), so in this case it would be 1/(1-3/5) = 2.5. Therefore, a $100 increase in government spending would increase aggregate demand by $250.

Question 13

Sometimes during wars, government expenditures are larger than normal. To reduce the effects this spending creates on interest rates,

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The answer of Sometimes during wars, government expenditures are larger...

Question 14

If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by

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The answer of If the marginal propensity to consume is...

Question 15

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

Accepted Answer

Assuming a multiplier effect, a $100 billion increase in government expenditures will have a larger impact on aggregate demand than just $100 billion because of the additional spending that will be generated in other sectors of the economy as a result. The actual impact will depend on the size of the multiplier, but it is likely to be greater than $100 billion.

Question 16

Assume the multiplier is 5 and that the crowding-out effect is $30 billion. An increase in government purchases of $20 billion will shift the aggregate-demand curve to the

Accepted Answer

The formula for calculating the total impact of an increase in government spending is:
Total Impact = Initial Increase in Spending x Multiplier
Total Impact = $20 billion x 5
Total Impact = $100 billion
However, we have to account for the crowding-out effect of $30 billion. Therefore, the net increase in aggregate demand is $70 billion ($100 billion - $30 billion). Therefore, the correct answer is B, which represents a rightward shift in the aggregate-demand curve by $70 billion.

Question 17

If the MPC is 0, then the multiplier is

Accepted Answer

The multiplier formula is 1/MPC. If the MPC is 0, the denominator becomes zero, making the multiplier undefined. Therefore, none of the answer choices given are correct. However, if we assume an MPC of 0.000000001 for the sake of calculation, then the multiplier would be 1/0.000000001 = 1,000,000,000, which approximates to infinity. But this assumption may not always be valid. Therefore, the best answer choice is B, which acknowledges that none of the answer choices are correct.

Question 18

As the MPC gets close to 1, the value of the multiplier approaches

Accepted Answer

The multiplier equals 1 / (1 - MPC). As the MPC gets close to 1, the denominator gets close to 0, making the multiplier approach infinity.

Question 19

Assume the MPC is 0.65. Assuming only the multiplier effect matters, a decrease in government purchases of $20 billion will shift the aggregate demand curve to the

Accepted Answer

The formula for the multiplier effect is 1/(1-MPC). 
Given that MPC is 0.65, the multiplier effect is 1/(1-0.65) = 2.86. 
Therefore, a decrease in government purchases of $20 billion will decrease aggregate demand by $20 billion x 2.86 = $57.1 billion. 
Since the question asked for the direction of the shift, the answer is left, as the decrease in government purchases decreases aggregate demand.

Question 20

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

Accepted Answer

Assuming no crowding-out, investment-accelerator, or multiplier effects, an increase in government expenditures of $100 billion directly increases aggregate demand by the same amount. Therefore, the correct choice is B, right by $100 billion.

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