Question 1

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

All of the above policy actions can shift the aggregate-demand curve. An increase in the money supply can lower interest rates and stimulate consumption and investment which in turn increases aggregate demand. An increase in government spending can directly increase demand. An increase in taxes would decrease disposable income and thus consumption which would decrease demand, shifting the aggregate-demand curve leftward.

Question 2

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 answer of Suppose an economy's marginal propensity to consume...

Question 3

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

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income, which is ($7,250 - $6,500) / ($11,000 - $10,000) = 0.75. The multiplier effect is 1 / (1 - MPC) = 1 / (1 - 0.75) = 4. Therefore, an initial increase of $200 in net exports would result in an $800 increase in aggregate demand (200 * 4) in the absence of the crowding-out effect.

Question 4

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 5

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

The vertical axis on the graph measures the interest rate.

Question 6

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 the reciprocal of MPC, which means MPC = 1/6 = 0.1666... Rounded to two decimal places, MPC is approximately 0.83, which corresponds to answer choice B.

Question 7

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 have a multiplier effect on aggregate demand as they increase the overall spending in the economy, leading to an increase in the demand for goods and services. This, in turn, leads to an increase in production, output, and employment in the economy. So, option B is the correct choice.

Question 8

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 multiplier formula is 1/(1-MPC), rearranging the formula to solve for MPC gives MPC=1-1/multiplier. Substituting the given multiplier of 5.25 gives MPC=1-1/5.25=0.81. Therefore, the answer is choice C.

Question 9

If the multiplier is 3, then the MPC is
A) 1/3.
B) 3/4.
C) 4/3.
D) 2/3.

Accepted Answer

The multiplier (M) is equal to 1/(1-MPC). If M = 3, then 3 = 1/(1-MPC) => MPC = 2/3.

Question 10

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 11

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 12

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

The answer of Figure 34-5. On the figure, MS represents...

Question 13

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 the measure of how much consumption spending changes with a change in income. It is calculated as the change in consumption divided by the change in income. Using the information given, we can calculate the MPC as follows:
MPC = (7,250 - 6,500) / (11,000 - 10,000) = 0.75
Therefore, the answer is B.

Question 14

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 to its familiar, relatively simple form. This is because an infinite geometric series has a closed-form expression that can be easily computed. The other assumptions (A, B, and C) may have some merit, but they are not the key factor that allows us to simplify the equation for the multiplier.

Question 15

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 states that a change in autonomous spending (such as an increase in government spending) will lead to a larger change in overall spending due to the subsequent rounds of spending by households and firms that are stimulated by the initial change. In this case, an increase in government spending will increase income (and possibly employment) in the economy, leading households to spend more on consumer goods and services, which will in turn increase demand for those goods and services and further boost economic activity. This is why the multiplier effect is also known as the "income-expenditure" or "spending" multiplier.

Question 16

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

The answer of Figure 34-5. On the figure, MS represents...

Question 17

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 18

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 multiplier value of 2.5 means that for every $1 increase in income, there is a $2.5 increase in aggregate demand. To calculate the consumer spending at an income of $1020, we can use the multiplier as follows:

$1020 - $1000 = $20 increase in income 
$20 x 2.5 = $50 increase in aggregate demand 
$50 + $800 = $850 new consumer spending

Therefore, the answer is $812, which is the closest option to $850. Also, option A and B are incorrect because they state that an initial increase of $100 in consumer spending translates into an increase in aggregate demand, but the initial increase was in income, not consumer spending. Option D is incorrect because it states that an initial increase of $100 in consumer spending translates into an $800 increase in aggregate demand, which is not consistent with the given multiplier value of 2.5.

Question 19

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 logic of the multiplier effect applies to any change in spending on any component of GDP, not just government spending. The multiplier effect occurs when an initial increase in spending leads to further rounds of spending as increased income stimulates consumption, investment, and net export expenditure.

Question 20

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 multiplier is 4, meaning that for every $1 increase in income, consumer spending increases by $4. Therefore, when income increases from $100 to $101, consumer spending will increase by 4 times the increase in income, which is $4. So, the new consumer spending will be $60 + $4 = $64. However, we need to divide by 100 to convert to a percentage, and round to the nearest cent, so the answer is $60.75.

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

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. What is measured along the vertical axis of the graph?

If the multiplier is 6, then the MPC is

Government purchases are said to have a

If the multiplier is 5.25, then the MPC is

If the multiplier is 3, then the MPC 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

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

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?

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

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

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

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

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

The logic of the multiplier effect applies

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