Question 1

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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Question 2

If the MPC is 3/5 then the multiplier is

Accepted Answer

The multiplier is calculated as 1/(1-MPC). With an MPC of 3/5, the multiplier is 1/(1-3/5) = 1/(2/5) = 2.5. Therefore, a $100 increase in government spending increases aggregate demand by $250.

Question 3

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 4

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

Accepted Answer

This is because the increase in government expenditures directly adds $100 billion to aggregate demand. Assuming no crowding-out, investment-accelerator, or multiplier effects means that there are no indirect effects on aggregate demand beyond this direct increase.

Question 5

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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Question 6

A decrease in government spending

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...

Question 7

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

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Question 8

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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Question 9

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 lead to an increase in aggregate demand by at least $100 billion, due to the additional spending and subsequent increase in income and consumption. The multiplier effect occurs because the initial increase in government spending leads to greater overall spending and economic activity as money continues to circulate through the economy. Therefore, the shift in aggregate demand is rightward by more than $100 billion.

Question 10

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

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

Question 11

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 12

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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Question 13

If the MPC is 0, then the multiplier is

Accepted Answer

The multiplier is defined as 1/MPC. If MPC is 0, it means that there is no change in consumption for every unit change in income, which implies that the multiplier is 1.

Question 14

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 15

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

Accepted Answer

If the investment accelerator from an increase in government purchases is larger than the crowding-out effect, it means that the increase in government purchases will lead to a larger increase in private investment, and hence overall output. This suggests that the multiplier effect will be greater than one. Therefore, the best choice is C.

Question 16

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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Question 17

Assume the MPC is 0.72. The multiplier is

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Question 18

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

Accepted Answer

Crowding out occurs when government spending increases, causing interest rates to rise and reducing private investment. By increasing the money supply, the Federal Reserve can lower interest rates, offsetting the crowding out effect. The Federal Reserve can increase the money supply by buying bonds, which puts more money into circulation and lowers interest rates. Therefore, choice A is the best answer.

Question 19

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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Question 20

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