Question 1

A tax increase has
A) a multiplier effect but not a crowding out effect
B) a crowding out effect but not a multiplier effect
C) both a crowding out and multiplier effect
D) neither a multiplier or crowding out effect

Accepted Answer

The answer of A tax increase has
A) a multiplier effect...

Question 2

Scenario 34-2. The following facts apply to a small, imaginary economy.
• Consumption spending is $6,720 when income is $8,000.
• Consumption spending is $7,040 when income is $8,500.
-Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500?
A) A stock-market boom stimulates consumer spending by $300, and there is an operative crowding-out effect.
B) A stock-market boom stimulates consumer spending by $550, and there is a small operative crowding-out effect.
C) An economic boom overseas increases the demand for U.S. net exports by $550, and there is no crowding- out effect.
D) An economic boom overseas increases the demand for U.S. net exports by $300, and there is no crowding- out effect.

Accepted Answer

The answer of Scenario 34-2. The following facts apply to...

Question 3

A reduction in personal income taxes increases Aggregate Demand through
A) an increase in investment spending.
B) an increase in national savings.
C) an increase in private savings.
D) an increase in personal consumption.

Accepted Answer

When personal income taxes are reduced, individuals have more disposable income. This increased disposable income can lead to an increase in personal consumption, which is a component of Aggregate Demand. Therefore, the correct answer is D) an increase in personal consumption. The other options (A, B, and C) do not directly relate to an increase in personal income taxes.

Question 4

Scenario 34-2. The following facts apply to a small, imaginary economy.
• Consumption spending is $6,720 when income is $8,000.
• Consumption spending is $7,040 when income is $8,500.
-Refer to Scenario 34-2. The multiplier for this economy is
A) 1.31.
B) 6.25.
C) 2.78.
D) 2.27.

Accepted Answer

The formula for the multiplier is:

Multiplier = 1 / (1 - Marginal Propensity to Consume)

To find the Marginal Propensity to Consume (MPC), we need to calculate the change in consumption spending divided by the change in income:

MPC = (Change in Consumption) / (Change in Income)

MPC = ($7,040 - $6,720) / ($8,500 - $8,000)

MPC = $320 / $500

MPC = 0.64

Now we can plug in the MPC to the multiplier formula:

Multiplier = 1 / (1 - 0.64)

Multiplier = 1 / 0.36

Multiplier = 2.78

Therefore, the multiplier for this economy is 2.78, and the best choice is C.

Question 5

Scenario 34-2. The following facts apply to a small, imaginary economy.
• Consumption spending is $6,720 when income is $8,000.
• Consumption spending is $7,040 when income is $8,500.
-Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500?
A) A stock­market boom increases households' wealth by $500, and there is an operative crowding­out effect.
B) A stock­market boom increases households' wealth by $575, and there is an operative crowding­out effect.
C) An economic boom overseas increases the demand for U.S. net exports by $600, and there is no crowding- out effect.
D) Aggregate demand could increase by $1,500 in response to any of these events.

Accepted Answer

The answer of Scenario 34-2. The following facts apply to...

Question 6

The multiplier effect
A) and the crowding-out effect both amplify the effects of an increase in government expenditures.
B) and the crowding-out effect both diminish the effects of an increase in government expenditures.
C) diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects.
D) amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.

Accepted Answer

The multiplier effect amplifies the effects of an increase in government expenditures since the initial injection of money leads to increased spending and income, which in turn leads to further spending and income. The crowding-out effect, on the other hand, diminishes the effects of an increase in government expenditures by reducing private investment due to increased interest rates. Therefore, option D is the best choice as it correctly identifies the respective effects of the multiplier and crowding-out effect.

Question 7

If a $1,000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is
A) 0.2 and the multiplier is 1.25.
B) 0.8 and the multiplier is 5.
C) 0.2 and the multiplier is 1.20.
D) 0.8 and the multiplier is 8.

Accepted Answer

The marginal propensity to consume (MPC) is calculated by dividing the change in consumption by the change in income. So MPC = 800/1000 = 0.8. 
The multiplier is calculated as 1/MPS, where MPS is the marginal propensity to save. Since MPC + MPS = 1, then MPS = 1 - MPC = 1 - 0.8 = 0.2. Thus, the multiplier is 1/0.2 = 5. Therefore, the correct answer is B.

Question 8

When the government reduces taxes, which of the following decreases?
A) consumption
B) take-home pay
C) household saving
D) None of the above is correct.

Accepted Answer

When the government reduces taxes, people have more take-home pay and disposable income, which can lead to an increase in consumption and household saving. Therefore, A, B, and C are not correct answers.

Question 9

Scenario 34-2. The following facts apply to a small, imaginary economy.
• Consumption spending is $6,720 when income is $8,000.
• Consumption spending is $7,040 when income is $8,500.
-Refer to Scenario 34-2. For this economy, an initial increase of $500 in government purchases translates into a
A) $1,388.89 increase in aggregate demand in the absence of the crowding-out effect.
B) $3,125.00 increase in aggregate demand in the absence of the crowding-out effect.
C) $1,135 increase in aggregate demand when the crowding-out effect is taken into account.
D) $3,125.00 increase in aggregate demand when the crowding-out effect is taken into account.

Accepted Answer

The answer of Scenario 34-2. The following facts apply to...

Question 10

An increase in the MPC
A) increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
B) increases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.
C) decreases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
D) decreases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.

Accepted Answer

The multiplier effect is determined by the MPC (Marginal Propensity to Consume), which is the proportion of additional income that households spend on consumption. A higher MPC means that households are more likely to spend their additional income on consumption, which results in a larger impact on aggregate demand. Therefore, an increase in the MPC will increase the multiplier, making changes in government expenditures have a larger effect on aggregate demand.

Question 11

As the MPC gets close to 1, the value of the multiplier approaches
A) 0.
B) 1.
C) infinity.
D) None of the above is correct.

Accepted Answer

The multiplier is defined as 1/(1-MPC). As MPC approaches 1, the denominator (1-MPC) approaches 0, making the multiplier approach infinity.

Question 12

Which of the following tends to make the size of a shift in aggregate demand resulting from an increase in government purchases smaller than it otherwise would be?
A) the multiplier effect
B) the crowding-out effect
C) the accelerator effect
D) All of the above are correct.

Accepted Answer

The crowding-out effect tends to make the size of a shift in aggregate demand resulting from an increase in government purchases smaller than it otherwise would be because it occurs when government borrowing to finance the purchases leads to higher interest rates, which can reduce private sector borrowing and spending. The multiplier effect and accelerator effect both tend to amplify the initial impact of the increase in government purchases on aggregate demand. Therefore, options A and C are incorrect.

Question 13

Scenario 34-2. The following facts apply to a small, imaginary economy.
• Consumption spending is $6,720 when income is $8,000.
• Consumption spending is $7,040 when income is $8,500.
-Refer to Scenario 34-2. The marginal propensity to consume for this economy is
A) 0.64.
B) 0.83.
C) 0.56.
D) 0.840.

Accepted Answer

The answer of Scenario 34-2. The following facts apply to...

Question 14

When there is an increase in government expenditures, which of the following raises investment spending?
A) the investment accelerator and crowding out
B) the investment accelerator but not crowding out
C) crowding out but not the investment accelerator
D) neither the investment accelerator or crowding out

Accepted Answer

An increase in government expenditures would raise national income, which in turn would increase investment expenditures (as per the investment accelerator theory). However, it could also lead to crowding out of private investment due to higher interest rates caused by increased government borrowing. Therefore, both the investment accelerator and crowding out would come into play, but the investment accelerator would have a greater impact, making option B the best choice.

Question 15

If taxes
A) increase, then consumption increases, and aggregate demand shifts leftward.
B) increase, then consumption decreases, and aggregate demand shifts rightward.
C) decrease, then consumption increases, and aggregate demand shifts rightward.
D) decrease, then consumption decreases, and aggregate demand shifts leftward.

Accepted Answer

If taxes decrease, people have more disposable income and therefore are more likely to consume goods and services, leading to an increase in aggregate demand and a rightward shift in the aggregate demand curve. Conversely, an increase in taxes would lead to less disposable income and less consumption, shifting the aggregate demand curve leftward.

Question 16

If the multiplier is 6 and if there is no crowding-out effect, then a $60 billion increase in government expenditures causes aggregate demand to
A) increase by $250 billion.
B) increase by $333 billion.
C) increase by $360 billion.
D) None of the above are correct.

Accepted Answer

If the multiplier is 6, then the formula for the change in aggregate demand is given by the following formula:
ΔAD = multiplier x ΔG 
where ΔAD is the change in aggregate demand, ΔG is the change in government spending, and the multiplier is 6. 
Substituting the values given, we get:
ΔAD = 6 x $60 billion
ΔAD = $360 billion 
Therefore, a $60 billion increase in government expenditures causes aggregate demand to increase by $360 billion.

Question 17

An increase in government purchases is likely to
A) decrease interest rates.
B) reduce money demand.
C) crowd out investment spending by business firms.
D) All of the above are correct.

Accepted Answer

An increase in government purchases is likely to crowd out investment spending by business firms, as the increased government spending would increase demand for goods and services, therefore raising prices and interest rates. This would make investments less attractive for businesses, reducing their investment spending. The other options, decreasing interest rates and reducing money demand, are not likely outcomes of an increase in government purchases.

Question 18

Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?
A) both the multiplier effect and the crowding-out effect
B) the multiplier effect, but not the crowding-out effect
C) the crowding-out effect, but not the multiplier effect
D) neither the crowding out effect nor the multiplier effect

Accepted Answer

Both the multiplier effect and the crowding-out effect would tend to make the change in aggregate demand different from the initial increase in government spending of $75 billion. The multiplier effect would cause an additional increase in aggregate demand, while the crowding-out effect would cause a decrease in aggregate demand. Therefore, the actual change in aggregate demand would be less than $75 billion.

Question 19

As real GDP falls,
A) money demand rises, so the interest rate rises.
B) money demand rises, so the interest rate falls
C) money demand falls, so the interest rate rises.
D) money demand falls, so the interest rate falls.

Accepted Answer

The answer of As real GDP falls,
A) money demand rises,...

Question 20

Tax increases
A) and increases in government expenditures shift aggregate demand right.
B) and increases in government expenditures shift aggregate demand left.
C) shift aggregate demand right while increases in government expenditures shift aggregate demand left.
D) shift aggregate demand left while increases in government expenditures shift aggregate demand right.

Accepted Answer

Tax increases lead to a decrease in disposable income and thus, a decrease in consumer spending. This causes a shift in aggregate demand to the left. On the other hand, increases in government expenditures can stimulate economic growth, leading to an increase in aggregate demand and thus, a shift to the right.

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

A tax increase has

A reduction in personal income taxes increases Aggregate Demand through

Scenario 34-2. The following facts apply to a small, imaginary economy. • Consumption spending is $6,720 when income is $8,000. • Consumption spending is $7,040 when income is $8,500. -Refer to Scenario 34-2. The multiplier for this economy is

The multiplier effect

If a $1,000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is

When the government reduces taxes, which of the following decreases?

An increase in the MPC

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

Which of the following tends to make the size of a shift in aggregate demand resulting from an increase in government purchases smaller than it otherwise would be?

Scenario 34-2. The following facts apply to a small, imaginary economy. • Consumption spending is $6,720 when income is $8,000. • Consumption spending is $7,040 when income is $8,500. -Refer to Scenario 34-2. The marginal propensity to consume for this economy is

When there is an increase in government expenditures, which of the following raises investment spending?

If taxes

If the multiplier is 6 and if there is no crowding-out effect, then a $60 billion increase in government expenditures causes aggregate demand to

An increase in government purchases is likely to

Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?

As real GDP falls,

Tax increases