Question 1

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

Question 2

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 3

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 4

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 policy actions listed will shift the aggregate-demand curve. 
- An increase in the money supply will lower interest rates and increase spending, leading to a rightward shift of the AD curve. 
- An increase in government spending will directly increase demand for goods and services, also leading to a rightward shift of the AD curve. 
- An increase in taxes will reduce disposable income and decrease spending, leading to a leftward shift of the AD curve.

Question 5

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 6

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 form of 1/(1-MPC), where MPC is the marginal propensity to consume. This formula assumes that each round of spending generates a fraction of its value as income, which is then spent, and so on in an infinite series.

Question 7

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 8

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 9

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 10

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

We can use the formula for the expenditure multiplier to find the increase in consumer spending: 
Multiplier = 1 / (1 - MPC) where MPC is the marginal propensity to consume (the fraction of each additional dollar of income that is spent on consumption). 
We know that the multiplier is 2.5, so: 
2.5 = 1 / (1 - MPC) 
1 - MPC = 1 / 2.5 = 0.4 
MPC = 0.6

So, for every additional dollar of income, 60 cents will be spent on consumption. 
When income is $1020, consumer spending will be: 
$800 + 0.6($20) = $812

Therefore, the answer is choice C.

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 have a multiplier effect on aggregate demand, as they increase the overall demand for goods and services in the economy. This can lead to increased production and output, as businesses respond to the increased demand by expanding production and hiring more workers. The multiplier effect refers to the idea that the increase in government purchases will lead to a larger increase in overall demand due to the additional spending and subsequent rounds of spending that follow.

Question 12

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 13

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 an initial increase in government spending or a decrease in taxes leads to an increase in income for individuals and firms. This increase in income results in an increase in consumer spending, thereby leading to a further increase in demand. This process then continues, resulting in a magnified effect on aggregate demand. Therefore, option C is correct as it correctly explains how the multiplier effect occurs. The other options do not accurately describe the multiplier effect.

Question 14

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, not just government spending. The basic idea is that an initial change in spending (such as an increase in investment or consumption) leads to further rounds of spending as the recipients of the initial spending use some of the money to make their own purchases, and so on. This leads to a larger overall increase in economic activity than the initial spending change alone.

Question 15

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 of the graph represents the interest rate.

Question 16

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 equal to 1/(1-MPC). Therefore, if the multiplier is 6, we can solve for the MPC as follows:

6 = 1/(1-MPC)
6(1-MPC) = 1
6 - 6MPC = 1
-6MPC = -5
MPC = 5/6

This is equal to approximately 0.83, so the correct answer is B.

Question 17

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 18

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 multiplier effect in this case is approximately 4, calculated as 1/(1-MPC) = 1/(1-0.35) = 1.54, and 1.54 x $200 = $308. Therefore, without considering the crowding-out effect, the increase in net exports would lead to a $308 x 4 = $1,232 increase in aggregate demand. However, as the crowding-out effect is not specified in the scenario, we assume its absence, leading to a final answer of $308 x 2 = $616 or approximately $800.

Question 19

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 increase in government purchases of $25 billion will have a multiplied effect on aggregate demand, resulting in an increase in AD from AD1 to AD2 by $75 billion (3 x $25 billion). However, due to crowding out, the actual shift in AD will be smaller than the initial increase in government purchases. The horizontal distance between AD1 and AD3 is $40 billion, which represents the amount of crowding out. Therefore, the extent of crowding out is $35 billion ($75 billion - $40 billion).

Question 20

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...

Quiz 21: The Influence of Monetary and Fiscal Policy on Aggregate Demand

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

If the multiplier is 5.25, 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

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

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

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

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?

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

Government purchases are said to have a

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

The logic of the multiplier effect applies

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

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

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