Question 1

If the MPC is 3/5 then the multiplier is
A) 4, so a $100 increase in government spending increases aggregate demand by $400.
B) 1.5, so a $100 increase in government spending increases output by $150.
C) 2.5, so a $100 increase in government spending increases aggregate demand by $250.
D) 1.67, so a $100 increase in government spending increases output by $166.67.

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 2

If the investment accelerator from an increase in government purchases is larger than the crowding-out effect, then
A) the multiplier is probably zero.
B) the multiplier is probably equal to one.
C) the multiplier is probably greater than one.
D) the multiplier is probably less than one.

Accepted Answer

If the investment accelerator from an increase in government purchases is larger than the crowding-out effect, it means that the total increase in demand is greater than the decrease in investment caused by higher interest rates. This suggests that the multiplier effect is positive and greater than one, meaning that an initial increase in government purchases leads to a larger increase in GDP.

Question 3

To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could
A) increase the money supply by buying bonds.
B) increase the money supply by selling bonds.
C) decrease the money supply by buying bonds
D) increase the money supply by selling bonds

Accepted Answer

Crowding out occurs when government spending increases, leading to a decrease in private spending. To counteract this, the Federal Reserve can increase the money supply by buying bonds, which injects money into the economy and encourages private spending. Option B would have the opposite effect, as selling bonds would reduce the money supply and potentially worsen crowding out. Option C would also reduce the money supply and may further exacerbate the effects of crowding out. Therefore, option A is the best choice to reduce the effects of crowding out.

Question 4

Sometimes during wars, government expenditures are larger than normal. To reduce the effects this spending creates on interest rates,
A) the Federal Reserve could increase the money supply by buying bonds.
B) the Federal Reserve could increase the money supply by selling bonds.
C) the Federal Reserve could decrease the money supply by buying bonds.
D) the Federal Reserve could decrease the money supply by selling bonds.

Accepted Answer

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

Question 5

If the MPC is 5/6 then the multiplier is
A) 6/5, so a $200 increase in government spending increases aggregate demand by $240.
B) 5, so a $200 increase in government spending increases aggregate supply by $1000.
C) 6, so a $200 increase in government spending increases aggregate demand by $1200.
D) 6/5, so a $200 increase in government spending increases aggregate supply by $1200.

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 6

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
A) shifts rightward by $100 billion.
B) shifts rightward by $51 billion.
C) shifts rightward by $170 billion.
D) shifts rightward by $72.8 billion.

Accepted Answer

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

Question 7

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures shifts aggregate demand
A) right by more than $100 billion.
B) right by $100 billion.
C) left by more than $100 billion.
D) left by $100 billion.

Accepted Answer

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures directly adds $100 billion to aggregate demand. It is a simple one-to-one increase. Therefore, the correct answer is B) right by $100 billion.

Question 8

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
A) left by $180 billion.
B) left by $500 billion.
C) right by $180 billion.
D) right by $400 billion.

Accepted Answer

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

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
A) $216 billion.
B) $150 billion.
C) $600 billion.
D) $480 billion.

Accepted Answer

The multiplier effect can be calculated as:

Multiplier = 1 / (1 - MPC)
Multiplier = 1 / (1 - 0.8)
Multiplier = 1 / 0.2
Multiplier = 5

Therefore, the initial increase in aggregate demand of $120 billion will eventually increase aggregate demand by:

$120 billion x 5 = $600 billion

Question 10

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
A) right by $130 billion.
B) right by $70 billion.
C) right by $50 billion.
D) right by $10 billion.

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 11

Suppose there are both multiplier and crowding out effects but without any accelerator effects. An increase in government expenditures would definitely
A) shift aggregate demand right by a larger amount than the increase in government expenditures.
B) shift aggregate demand right by the same amount as the increase in government expenditures.
C) shift aggregate demand right by a smaller amount than the increase in government expenditures.
D) Any of the above outcomes are possible.

Accepted Answer

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

Question 12

If the MPC is 0, then the multiplier is
A) 0.
B) 1.
C) infinite.
D) None of the above is correct.

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 13

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
A) left by $60 billion.
B) left by $36 billion.
C) right by $68 billion.
D) right by $36 billion.

Accepted Answer

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

Question 14

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
A) aggregate demand falls by 2 x $40 billion.
B) aggregate demand falls by 11/2 x $40 billion.
C) aggregate demand falls by 11/9 x $40 billion.
D) aggregate demand falls by 9/11 x $40 billion.

Accepted Answer

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

Question 15

Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more,
A) the smaller the MPC and the stronger the influence of income on money demand.
B) the smaller the MPC and the weaker the influence of income on money demand.
C) the larger the MPC and the stronger the influence of income on money demand.
D) the larger the MPC and the weaker the influence of income on money demand.

Accepted Answer

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

Question 16

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
A) $60 billion, but the effect would be larger if there were an investment accelerator.
B) $60 billion, but the effect would be smaller if there were an investment accelerator.
C) $45 billion, but the effect would be larger if there were an investment accelerator.
D) $45 billion, but the effect would be smaller if there were an investment accelerator.

Accepted Answer

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

Question 17

Assume the MPC is 0.72. The multiplier is
A) 4.53.
B) 1.39.
C) 2.57.
D) 3.57.

Accepted Answer

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

Question 18

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 formula is 1/(1-MPC). As the MPC approaches 1, the denominator of the formula (1-MPC) approaches zero, making the multiplier approach infinity. Therefore, the correct choice is C, infinity.

Question 19

Assuming a multiplier effect, but no crowding-out or investment-accelerator effects, a $100 billion increase in government expenditures shifts aggregate
A) demand rightward by more than $100 billion.
B) demand rightward by less than $100 billion.
C) supply leftward by more than $100 billion.
D) supply leftward by less than $100 billion.

Accepted Answer

With a multiplier effect, an increase in government expenditure will lead to an increase in aggregate demand by more than the initial $100 billion. The multiplier effect refers to the phenomenon that one person's spending becomes another person's income, which they then spend, generating further income and spending. As a result, the total increase in demand will be greater than the initial increase in government expenditure.

Question 20

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
A) left by about $30.77 billion.
B) left by about $57.1 billion.
C) right by about $57.1 billion.
D) right by about $30.77 billion.

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.

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

If the MPC is 3/5 then the multiplier is

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

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

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

If the MPC is 5/6 then the multiplier is

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

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

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

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

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

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

If the MPC is 0, then the multiplier is

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

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

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

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

Assume the MPC is 0.72. The multiplier is

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

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

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