Question 1

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 2

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

The formula for calculating the impact of a change in government spending on aggregate demand is given by the formula ΔAD = ΔG × multiplier, where ΔAD is the change in aggregate demand, ΔG is the change in government spending, and multiplier is the spending multiplier. In this case, the multiplier is given as 6, and the change in government spending is $60 billion. Therefore, the change in aggregate demand is ΔAD = $60 billion × 6 = $360 billion. Hence, the correct option is C, i.e., increase by $360 billion.

Question 3

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 could lead to an increase in overall demand in the economy, which would in turn raise the prospects for future profitability and investment by businesses. This is known as the investment accelerator effect. However, if the government finances this increase in spending through borrowing, it could lead to a decrease in the amount of funding available for private investment, known as crowding out. So while crowding out could restrain investment, the investment accelerator effect would still be present. Therefore, only option B is correct.

Question 4

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 5

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 6

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. This is because when the government increases its spending, it typically needs to borrow money, which increases interest rates and reduces private investment and consumption, offsetting some of the initial increase in government spending. The multiplier effect and the accelerator effect both tend to increase the size of the shift in aggregate demand.

Question 7

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 reduce disposable income, which leads to a reduction in consumer spending, and thus a decrease in aggregate demand. Increases in government expenditures, on the other hand, increase aggregate demand by directly increasing spending in the economy. Therefore, tax increases shift aggregate demand left, while increases in government expenditures shift aggregate demand right.

Question 8

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, which leads to an increase in consumption. This increase in consumption causes an increase in aggregate demand, shifting it rightward.

Question 9

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 can influence the change in aggregate demand when the government increases its spending. The multiplier effect results in an increase in aggregate demand that is greater than the initial increase in government spending, while the crowding-out effect results in a decrease in aggregate demand due to a decrease in private investment caused by the increase in government borrowing. Therefore, both effects can cause the change in aggregate demand to be different from the initial increase in government spending.

Question 10

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 11

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 increase aggregate demand which may lead to an increase in interest rates and reduction of money demand. As the government borrows more money, it may reduce the amount of funds available for private investment, leading to the crowding out of investment spending by business firms.

Question 12

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

To find the multiplier:

Multiplier = 1/(1-MPC)

where MPC is the marginal propensity to consume.

MPC can be found by taking the change in consumption spending and dividing it by the change in income:

MPC = (7,040-6,720)/(8,500-8,000) = 0.32

Plugging this value into the multiplier equation, we get:

Multiplier = 1/(1-0.32) = 2.78

Therefore, the multiplier for this economy is 2.78.

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. 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 14

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 refers to the increase in aggregate demand (and thus GDP) resulting from an initial increase in government expenditures. As the money circulates through the economy, it stimulates spending and employment, leading to further increases in output. The crowding-out effect occurs when the government borrows money to finance its expenditures, which can cause interest rates to rise and therefore reduce private investment. Thus, the crowding-out effect diminishes the effects of an increase in government expenditures, while the multiplier effect amplifies the effects.

Question 15

Which of the following sequences best represents the crowding-out effect?
A) government purchases ↑ ⇒ GDP ↑ ⇒ supply of money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
B) government purchases ↓ ⇒ GDP ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↓
C) government purchases ↑ ⇒ GDP ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
D) taxes ↑ ⇒ GDP ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓

Accepted Answer

The crowding-out effect occurs when government spending increases, which leads to an increase in the demand for money. This increase in demand for money then leads to an increase in the equilibrium interest rate. The higher interest rate reduces the quantity of goods and services demanded, which is represented by the decrease in GDP. Therefore, the best sequence that represents the crowding-out effect is government purchases increasing (↑) leading to an increase in GDP (↑), which increases the demand for money (↑), and in turn increases the equilibrium interest rate (↑), and finally decreases the quantity of goods and services demanded (↓). Option C represents this sequence.

Question 16

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 17

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 1.25
D) 0.8 and the multiplier is 8.

Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption expenditures divided by the change in income. In this case, MPC = $800/$1000 = 0.8. The multiplier is calculated as 1/(1-MPC), so the multiplier is 1/(1-0.8) = 5. Therefore, the correct choice is B.

Question 18

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 which they can use to increase their personal consumption. This increase in consumer spending will lead to an increase in Aggregate Demand. An increase in investment spending or national/private savings may also have some positive effects on Aggregate Demand in the long run, but in the short run, personal consumption is the most directly affected by a reduction in income taxes.

Question 19

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 20

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

An increase in the MPC (marginal propensity to consume) means that households are spending more out of each additional dollar of disposable income. This leads to a larger multiplier effect, as each government expenditure will have a larger ripple effect throughout the economy. Therefore, the answer is A, which states that an increase in the MPC increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.

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

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

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

As real GDP falls,

A tax increase has

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?

Tax increases

If taxes

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?

An increase in government purchases is likely to

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

Which of the following sequences best represents the crowding-out effect?

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

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

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 marginal propensity to consume for this economy is

An increase in the MPC