Question 1

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

Accepted Answer

The answer of Suppose an economy's marginal propensity to consume...

Question 2

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

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 3

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 graphs are drawn to show the effects of an increase in government purchases. If it were not for the increase in r from r1 to r2, then

Accepted Answer

The answer of Figure 34-6. On the left-hand graph, MS...

Question 4

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

Accepted Answer

The answer of Figure 34-6. On the left-hand graph, MS...

Question 5

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

Accepted Answer

The multiplier effect occurs when an initial increase in spending (i.e. fiscal policy, such as government spending or tax cuts) causes a chain reaction of increased spending throughout the economy, resulting in a greater overall increase in aggregate demand. This occurs because the initial increase in spending leads to an increase in income for those receiving the spending, who in turn spend more themselves. This increase in consumer spending leads to further increases in income and spending throughout the economy. Therefore, Option C is the correct answer as it states that fiscal policy increases income and thereby increases consumer spending, which is a key aspect of the multiplier effect.

Question 6

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

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 a familiar, relatively simple form. The formula for the multiplier then becomes 1/(1-MPC), where MPC is the marginal propensity to consume. This assumes that each subsequent round of spending is reduced by the MPC, which is a realistic assumption based on consumption patterns.

Question 7

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 a(n)

Accepted Answer

The multiplier for consumption spending in this economy is 1.3 (($7,250 - $6,500) / ($11,000 - $10,000)). Therefore, an initial increase of $200 in net exports would increase income by $260 (1.3 x $200). Without the crowding-out effect, this would result in a $260 increase in consumption spending, leading to an $800 (1 / (1 - 0.8)) increase in aggregate demand. With the crowding-out effect, the actual increase in aggregate demand would be lower, but not as low as the other answer choices.

Question 8

Government purchases are said to have a

Accepted Answer

Government purchases have a multiplier effect on aggregate demand because they increase the level of spending in the economy. This can lead to an increase in production and employment, as firms respond to the higher demand for goods and services. The multiplier effect occurs because the money spent by the government circulates through the economy multiple times, as individuals and firms use the income they receive to make their own purchases. This leads to an overall increase in economic activity and a shift in the aggregate demand curve to the right.

Question 9

The logic of the multiplier effect applies

Accepted Answer

The multiplier effect is a concept that applies to any change in spending on any component of GDP, whether it's from government spending, consumption, investment, or net exports. The idea is that the initial change in spending will create a ripple effect on the economy, leading to further changes in spending and ultimately a larger change in GDP than the initial change in spending would have suggested.

Question 10

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?

Accepted Answer

The answer of Figure 34-5. On the figure, MS represents...

Question 11

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

Accepted Answer

The multiplier formula is:
Multiplier = Change in GDP / Change in autonomous expenditure

Where autonomous expenditure is the level of spending that does not depend on income, such as government spending or investment.

Here, the change in GDP (income) is 1, and the multiplier is 4. So the change in autonomous expenditure must be:
Multiplier = Change in GDP / Change in autonomous expenditure
4 = 1 / Change in autonomous expenditure
Change in autonomous expenditure = 0.25

In other words, for every $1 increase in income, consumer spending will increase by $0.25. So when income is $101, consumer spending will be:
Consumer spending = Autonomous expenditure + (Multiplier * Change in income)
Consumer spending = $60 + (4 * $1)
Consumer spending = $64

Therefore, the answer is B) $60.75.

Question 12

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?

Accepted Answer

The vertical axis of the graph measures the interest rate.

Question 13

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

Accepted Answer

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

Question 14

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

Accepted Answer

The answer of Figure 34-5. On the figure, MS represents...

Question 15

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

Accepted Answer

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

Question 16

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

Accepted Answer

The answer of Scenario 34-1. Take the following information as...

Question 17

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

Accepted Answer

We can use the equation for the expenditure approach to GDP:

GDP = C + I + G + NX

where GDP is gross domestic product, C is consumer spending, I is investment, G is government spending, and NX is net exports.

Since we are given the value of the multiplier, we can use the formula:

Multiplier = 1 / (1 - MPC)

where MPC is the marginal propensity to consume. Solving for MPC, we get:

MPC = 1 - 1 / Multiplier
MPC = 1 - 1 / 2.5
MPC = 0.6

This means that for every additional dollar of income, consumers will spend 60 cents.

Using this MPC, we can calculate the change in consumption when income increases from $1000 to $1020:

Change in income = $1020 - $1000 = $20

Change in consumption = MPC x Change in income
Change in consumption = 0.6 x $20
Change in consumption = $12

So consumer spending when income is $1020 will be:

Consumer spending = Initial consumer spending + Change in consumption
Consumer spending = $800 + $12
Consumer spending = $812

Therefore, the best answer is C, which states that consumer spending will be $812 when income is $1020. The statement about the multiplier and initial increase in consumer spending is also correct: an initial increase of $100 in consumer spending would lead to a $250 increase in aggregate demand (which is the same as saying that the multiplier is 2.5).

Question 18

An increase in government spending initially and primarily shifts

Accepted Answer

An increase in government spending will lead to an increase in aggregate demand as it increases the total amount of spending in the economy. This shift is shown by a rightward shift in the AD curve.

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

Accepted Answer

The initial increase in government purchases of $25 billion would lead to an increase in AD by 3 times that amount or $75 billion. However, with crowding out, the actual increase in AD is only $35 billion ($75 billion - $40 billion horizontal distance between AD1 and AD3). Therefore, the extent of crowding out is $40 billion - $35 billion = $5 billion. However, since the initial increase in government spending was $25 billion, the percentage of crowding out is (5/25) x 100% = 20%.

Question 20

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

Accepted Answer

All of the above policy actions can shift the aggregate-demand curve. An increase in the money supply will lower interest rates, leading to increased spending and a shift to the right of the aggregate-demand curve. An increase in government spending also shifts the aggregate-demand curve to the right as it increases demand for goods and services. An increase in taxes will decrease disposable income, leading to decreased spending and a shift to the left of the aggregate-demand curve.

Quiz 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

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

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