Question 1

If the MPC is 5/6 then the multiplier is

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 2

If the MPC is 3/5 then the multiplier is

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 3

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

Accepted Answer

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

Question 4

An increase in the MPC

Accepted Answer

An increase in the MPC (marginal propensity to consume) means that individuals are more likely to spend additional income, rather than save it. This increases the multiplier effect, meaning that a change in government expenditures will have a larger effect on aggregate demand. Therefore, an increase in the MPC would lead to choice A - an increase in the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.

Question 5

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

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.

Question 6

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

Accepted Answer

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

Question 7

Assume the MPC is 0.72. The multiplier is

Accepted Answer

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

Question 8

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

Accepted Answer

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

Question 9

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

Accepted Answer

Using the formula for the multiplier, we can calculate the total increase in aggregate demand as:
Multiplier x Change in Government Purchases = Total Increase in Aggregate Demand

5 x $20 billion = $100 billion increase in aggregate demand

However, we must also consider the crowding-out effect, which reduces the total increase in aggregate demand. In this case, the crowding-out effect is $30 billion.

Therefore, the net increase in aggregate demand is:
$100 billion - $30 billion = $70 billion

This means that the aggregate-demand curve will shift to the right by $70 billion. Hence, the correct answer is choice B.

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. The marginal propensity to consume for this economy is

Accepted Answer

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

Question 11

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

Accepted Answer

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

Question 12

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

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. Therefore, the answer is B, as the shift is right by $100 billion.

Question 13

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

Accepted Answer

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

Question 14

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

Accepted Answer

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

Question 15

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

Accepted Answer

The multiplier effect can be calculated using the formula 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, the multiplier is 1/(1-0.8) = 5. Therefore, an initial increase in aggregate demand of $120 billion will eventually increase aggregate demand by 5 times that amount, or $600 billion.

Question 16

If the MPC is 0, then the multiplier is

Accepted Answer

The multiplier is equal to 1/(1-MPC). If MPC is 0, then 1-MPC is 1, which means the multiplier is 1/(1-0)=1. Therefore, the correct answer is B) 1.

Question 17

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

Accepted Answer

If the investment accelerator effect is greater than the crowding-out effect, it means that the increase in government purchases has a larger impact on private investment than the decrease in private investment due to higher interest rates caused by the increased demand for loanable funds by the government. This leads to a larger overall increase in aggregate demand, resulting in a larger multiplier effect. Therefore, the multiplier is probably greater than one.

Question 18

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

Accepted Answer

The multiplier is the ratio of the change in equilibrium output to the change in autonomous expenditure. It is calculated as 1/(1-MPC). As MPC approaches 1, the denominator of the multiplier approaches 0. Therefore, the value of the multiplier approaches infinity as MPC approaches 1.

Question 19

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

Accepted Answer

With a multiplier effect, the initial increase in government expenditures will lead to an increase in income and therefore an increase in consumption. This increase in consumption will lead to further increases in income and consumption, leading to a larger overall increase in aggregate demand than the initial $100 billion increase in government expenditures. Therefore, the shift in aggregate demand will be rightward by more than $100 billion.

Question 20

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

Accepted Answer

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

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