Question 1

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

Accepted Answer

An increase in government expenditures can lead to an increase in aggregate demand, which can raise firms' expectations of future sales and profits, leading to a rise in investment spending through the investment accelerator effect. However, if the increase in government spending leads to higher interest rates (due to increased demand for credit), it can also crowd out private investment spending as firms face higher borrowing costs. But since option B includes the investment accelerator, it is a better choice than options C or D.

Question 2

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

Accepted Answer

To find the multiplier, we can use the following formula: multiplier = 1/(1 - MPC), where MPC is the marginal propensity to consume. We can find MPC by taking the change in consumption over the change in income: (7040 - 6720)/(8500 - 8000) = 320/500 = 0.64. So, the multiplier is 1/(1 - 0.64) = 2.78. Therefore, the answer is C.

Question 3

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?

Accepted Answer

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

Question 4

A tax increase has

Accepted Answer

The answer of A tax increase has
...

Question 5

The multiplier effect

Accepted Answer

The multiplier effect amplifies the effects of an increase in government expenditures because it leads to increased spending and higher economic activity, which generates further spending in the economy. On the other hand, the crowding-out effect diminishes the effects of an increase in government expenditures because it can lead to higher interest rates and reduced private investment, which offsets the initial increase in government spending. Therefore, D is the best choice as it correctly identifies the opposite effects of the two concepts.

Question 6

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one- third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

Accepted Answer

The answer of Initially, the economy is in long-run equilibrium....

Question 7

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?

Accepted Answer

Both the multiplier effect and the crowding-out effect would tend to make the change in aggregate demand different from $75 billion. The multiplier effect would amplify the initial increase in government spending, leading to a larger overall increase in aggregate demand. However, the crowding-out effect would decrease the overall increase in aggregate demand by causing interest rates to rise, reducing private investment and consumption. Therefore, the actual change in aggregate demand would depend on the relative strength of these two effects.

Question 8

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

Accepted Answer

Given multiplier = 6, and there is no crowding-out effect, then the total increase in aggregate demand can be calculated as:
Total increase in aggregate demand = Multiplier x Change in government expenditure
Total increase in aggregate demand = 6 x $60 billion = $360 billion
Therefore, option C is correct.

Question 9

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

Accepted Answer

The marginal propensity to consume (MPC) is the fraction of each additional dollar of income that is spent on consumption. In this case, MPC = $800/$1000 = 0.8. The multiplier effect of an increase in income on aggregate demand is the reciprocal of the marginal propensity to save (MPS), which is the fraction of each additional dollar of income that is saved rather than spent. Since MPS + MPC = 1, MPS = 1 - MPC = 0.2. Therefore, the multiplier is 1/MPS = 1/0.2 = 5. So, an increase in income of $1,000 will lead to an increase in consumption of $800, which will in turn increase aggregate demand by $4,000 (i.e. 5 times the initial increase in income). Therefore, the best choice is B.

Question 10

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?

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 the increase in government spending can lead to higher interest rates, which in turn reduces private investment and consumption. The multiplier effect and accelerator effect both tend to amplify the initial increase in government spending, making the overall shift in aggregate demand larger.

Question 11

Tax increases

Accepted Answer

Tax increases reduce disposable income and decrease consumer spending, which leads to a leftward shift in aggregate demand. On the other hand, increases in government expenditures, such as through infrastructure projects or social programs, increase demand and shift aggregate demand to the right.

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. For this economy, an initial increase of $500 in government purchases translates into a

Accepted Answer

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

Question 13

An increase in government purchases is likely to

Accepted Answer

An increase in government purchases would lead to an increase in demand for goods and services, which could lead to an increase in interest rates if the Federal Reserve Bank raises rates to control inflation. This would increase the cost of borrowing for business firms, thus reducing investment spending by crowding it out. This option best fits the question.

Question 14

If taxes

Accepted Answer

If taxes decrease, individuals have more disposable income to spend, which leads to increased consumption. This increase in consumption leads to a rightward shift in aggregate demand.

Question 15

As real GDP falls,

Accepted Answer

The answer of As real GDP falls,
...

Question 16

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

Accepted Answer

The crowding-out effect refers to the decrease in private sector spending that occurs as a result of increased government spending. Option C represents this relationship accurately, as an increase in government purchases leads to an increase in demand for money in the economy, driving up the equilibrium interest rate and reducing the quantity of goods and services demanded. Options A and D do not accurately represent the crowding-out effect. Option B is partially correct in representing the decrease in GDP, but it incorrectly suggests that a decrease in government purchases would lead to a decrease in the equilibrium interest rate and quantity of goods and services demanded.

Question 17

A reduction in personal income taxes increases Aggregate Demand through

Accepted Answer

A reduction in personal income taxes increases the disposable income available to consumers, which leads to an increase in personal consumption. This increase in consumption leads to an increase in aggregate demand as a whole.

Question 18

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?

Accepted Answer

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

Question 19

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

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 20

An aide to a U.S. Congressman computes the effect on aggregate demand of a $20 billion tax cut. The actual increase in aggregate demand is less than the aide expected. Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand?

Accepted Answer

The answer of An aide to a U.S. Congressman computes...

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

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

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

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 tax increase has

The multiplier effect

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?

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

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

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

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

An increase in government purchases is likely to

If taxes

As real GDP falls,

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

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. In response to which of the following events could aggregate demand increase by $1,500?

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