Question 1

The money demand curve shifts to the right if there is _____, causing the equilibrium interest rate to _____.

Accepted Answer

An increase in the price level increases the demand for money as people need more money to purchase goods and services at higher prices. This shift to the right in the money demand curve causes the equilibrium interest rate to rise as the price of borrowing money increases with higher demand.

Question 2

Supply-side economists focus on:

Accepted Answer

Supply-side economists focus on how tax-policy affects the incentives to work, which in turn affects aggregate supply. They do not focus on how fiscal policy affects aggregate demand, which is the focus of demand-side economists.

Question 3

The two macroeconomic effects that make the size of the shift in aggregate demand differ from the change in government purchases are:

Accepted Answer

The multiplier effect occurs when government spending increases, leading to increased consumer spending and increased aggregate demand, which in turn leads to increased production and employment. The crowding-out effect occurs when government spending increases, leading to increased interest rates and decreased private investment, which in turn leads to decreased production and employment. These two effects together make the size of the shift in aggregate demand differ from the change in government purchases.

Question 4

If MPC = 0.9, then the government-purchases multiplier is:

Accepted Answer

The government-purchases multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Substituting 0.9 for MPC, we get 1/(1-0.9) = 1/0.1 = 10. Therefore, the answer is D) 10.

Question 5

Most economists believe that a cut in tax rates:

Accepted Answer

Most economists believe that a cut in tax rates will have only a small effect on the aggregate-supply curve. This is because the relationship between tax rates and aggregate supply is not straightforward and depends on a variety of factors, including the overall health of the economy, the specific tax being cut, and the level of government spending. The other options (A and B) are not supported by mainstream economic theory and research.

Question 6

Assuming that the crowding-out effect is $100 billion and the multiplier effect of an increase in government purchases is $120 billion, then the total effect on aggregate demand will be:

Accepted Answer

The total effect on aggregate demand will be the sum of the crowding-out effect and the multiplier effect. 
Total effect = crowding-out effect + multiplier effect
Total effect = $100 billion + $120 billion
Total effect = $220 billion
Since the multiplier effect is larger than the crowding-out effect, the total effect will be a net increase in aggregate demand of $220 billion. Thus, the best choice is option C (a $20 billion increase).

Question 7

Suppose government purchases increase by $200 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.75.What is the total effect of this increase in government purchases?

Accepted Answer

The total effect of the increase in government purchases can be calculated using the multiplier effect formula: Multiplier = 1 / (1 - MPC), where MPC is the marginal propensity to consume. Here, MPC = 0.75, so the multiplier = 1 / (1 - 0.75) = 4. The total effect = government purchases increase * multiplier = $200 billion * 4 = $800 billion.

Question 8

An increase in money supply shifts the money supply curve to the _____, _____the equilibrium interest rate in the money market.

Accepted Answer

The answer of An increase in money supply shifts the...

Question 9

The money-demand curve is downward-sloping because:

Accepted Answer

As the interest rate falls, the opportunity cost of holding money decreases, making people willing to hold more money. This results in a higher demand for money and a downward-sloping money-demand curve.

Question 10

The positive feedback from demand to investment is called:

Accepted Answer

The positive feedback from demand to investment is known as the investment accelerator, which states that an increase in demand will lead to a proportionately larger increase in investment. Choice A is incorrect because the investment multiplier refers to the effect a change in investment has on total output. Choices C and D are incorrect because the terms "multiplier" and "accelerator" are not used together in economics.

Question 11

The government-purchases multiplier is defined as:

Accepted Answer

The government-purchases multiplier is calculated as 1/(1-MPC). This is because an increase in government purchases leads to an increase in income, which in turn leads to an increase in consumption spending. The MPC (marginal propensity to consume) measures the increase in consumption spending for every additional dollar of income. Therefore, the multiplier is the reciprocal of the fraction that represents the portion of income that is not consumed (1-MPC), which is why the correct answer is D.

Question 12

Which of the following policies would Keynes have supported when the economy is experiencing unemployment?

Accepted Answer

Keynes believed in the use of fiscal policies to stimulate the economy during times of unemployment. An open-market purchase by the central bank would increase the money supply and can lead to lower interest rates, which stimulates borrowing and investment. A reduction in tax rates would increase disposable income and encourage consumption and investment. An increase in government purchases would increase the aggregate demand in the economy and can create jobs. Therefore, Keynes would have supported all of the above policies during times of unemployment.

Question 13

The notion that when the government increases its purchases of aeroplanes, the owners and employees of the aeroplane manufacturing companies will also purchase more as their incomes rise, and hence total purchases will increase by more than the initial change in government purchases, is known as the:

Accepted Answer

The scenario described is an example of the multiplier effect, which suggests that a change in autonomous spending (like government purchases) can have a larger impact on a country's total output and income due to the resulting increase in spending by those who receive the increased income.

Question 14

When the government reduces taxes, households' take-home pay:

Accepted Answer

When the government reduces taxes, households' take-home pay increases. With the increased income, households have the option to either save more or consume more. If households choose to consume more, it will lead to an increase in consumption. Additionally, households can also choose to save more, which increases their overall savings. Therefore, households' take-home pay increases, households' saving increases and households' consumption increases.

Question 15

Economists agree that:

Accepted Answer

While some economists may argue for the active use of monetary or fiscal policy to stabilize the economy, there is broader consensus that fiscal policy can be used to shift the aggregate-demand curve. This involves using government spending and taxation to directly influence consumer and business spending, and can be effective in boosting economic growth during a recession or slowing down an overheating economy. Monetary policy, on the other hand, involves regulating the money supply, interest rates, and credit availability through the actions of a central bank, and may be less effective in certain situations.

Question 16

An increase in government purchases of $100 billion will shift the aggregate-demand curve to the:

Accepted Answer

An increase in government purchases will directly add to aggregate demand by the same amount, so the AD curve will shift to the right by $100 billion or more. This is because the multiplier effect may amplify the impact of the initial increase in government spending. Therefore, choices A and B are incorrect because the AD curve will not shift to the left. Choice C is incorrect because the AD curve will shift only by the same amount as the increase in government purchases.

Question 17

The RBA can stimulate the economy by _____, all of which shifts the aggregate demand to the _____.

Accepted Answer

Increasing the money supply means there is more money available for spending, which increases consumption and investment, and thus increases aggregate demand. Shifting aggregate demand to the right means there is higher demand for goods and services, leading to increased economic activity and growth.

Question 18

For a given fixed price level, an increase in the money supply will lead to:

Accepted Answer

An increase in the money supply will lower interest rates because there is now more money in circulation to lend out, causing lenders to lower the interest rates they charge. This will lead to an increase in the quantity of goods and services demanded, as individuals and firms are more likely to borrow and spend when interest rates are low. Therefore, option C is the correct choice.

Question 19

Fiscal policy refers to the idea that changes in:

Accepted Answer

Fiscal policy is related to changes in government purchases and taxing policy that can affect aggregate demand. The other options are related to other economic policies - monetary policy and exchange rate policy.

Question 20

Assume that the MPC is 0.5.A $100-billion cut in taxes will shift the aggregate-demand curve to the:

Accepted Answer

The answer of Assume that the MPC is 0.5.A $100-billion...

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

The money demand curve shifts to the right if there is _, causing the equilibrium interest rate to _.