Question 1

If the MPC = 5/6,what is the government purchases multiplier?
A)1/6
B)5/6
C)6/5
D)6

Accepted Answer

The answer of If the MPC = 5/6,what is the...

Question 2

Assuming the multiplier effect but no crowding-out or investment-accelerator effects,what is the effect of a $300 billion increase in government expenditures on the aggregate demand?
A)It shifts the aggregate demand right by more than $300 billion.
B)It shifts the aggregate demand right by less than $300 billion.
C)It shifts the aggregate demand left by more than $300 billion
D)It shifts the aggregate demand left by less than $300 billion.

Accepted Answer

According to the multiplier effect, an increase in government expenditures will increase the income and spending of consumers and businesses, which will further increase aggregate demand. If there are no crowding-out or investment-accelerator effects, the increase in government expenditures will be multiplied through the economy, resulting in a larger increase in aggregate demand. Therefore, the aggregate demand will shift right by more than $300 billion.

Question 3

Which of the following defines the government purchases multiplier?
A)1/MPC
B)1/(1 - MPC)
C)MPC/(1 - MPC)
D)(1 - MPC)/MPC

Accepted Answer

The government purchases multiplier is the change in equilibrium GDP resulting from a change in government purchases. It is calculated as the initial change in government purchases multiplied by the expenditure multiplier. The expenditure multiplier is 1/(1-MPC) where MPC is the marginal propensity to consume. Therefore, the government purchases multiplier is 1/(1-MPC).

Question 4

Which of the following is an effect of an increase in government purchases?
A)It decreases interest rates.
B)It results in a net decrease in aggregate demand.
C)It crowds out investment spending by business.
D)It decreases money demand.

Accepted Answer

An increase in government purchases can lead to a decrease in investment spending by business, as the government is taking up more resources and competing for them with the private sector. This is known as crowding out. Option A is incorrect as an increase in government purchases would likely lead to an increase in interest rates due to increased demand for borrowing. Option B is incorrect as an increase in government purchases typically increases aggregate demand. Option D is incorrect as an increase in government purchases would likely increase money demand due to increased economic activity.

Question 5

If the MPC is 0,what is the multiplier?
A)0
B)1
C)10
D)100

Accepted Answer

The multiplier is defined as 1/MPC, so if MPC is 0, then the denominator of 1/MPC is 0, which is undefined. Therefore, the multiplier does not exist and the answer is B) 1, indicating that there is no multiplier effect.

Question 6

Assume that the MPC is 0.8.What is the multiplier?
A).20
B).25
C)5
D)8

Accepted Answer

The multiplier is calculated using the formula: Multiplier = 1 / (1 - MPC). Substituting 0.8 for MPC, we get Multiplier = 1 / (1 - 0.8) = 1 / 0.2 = 5. Therefore, the correct answer is C)5.

Question 7

Which of the following defines the government purchases multiplier?
A)MPC
B)1 - MPC
C)1/MPC
D)1/(1 - MPC)

Accepted Answer

The government purchases multiplier is defined as 1/(1 - MPC), where MPC is the marginal propensity to consume. This measures the change in aggregate demand that results from a change in government purchases, accounting for the subsequent rounds of spending and income generation as money flows through the economy. Thus, a higher MPC would result in a smaller multiplier, meaning that a given increase in government purchases would have a relatively smaller impact on overall output and employment.

Question 8

Assuming the crowding-out effect but no multiplier or investment-accelerator effects,what is the effect of a $500 billion increase in government expenditures on the aggregate demand or supply?
A)It shifts the aggregate demand right by more than $500 billion.
B)It shifts the aggregate demand right by less than $500 billion.
C)It shifts the aggregate supply left by more than $500 billion.
D)It shifts the aggregate supply left by less than $500 billion.

Accepted Answer

Assuming the crowding-out effect, a $500 billion increase in government expenditures will lead to an increase in interest rates, which in turn leads to a decrease in private investment and consumption, partially offsetting the increase in government spending. Therefore, the shift in aggregate demand will be less than $500 billion.

Question 9

If the MPC = 0.9,what is the government purchases multiplier?
A)0.10
B)1
C)1.11
D)10

Accepted Answer

The answer of If the MPC = 0.9,what is the...

Question 10

If there is crowding out,which of the following might decrease as government expenditures increase?
A)the overall change in real GDP
B)the demand for money curve
C)interest rates
D)the demand for capital goods

Accepted Answer

Crowding out occurs when increased government spending leads to higher interest rates, which in turn reduces investment spending by businesses on capital goods. As the government borrows more to finance its spending, it competes with the private sector for available funds in the financial markets, leading to higher interest rates. This makes borrowing more expensive for businesses, which can reduce their investment in capital goods.

Question 11

According to the crowding-out effect,how does a decrease in government spending affect the interest rate and investment spending?
A)It increases the interest rate and so increases investment spending.
B)It increases the interest rate and so decreases investment spending.
C)It decreases the interest rate and so increases investment spending.
D)It decreases the interest rate and so decreases investment spending.

Accepted Answer

A decrease in government spending reduces the demand for loanable funds, which leads to a decrease in the interest rate. Lower interest rates make borrowing cheaper, which encourages more investment spending.

Question 12

How does the multiplier change when the MPC increases,and what is the effect on aggregate demand?
A)Higher MPC increases the multiplier so that changes in government expenditures have a larger effect on aggregate demand.
B)Higher MPC increases the multiplier so that changes in government expenditures have a smaller effect on aggregate demand.
C)Higher MPC decreases the multiplier so that changes in government expenditures have a larger effect on aggregate demand.
D)Higher MPC decreases the multiplier so that changes in government expenditures have a smaller effect on aggregate demand.

Accepted Answer

When the MPC (Marginal Propensity to Consume) increases, it means that people are spending more of their income instead of saving it. This leads to a higher multiplier effect, as each dollar of spending leads to more rounds of spending and income generation in the economy. Hence, a higher MPC increases the effectiveness of government expenditures in stimulating aggregate demand.

Question 13

Which of the following terms refers to the reduction in demand that results when a fiscal expansion raises the interest rate?
A)the multiplier effect
B)the crowding-out effect
C)the accelerator effect
D)the Ricardian equivalence effect

Accepted Answer

The crowding-out effect refers to the reduction in demand that occurs when government spending increases, causing interest rates to rise and private investment to decrease. This occurs because as the government competes with private borrowers for funds in the financial market, lenders raise interest rates to compensate for the increased risk. As a result, private investment becomes more expensive, and individuals and firms are less likely to borrow and spend.

Question 14

As the MPC gets close to 1,what does the value of the multiplier approach?
A)0
B)1
C)10
D)infinity

Accepted Answer

As the MPC (marginal propensity to consume) gets close to 1, the value of the multiplier approaches infinity. This is because as people consume more, it leads to an increase in aggregate demand, which leads to producers increasing production, which leads to further increases in income and consumption. This cycle continues and leads to a large increase in overall spending and GDP.

Question 15

According to the crowding-out effect,how do the interest rate and investment spending change when government spending increases?
A)The interest rate and investment spending both increase.
B)The interest rate increases and investment spending decreases.
C)The interest rate decreases and investment spending increases.
D)The interest rate and investment spending both decrease.

Accepted Answer

The crowding-out effect suggests that when government spending increases, it leads to an increase in the demand for loanable funds, causing the interest rates to rise. The rise in interest rates makes borrowing more expensive, so businesses reduce their investment spending, leading to a decrease in investment spending.

Question 16

Assuming no crowding-out,investment-accelerator,or multiplier effects,how will a $200 billion increase in government expenditures shift aggregate demand?
A)It will shift aggregate demand right by more than $200 billion.
B)It will shift aggregate demand right by $200 billion.
C)It will shift aggregate demand right by less than $200 billion.
D)It will shift aggregate demand left by more than $200 billion.

Accepted Answer

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $200 billion increase in government expenditures will directly add $200 billion to aggregate demand. Therefore, it will shift aggregate demand right by $200 billion.

Question 17

If the multiplier is 4,what is the MPC?
A)0.25
B)0.50
C)0.75
D)1.00

Accepted Answer

The multiplier (k) is calculated as 1/(1-MPC). If the multiplier is 4, then 1/(1-MPC) = 4. Solving for MPC gives MPC = 0.75.

Question 18

If the MPC is 0.75 and there are no crowding-out or accelerator effects,an initial increase in AD of $200 billion will eventually shift the AD curve to the right by how much?
A)$80 billion
B)$133.33 billion
C)$150 billion
D)$800 billion

Accepted Answer

The answer of If the MPC is 0.75 and there...

Question 19

Which of the following correctly explains the crowding-out effect?
A)An increase in government expenditures decreases the interest rate and so increases investment spending.
B)An increase in government expenditures increases the interest rate and so reduces investment spending.
C)A decrease in government expenditures increases the interest rate and so increases investment spending.
D)A decrease in government expenditures decreases the interest rate and so reduces investment spending.

Accepted Answer

The crowding-out effect occurs when government borrowing to finance an increase in expenditures raises interest rates, which in turn reduces investment spending by firms and households. This happens because the increased demand for loanable funds from the government leaves less funds available for private investment. Therefore, an increase in government expenditure increases the interest rate and reduces investment spending, as stated in choice B.

Question 20

If the multiplier is 6,what is the MPC?
A)1/6
B)1/2
C)4/5
D)5/6

Accepted Answer

The answer of If the multiplier is 6,what is the...

Quiz 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand

If the MPC = 5/6,what is the government purchases multiplier?

Assuming the multiplier effect but no crowding-out or investment-accelerator effects,what is the effect of a $300 billion increase in government expenditures on the aggregate demand?

Which of the following defines the government purchases multiplier?

Which of the following is an effect of an increase in government purchases?

If the MPC is 0,what is the multiplier?

Assume that the MPC is 0.8.What is the multiplier?

Which of the following defines the government purchases multiplier?

Assuming the crowding-out effect but no multiplier or investment-accelerator effects,what is the effect of a $500 billion increase in government expenditures on the aggregate demand or supply?

If the MPC = 0.9,what is the government purchases multiplier?

If there is crowding out,which of the following might decrease as government expenditures increase?

According to the crowding-out effect,how does a decrease in government spending affect the interest rate and investment spending?

How does the multiplier change when the MPC increases,and what is the effect on aggregate demand?

Which of the following terms refers to the reduction in demand that results when a fiscal expansion raises the interest rate?

As the MPC gets close to 1,what does the value of the multiplier approach?

According to the crowding-out effect,how do the interest rate and investment spending change when government spending increases?

Assuming no crowding-out,investment-accelerator,or multiplier effects,how will a $200 billion increase in government expenditures shift aggregate demand?

If the multiplier is 4,what is the MPC?

If the MPC is 0.75 and there are no crowding-out or accelerator effects,an initial increase in AD of $200 billion will eventually shift the AD curve to the right by how much?

Which of the following correctly explains the crowding-out effect?

If the multiplier is 6,what is the MPC?