Question 1

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 2

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

Accepted Answer

An increase in government purchases leads to an increase in aggregate demand, which can result in higher interest rates due to a higher demand for credit. This higher demand can "crowd out" private investment spending by businesses, which can lead to a decrease in long-term economic growth. It may also worsen the government deficit, but this is not necessarily a direct effect of the increase in purchases. A decrease in money demand would likely come from a decrease in interest rates, which is unlikely to occur with an increase in government purchases.

Question 3

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 predicts that an increase in government spending will lead to an increase in demand for loanable funds, which will drive up interest rates. Higher interest rates make it more expensive for firms to borrow money for investment spending, so investment spending decreases. Therefore, the correct answer is B, which states that the interest rate increases and investment spending decreases when government spending increases.

Question 4

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

Accepted Answer

The government purchases multiplier is defined as 1/(1 - MPC), where MPC is the marginal propensity to consume. This formula shows the amount by which real GDP increases in response to a one-unit increase in government purchases. The larger the MPC, the smaller the multiplier, and vice versa. Therefore, option B is the correct answer.

Question 5

Which statement best 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 an increase in government expenditures increases the demand for loanable funds, causing the interest rate to rise. The higher interest rate then reduces private investment spending, as borrowing becomes more expensive for individuals and businesses. Therefore, choice B is the correct statement explaining the crowding-out effect.

Question 6

If the multiplier is 5, what is the MPC?
A) 0.20
B) 0.50
C) 0.80
D) 1.00

Accepted Answer

The Marginal Propensity to Consume (MPC) can be calculated from the multiplier using the formula: Multiplier = 1 / (1 - MPC). Given a multiplier of 5, solving for MPC gives 0.80.

Question 7

Assuming no crowding-out, investment-accelerator, or multiplier effects, how will a $100 billion increase in government expenditures shift aggregate demand?
A) It will shift aggregate demand right by more than $100 billion.
B) It will shift aggregate demand right by $100 billion.
C) It will shift aggregate demand right by less than $100 billion.
D) It will shift aggregate demand left by more than $100 billion.

Accepted Answer

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures will directly increase aggregate demand by $100 billion. There will not be any additional shifts in aggregate demand beyond the initial increase of $100 billion. Therefore, choice B is the correct answer.

Question 8

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

The multiplier shows how much the change in government expenditures affects aggregate demand. It is calculated by dividing 1 by the marginal propensity to save (MPS) or 1/(1-MPC). If the MPC increases, MPS decreases, and the denominator in the multiplier formula becomes smaller, causing the multiplier to increase. Therefore, higher MPC increases the multiplier so that changes in government expenditures have a larger effect on aggregate demand.

Question 9

If the multiplier is 10, what is the MPC?
A) 1/9
B) 1/5
C) 4/5
D) 9/10

Accepted Answer

The multiplier formula is: 
Multiplier = 1 / (1 - MPC) 
If the multiplier is 10: 
10 = 1 / (1 - MPC) 
1 - MPC = 1/10 
MPC = 9/10

Question 10

Which term refers to the reduction in demand that results when a fiscal expansion raises the interest rate?
A) multiplier effect
B) crowding-out effect
C) accelerator effect
D) catch-up effect

Accepted Answer

The crowding-out effect refers to the reduction in demand that results when a fiscal expansion raises the interest rate. This occurs because when the government increases spending, it has to borrow more money, which increases demand for loanable funds and drives up the interest rate. As a result, private investment and consumption decrease, which reduces overall aggregate demand.

Question 11

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 12

If the MPC is 0.75 and there are no crowding-out or accelerator effects, an initial increase in AD of $100 billion will eventually shift the AD curve to the right by how much?
A) $40 billion
B) $133.33 billion
C) $250 billion
D) $400 billion

Accepted Answer

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

Question 13

Assuming the multiplier effect but no crowding-out or investment-accelerator effects, what is the effect of a $400 billion increase in government expenditures on the aggregate demand?
A) It shifts the aggregate demand right by more than $400 billion.
B) It shifts the aggregate demand right by less than $400 billion.
C) It shifts the aggregate demand left by more than $400 billion
D) It shifts the aggregate demand left by less than $400 billion.

Accepted Answer

The answer of Assuming the multiplier effect but no crowding-out...

Question 14

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

Accepted Answer

The government purchases multiplier is calculated by dividing 1 by the marginal propensity to save (MPS), which is equal to 1 - MPC. Therefore, the correct answer is D, which divides 1 by 1 - MPC.

Question 15

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) approaches 1 (or 100%), the value of the multiplier approaches infinity. This is because a change in autonomous spending (such as government spending or investment) will lead to a larger change in overall spending (GDP) due to the high consumption multiplier. A multiplier of infinity is not an actual possibility in real-world scenarios, but as the MPC gets closer to 1, the multiplier becomes increasingly large.

Question 16

Assuming the crowding-out effect but no multiplier or investment-accelerator effects, what is the effect of a $600 billion increase in government expenditures on the aggregate demand or supply?
A) It shifts the aggregate demand right by more than $600 billion.
B) It shifts the aggregate demand right by less than $600 billion.
C) It shifts the aggregate supply left by more than $600 billion.
D) It shifts the aggregate supply left by less than $600 billion.

Accepted Answer

The crowding-out effect suggests that an increase in government expenditures will lead to a decrease in private expenditures due to higher interest rates. This means that the increase in government spending will not have a fully additive effect on aggregate demand. Therefore, the shift will be less than $600 billion.

Question 17

Assume that the MPC is 0.75. What is the multiplier?
A) 0.25
B) 1.33
C) 4
D) 7.5

Accepted Answer

The answer of Assume that the MPC is 0.75. What...

Question 18

If the MPC = 3/4, what is the government purchases multiplier?
A) 1/4
B) 3/4
C) 4/3
D) 4

Accepted Answer

The government purchases multiplier is calculated as 1/(1-MPC). With an MPC of 3/4, the multiplier is 1/(1-3/4) = 1/(1/4) = 4.

Question 19

If the MPC = 0.8, what is the government purchases multiplier?
A) 0.20
B) 0.50
C) 2
D) 5

Accepted Answer

The government purchases multiplier is calculated as 1/(1-MPC). With an MPC of 0.8, the multiplier is 1/(1-0.8) = 1/0.2 = 5.

Question 20

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.

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

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

What is an effect of an increase in government purchases?

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

Which of the following defines the government purchases multiplier?

Which statement best explains the crowding-out effect?

If the multiplier is 5, what is the MPC?

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

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

If the multiplier is 10, what is the MPC?

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

If the MPC is 0, what is the multiplier?

If the MPC is 0.75 and there are no crowding-out or accelerator effects, an initial increase in AD of $100 billion will eventually shift the AD curve to the right by how much?

Assuming the multiplier effect but no crowding-out or investment-accelerator effects, what is the effect of a $400 billion increase in government expenditures on the aggregate demand?

Which of the following defines the government purchases multiplier?

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

Assuming the crowding-out effect but no multiplier or investment-accelerator effects, what is the effect of a $600 billion increase in government expenditures on the aggregate demand or supply?

Assume that the MPC is 0.75. What is the multiplier?

If the MPC = 3/4, what is the government purchases multiplier?

If the MPC = 0.8, what is the government purchases multiplier?

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