Question 1

Scenario 34-1.Take the following information as given for a small,imaginary economy:
• When income is $10,000,consumption spending is $6,500.
• When income is $11,000,consumption spending is $7,250.
-Refer to Scenario 34-1.For this economy,an initial increase of $200 in net exports translates into a(n)

Accepted Answer

The multiplier can be calculated by taking the change in equilibrium output divided by the initial change in autonomous spending. In this case, the initial increase in net exports is $200, and the corresponding increase in equilibrium output is $800 (from $10,000 to $10,800). Therefore, the multiplier is 4. Without the crowding-out effect, this would result in a total increase in aggregate demand of $800 x 4 = $3,200. However, with the crowding-out effect, only a portion of this increase in output will translate into an increase in aggregate demand. In this case, the crowding-out effect is assumed to be 0.4, so the actual increase in aggregate demand would be $800 x 4 x (1 - 0.4) = $1,920.

Question 2

An increase in government spending initially and primarily shifts

Accepted Answer

When government spending increases, it leads to an increase in demand for goods and services, thus shifting the aggregate demand curve to the right. This is because the government is now buying more goods and services, which stimulates economic growth and encourages businesses to increase production to meet the increased demand.

Question 3

In order to simplify the equation for the multiplier to its familiar,relatively simple form,we make use of the

Accepted Answer

The fact that the multiplier effect is represented by an infinite geometric series allows us to simplify the equation for the multiplier into a relatively simple form that involves only the MPC. This is commonly known as the "simplified multiplier formula." The other assumptions or empirical evidence listed may be used in certain contexts, but they are not necessary for simplifying the multiplier equation.

Question 4

Figure 34-6.On the left-hand graph,MS represents the supply of money and MD represents the demand for money;on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs. -Refer to Figure 34-6.Suppose the multiplier is 3 and the government increases its purchases by $25 billion.Also,suppose the AD curve would shift from AD₁ to AD₂ if there were no crowding out;the AD curve actually shifts from AD₁ to AD₃ with crowding out.Finally,assume the horizontal distance between the curves AD₁ and AD₃ is $40 billion.The extent of crowding out,for any particular level of the price level,is

Accepted Answer

With a multiplier of 3, a $25 billion increase in government purchases would lead to a $75 billion increase in aggregate demand. However, due to crowding out (the increase in government purchases leading to higher interest rates, which decreases private investment and consumption), the actual increase in aggregate demand is less than $75 billion. Since the horizontal distance between the curves is $40 billion, this means that the extent of crowding out is $35 billion ($75 billion - $40 billion). Therefore, the best choice is C.

Question 5

The idea that expansionary fiscal policy has a positive affect on investment is known as

Accepted Answer

The idea that expansionary fiscal policy, in which the government increases spending or reduces taxes, will stimulate investment and economic growth is known as the investment accelerator. This theory suggests that an increase in aggregate demand, caused by government spending or tax cuts, will lead to a corresponding increase in investment spending by firms.

Question 6

Figure 34-5.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 34-5.A shift of the money-demand curve from MD₁ to MD₂ could be a result of

Accepted Answer

A shift of the money-demand curve from MD1 to MD2 could be a result of a decrease in taxes, an increase in government spending, or an increase in the price level.

Question 7

Scenario 34-1.Take the following information as given for a small,imaginary economy:
• When income is $10,000,consumption spending is $6,500.
• When income is $11,000,consumption spending is $7,250.
-Refer to Scenario 34-1.The multiplier for this economy is

Accepted Answer

The answer of Scenario 34-1.Take the following information as given...

Question 8

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

Accepted Answer

The multiplier effect causes an initial increase in government expenditures to have a larger impact on aggregate demand than just the amount of the increase itself. This is because the increase in government spending creates additional income and increases consumer spending, which in turn leads to further increases in aggregate demand. The crowding-out effect, interest-rate effect, and exchange-rate effect all have the potential to reduce the impact of government expenditure increases on aggregate demand.

Question 9

Figure 34-5.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 34-5.A shift of the money-demand curve from MD₂ to MD₁ is consistent with which of the following sets of events?

Accepted Answer

The answer of Figure 34-5.On the figure,MS represents money supply...

Question 10

Figure 34-6.On the left-hand graph,MS represents the supply of money and MD represents the demand for money;on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs. -Refer to Figure 34-6.Suppose the multiplier is 5 and the government increases its purchases by $15 billion.Also,suppose the AD curve would shift from AD₁ to AD₂ if there were no crowding out;the AD curve actually shifts from AD₁ to AD₃ with crowding out.Also,suppose the horizontal distance between the curves AD₁ and AD₃ is $55 billion.The extent of crowding out,for any particular level of the price level,is

Accepted Answer

The answer of Figure 34-6.On the left-hand graph,MS represents the...

Question 11

The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy,because it

Accepted Answer

The multiplier effect increases income, which in turn increases consumer spending. This happens because an increase in government spending or a decrease in taxes leads to increased demand for goods and services, which leads to increased production and increased employment. As more people are employed, they have more income to spend, which further increases aggregate demand. Therefore, the multiplier effect is a result of increased income and subsequent consumer spending, making option C the correct choice.

Question 12

The multiplier effect is exemplified by the multiplied impact on

Accepted Answer

The multiplier effect refers to the idea that a given increase in government purchases can have a multiplied impact on aggregate demand. This is because the increase in government spending leads to an increase in income and consumption, which in turn leads to further increases in demand and economic activity. The multiplier effect is not related to the money supply or tax revenues, and although investment can also have a multiplier effect, that is not what is being exemplified in this question.

Question 13

A decrease in government spending initially and primarily shifts

Accepted Answer

A decrease in government spending would lead to a decrease in government consumption and investment, which would lead to a decrease in aggregate demand, resulting in a shift of the aggregate demand curve to the left.

Question 14

Scenario 34-1.Take the following information as given for a small,imaginary economy:
• When income is $10,000,consumption spending is $6,500.
• When income is $11,000,consumption spending is $7,250.
-Refer to Scenario 34-1.The marginal propensity to consume for this economy is

Accepted Answer

The marginal propensity to consume (MPC) is calculated by dividing the change in consumption spending by the change in income. In this case, the change in consumption spending is $750 ($7,250-$6,500) and the change in income is $1,000 ($11,000-$10,000). Therefore, MPC is 0.75 ($750/$1,000).

Question 15

The government buys new weapons systems.The manufacturers of weapons pay their employees.The employees spend this money on goods and services.The firms from which the employees buy the goods and services pay their employees.This sequence of events illustrates

Accepted Answer

This sequence of events illustrates the multiplier effect, where one initially increased expenditure leads to further increases in spending by successive rounds of re-spending. In this case, the government's purchase of new weapons systems leads to increased employment and wages for the weapons manufacturers, who then spend this money on goods and services, thereby increasing demand and employment in other sectors of the economy.

Question 16

Suppose the multiplier has a value that exceeds 1,and there are no crowding out or investment accelerator effects.Which of the following would shift aggregate demand to the right by more than the increase in expenditures?

Accepted Answer

When the multiplier is greater than 1, any initial increase in expenditures (government, net exports, or investment) will lead to a more than proportional increase in aggregate demand, shifting it to the right.

Question 17

Which of the following events shifts aggregate demand rightward?

Accepted Answer

An increase in government expenditures directly increases aggregate demand, shifting it rightward. Changes in the price level do not shift the aggregate demand curve; they cause movement along the curve.

Question 18

The government builds a new water-treatment plant.The owner of the company that builds the plant pays her workers.The workers increase their spending.Firms from which the workers buy goods increase their output.This type of effect on spending illustrates

Accepted Answer

This is the multiplier effect, whereby an initial increase in spending leads to further increases in spending throughout the economy. Here, the government's investment in the water-treatment plant leads to increased income for the workers, who then spend more money, which in turn increases output and income for other firms.

Question 19

Figure 34-6.On the left-hand graph,MS represents the supply of money and MD represents the demand for money;on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs. -Refer to Figure 34-6.Suppose the graphs are drawn to show the effects of an increase in government purchases.If it were not for the increase in r from r₁ to r₂,then

Accepted Answer

An increase in government purchases would lead to a rightward shift in the aggregate demand curve. Without the increase in interest rates (r), there would be no crowding out, the full multiplier effect would be realized, and the AD curves would be separated by the multiplier times the change in government purchases.

Question 20

Figure 34-5.On the figure,MS represents money supply and MD represents money demand. 
-Refer to Figure 34-5.What is measured along the vertical axis of the graph?

Accepted Answer

The vertical axis of the graph measures the interest rate.

Quiz 21: The Influences of Monetary and Fiscal Policy on Aggregate Demand: How Fiscal Policy Influences Aggregate Demand