Question 1

Assuming a multiplier effect,but no crowding-out or investment-accelerator effects,a $100 billion increase in government expenditures shifts aggregate
A)demand rightward by more than $100 billion.
B)demand rightward by less than $100 billion.
C)supply leftward by more than $100 billion.
D)supply leftward by less than $100 billion.

Accepted Answer

According to the multiplier effect, an increase in government spending will lead to an increase in aggregate demand by a multiple of the initial increase. If we assume a multiplier of 1.5, for example, a $100 billion increase in government spending would result in a $150 billion increase in aggregate demand. Therefore, the correct answer is A, as the rightward shift in demand would be greater than $100 billion.

Question 2

If net exports fall $40 billion,the MPC is 9/11,and there is a multiplier effect but no crowding out and no investment accelerator,then
A)aggregate demand falls by 2 x $40 billion.
B)aggregate demand falls by 11/2 x $40 billion.
C)aggregate demand falls by 11/9 x $40 billion.
D)aggregate demand falls by 9/11 x $40 billion.

Accepted Answer

The multiplier is calculated as 1/(1-MPC), which is 11/2 in this case. Therefore, the fall in aggregate demand is the multiplier times the change in net exports, which is 11/2 x $40 billion.

Question 3

The positive feedback from aggregate demand to investment is called
A)the investment multiplier.
B)the crowding-out effect.
C)the investment accelerator.
D)the crowding-in multiplier.

Accepted Answer

The positive feedback from aggregate demand to investment is called the investment accelerator. This is when an increase in demand leads to an increase in production, which requires more investment in capital goods. This positive feedback loop can lead to higher economic growth and can be represented by the accelerator principle.

Question 4

The process of the investment accelerator involves
A)positive feedback from aggregate demand to investment.
B)negative feedback from aggregate demand to investment.
C)positive feedback from aggregate supply to investment.
D)negative feedback from aggregate supply to investment.

Accepted Answer

The investment accelerator involves positive feedback from changes in aggregate demand to changes in investment. When aggregate demand increases, businesses may see an increase in demand for their products or services and therefore may increase their investment in capital goods or expansion of production. This in turn leads to more spending and further increases in aggregate demand, creating a positive feedback loop.

Question 5

The term crowding-out effect refers to
A)the reduction in aggregate supply that results when a monetary expansion causes the interest rate to decrease.
B)the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease.
C)the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase.
D)the reduction in aggregate demand that results when a decrease in government spending or an increase in taxes causes the interest rate to increase.

Accepted Answer

The crowding-out effect occurs when increased government spending leads to higher interest rates, which then reduces private investment and consumption, thus decreasing aggregate demand.

Question 6

If the marginal propensity to consume is 0.75,and there is no investment accelerator or crowding out,a $15 billion increase in government expenditures would shift the aggregate demand curve right by
A)$60 billion,but the effect would be larger if there were an investment accelerator.
B)$60 billion,but the effect would be smaller if there were an investment accelerator.
C)$45 billion,but the effect would be larger if there were an investment accelerator.
D)$45 billion,but the effect would be smaller if there were an investment accelerator.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), which is 1/(1-0.75) = 4. Therefore, a $15 billion increase in government expenditures would shift the aggregate demand curve by 4 * $15 billion = $60 billion.

Question 7

Which of the following is an example of crowding out?
A)An increase in government spending increases interest rates,causing investment to fall.
B)A decrease in private savings increases interest rates,causing investment to fall.
C)A decrease in the money supply increases interest rates,causing investment to fall.
D)An increase in taxes increases interest rates,causing investment to fall.

Accepted Answer

Crowding out refers to a situation where an increase in government spending leads to a decrease in private investment. In this case, option A states that an increase in government spending leads to an increase in interest rates, which makes it more expensive for firms to borrow and invest. As a result, the level of investment falls, which is an example of crowding out. The other options do not involve an increase in government spending, which is a necessary condition for crowding out.

Question 8

Which of the following illustrates how the investment accelerator works?
A)An increase in government expenditures increases the interest rate so that the Burgerville chain of restaurants decides to build fewer new restaurants.
B)An increase in government expenditures increases aggregate spending so that Burgerville finds it profitable to build more new restaurants.
C)An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by Burgerville increases.
D)An increase in government expenditures decreases the interest rate so that Burgerville decides to build more new restaurants.

Accepted Answer

An increase in government expenditures increases aggregate spending, which leads to an increase in the demand for goods and services. This, in turn, leads to an increase in investment, as businesses find it profitable to expand their operations to meet the increased demand.

Question 9

Sometimes during wars,government expenditures are larger than normal.To reduce the effects this spending creates on interest rates,
A)the Federal Reserve could increase the money supply by buying bonds.
B)the Federal Reserve could increase the money supply by selling bonds.
C)the Federal Reserve could decrease the money supply by buying bonds.
D)the Federal Reserve could decrease the money supply by selling bonds.

Accepted Answer

Increasing the money supply by buying bonds can help lower interest rates, counteracting the upward pressure on rates due to increased government spending.

Question 10

A decrease in government spending
A)increases the interest rate and so investment spending increases.
B)increases the interest rate and so decreases investment spending decreases.
C)decreases the interest rate and so investment spending increases.
D)decreases the interest rate and so investment spending decreases.

Accepted Answer

A decrease in government spending reduces the demand for loanable funds, leading to a decrease in the interest rate, which encourages more investment spending.

Question 11

An increase in government spending
A)increases the interest rate and so investment spending increases.
B)increases the interest rate and so investment spending decreases.
C)decreases the interest rate and so increases investment spending increases.
D)decreases the interest rate and so investment spending decreases.

Accepted Answer

An increase in government spending leads to an increase in demand for goods and services in the economy. This increased demand can lead to an increase in the interest rates in the short run. Higher interest rates increase the cost of borrowing for firms, which can discourage them from investing. Therefore, investment spending is likely to decrease in the short run.

Question 12

Assume there is a multiplier effect,some crowding out,and no accelerator effect.An increase in government expenditures changes aggregate demand more,
A)the smaller the MPC and the stronger the influence of income on money demand.
B)the smaller the MPC and the weaker the influence of income on money demand.
C)the larger the MPC and the stronger the influence of income on money demand.
D)the larger the MPC and the weaker the influence of income on money demand.

Accepted Answer

The answer of Assume there is a multiplier effect,some crowding...

Question 13

Which of the following illustrates how the investment accelerator works?
A)An increase in government expenditures increases aggregate spending so that SnoozeBargain Co.decides to modernize its motels.
B)An increase in government expenditures increases the interest rate so that SnoozeBargain Co.decides to modernize its motels.
C)An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by SnoozeBargain Co.rises.
D)An increase in government expenditures decreases the interest rate so that SnoozeBargain Co.decides to modernize its motels.

Accepted Answer

The investment accelerator states that an increase in aggregate spending will lead to an increase in investment spending. In this case, an increase in government expenditures will lead to an increase in aggregate spending, which will lead to SnoozeBargain Co. deciding to modernize its motels.

Question 14

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

Accepted Answer

A $100 billion increase in government expenditures directly adds $100 billion to the AD (aggregate demand) as it is a component of AD. Assuming there are no other effects such as crowding-out, investment-accelerator, or multiplier effects, the shift in AD would be equal to the initial increase in government expenditures, which is $100 billion. Therefore, choice B is correct.

Question 15

If the MPC is 0.8 and there are no crowding-out or accelerator effects,then an initial increase in aggregate demand of $120 billion will eventually shift the aggregate demand curve to the right by
A)$216 billion.
B)$150 billion.
C)$600 billion.
D)$480 billion.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC). With an MPC of 0.8, the multiplier is 1/(1-0.8) = 5. Therefore, an initial increase in aggregate demand of $120 billion will eventually shift the aggregate demand curve by 5 * $120 billion = $600 billion.

Question 16

If the investment accelerator from an increase in government purchases is larger than the crowding-out effect,then
A)the multiplier is probably zero.
B)the multiplier is probably equal to one.
C)the multiplier is probably greater than one.
D)the multiplier is probably less than one.

Accepted Answer

If the investment accelerator effect is larger than the crowding-out effect, then it suggests that the overall effect of government purchases on the economy is expansionary. This means that the multiplier is greater than one, as the increase in government spending has a larger impact on output and income than the initial increase in spending.

Question 17

The change in aggregate demand that results from fiscal expansion changing the interest rate is called the
A)multiplier effect.
B)crowding-out effect.
C)accelerator effect.
D)Ricardian equivalence effect.

Accepted Answer

The change in interest rates resulting from fiscal expansion leads to a reduction in private investment, which, in turn, reduces the effect of fiscal expansion on aggregate demand. This reduction in aggregate demand resulting from the reduction of private investment is known as the crowding-out effect. The multiplier effect refers to the impact of an initial change in spending on economic activity, the accelerator effect describes the relationship between the rate of change in investment and the rate of change in aggregate demand, and Ricardian equivalence suggests that changes in government expenditure financed by borrowing have no impact on aggregate demand.

Question 18

Suppose there are both multiplier and crowding out effects but without any accelerator effects.An increase in government expenditures would
A)shift aggregate demand right by a larger amount than the increase in government expenditures.
B)shift aggregate demand right by the same amount as the increase in government expenditures.
C)shift aggregate demand right by a smaller amount than the increase in government expenditures.
D)Any of the above outcomes are possible.

Accepted Answer

The answer of Suppose there are both multiplier and crowding...

Question 19

To reduce the effects of crowding out caused by an increase in government expenditures,the Federal Reserve could
A)increase the money supply by buying bonds.
B)increase the money supply by selling bonds.
C)decrease the money supply by buying bonds.
D)increase the money supply by selling bonds

Accepted Answer

When the government increases its expenditures, it may lead to an increase in interest rates and decrease in private investment, causing crowding out. To reduce this effect, the Federal Reserve could increase the money supply by buying bonds, which would increase available funds and lower interest rates, making it easier for businesses and individuals to borrow and invest. This would help counteract the crowding out effect caused by government spending.

Question 20

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 is the phenomenon whereby an increase in government expenditures leads to an increase in interest rates, which then decreases investment spending. This is because the increase in government spending creates more competition for loans, driving up interest rates and making it more expensive for firms to borrow money for investment purposes. Therefore, option B correctly explains the crowding-out effect.

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

Assuming a multiplier effect,but no crowding-out or investment-accelerator effects,a $100 billion increase in government expenditures shifts aggregate

If net exports fall $40 billion,the MPC is 9/11,and there is a multiplier effect but no crowding out and no investment accelerator,then

The positive feedback from aggregate demand to investment is called

The process of the investment accelerator involves

The term crowding-out effect refers to

If the marginal propensity to consume is 0.75,and there is no investment accelerator or crowding out,a $15 billion increase in government expenditures would shift the aggregate demand curve right by

Which of the following is an example of crowding out?

Which of the following illustrates how the investment accelerator works?

Sometimes during wars,government expenditures are larger than normal.To reduce the effects this spending creates on interest rates,

A decrease in government spending

An increase in government spending

Assume there is a multiplier effect,some crowding out,and no accelerator effect.An increase in government expenditures changes aggregate demand more,

Which of the following illustrates how the investment accelerator works?

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

If the MPC is 0.8 and there are no crowding-out or accelerator effects,then an initial increase in aggregate demand of $120 billion will eventually shift the aggregate demand curve to the right by

If the investment accelerator from an increase in government purchases is larger than the crowding-out effect,then

The change in aggregate demand that results from fiscal expansion changing the interest rate is called the

Suppose there are both multiplier and crowding out effects but without any accelerator effects.An increase in government expenditures would

To reduce the effects of crowding out caused by an increase in government expenditures,the Federal Reserve could

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