Question 1

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

Accepted Answer

The formula to calculate the change in demand is: change in demand = -1 x (1 / marginal propensity to consume). Using the given marginal propensity to consume of 4/5, the calculation is: -1 x (1 / 4/5) = -$5 billion. Therefore, a decrease in government spending of $1 billion would decrease the demand for goods and services by $5 billion.

Question 2

Other things the same, an increase in taxes shifts aggregate demand to the left. In the short run this makes output fall which makes the interest rate rise.

Accepted Answer

An increase in taxes shifts aggregate demand to the left, which in the short run can lead to a decrease in output and a decrease in the demand for money, potentially leading to a lower interest rate, not a rise.

Question 3

If the marginal propensity to consume is 6/7, then the multiplier is 7.

Accepted Answer

The multiplier is equal to 1/MPC. In this case, 1/ (6/7) = 7/6. Therefore, the multiplier is 7.

Question 4

Unemployment insurance and welfare programs work as automatic stabilizers.

Accepted Answer

Unemployment insurance and welfare programs provide financial support to individuals during times of economic hardship, which helps to stimulate demand in the economy and prevent further economic downturns. This makes them automatic stabilizers.

Question 5

If the MPC is 4/5, the multiplier is 5/4.

Accepted Answer

The multiplier is the inverse of the MPC, so if the MPC is 4/5, the multiplier is 1/(4/5) = 5/4.

Question 6

Other things equal, the higher the price level, the higher is the real wealth of households.

Accepted Answer

The higher the price level, the lower the purchasing power of a given amount of money, reducing the real value of household wealth.

Question 7

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Accepted Answer

When taxes are permanently cut, it increases people's disposable income over a longer period of time, leading to greater confidence in long-term financial stability and thus encouraging a larger increase in consumption spending. On the other hand, temporary tax cuts may lead to temporary boosts in spending, but consumers may be more hesitant to significantly increase their consumption in the short term, as they anticipate the tax rates returning to their original levels.

Question 8

Some economists, called supply-siders, argue that changes in the money supply exert a strong influence on aggregate supply.

Accepted Answer

Supply-siders believe that changes in taxes and regulations have a greater impact on aggregate supply than changes in the money supply. They emphasize the importance of incentives to investment and production rather than just the quantity of money in the economy.

Question 9

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Accepted Answer

Both the multiplier effect and the investment accelerator create a ripple effect throughout the economy, leading to further shifts in aggregate demand beyond the initial increase in government expenditures.

Question 10

An essential piece of the liquidity preference theory is the demand for money.

Accepted Answer

The demand for money is central to Keynes' liquidity preference theory, which argues that the demand for money is based on individuals' desire for liquidity and precautionary motives.

Question 11

The theory of liquidity preference is largely at odds with the basic ideas of supply and demand.

Accepted Answer

The theory of liquidity preference, proposed by John Maynard Keynes, actually incorporates the principles of supply and demand within the context of the money market, where the demand for money (liquidity preference) and the supply of money determine the interest rate.

Question 12

If the spending multiplier is 8, then the marginal propensity to consume must be 7/8.

Accepted Answer

The spending multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. Therefore, if the spending multiplier is 8, then MPC would be 1-1/8 = 7/8.

Question 13

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Accepted Answer

When the Federal Reserve wants to increase the money supply, it can lower the interest rate it pays banks on the reserves they hold, which incentivizes the banks to lend out more money. Conversely, when the Fed wants to decrease the money supply, it can raise the interest rate it pays on reserves, which encourages banks to hold onto their reserves instead of lending them out.

Question 14

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Accepted Answer

The answer of The main criticism of those who doubt...

Question 15

The multiplier is computed as MPC / (1 - MPC).

Accepted Answer

The answer of The multiplier is computed as MPC /...

Question 16

Government expenditures on capital goods such as roads could increase aggregate supply. Such effects on aggregate supply are likely to matter more in the short run than in the long run.

Accepted Answer

Government expenditures on capital goods like roads can increase aggregate supply by improving infrastructure, which enhances productivity. These effects are more significant in the long run as the benefits of improved infrastructure accumulate over time, rather than having an immediate impact in the short run.

Question 17

A significant lag for monetary policy is the time it takes to for a change in the money supply to change the economy. A significant lag for fiscal policy is the time it takes to pass legislation authorizing it.

Accepted Answer

This is because monetary policy works through the financial sector, and changes to interest rates and money supply take time to filter through the economy. Meanwhile, fiscal policy involves changes in government spending and taxation, which require legislation to be passed before they can take effect, causing a lag in implementation.

Question 18

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

Accepted Answer

Increasing the money supply or increasing government expenditures are economic policy tools used by the government to stimulate economic growth and combat economic slowdowns, including those caused by pessimism.

Question 19

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Accepted Answer

The size of the multiplier and crowding-out effects can impact the overall impact of a tax cut on aggregate demand. If the multiplier effect is large and the crowding-out effect is small, the rightward shift in aggregate demand could be greater than the size of the tax cut itself. However, if the multiplier effect is small and the crowding-out effect is large, the rightward shift in aggregate demand may be less than the size of the tax cut.

Question 20

The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.

Accepted Answer

The interest-rate effect is partially explained by the fact that a higher price level increases money demand, which in turn increases interest rates and reduces investment spending.

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