Question 1

In a certain economy, when income is $500, consumer spending is $375. The value of the multiplier for this economy is 5. It follows that, when income is $510, consumer spending is
A)$381.67.
B)$378.
C)$383.
D)$383.33.

Accepted Answer

The answer of In a certain economy, when income is...

Question 2

The logic of the multiplier effect applies
A)only to changes in government spending.
B)to any change in spending on any component of GDP.
C)only to changes in the money supply.
D)only when the crowding-out effect is sufficiently strong.

Accepted Answer

The logic of the multiplier effect applies to any change in spending on any component of GDP, including consumption, investment, government spending, or net exports. The multiplier effect amplifies the initial change in spending through secondary effects on the economy, which leads to a larger overall increase in GDP.

Question 3

In a certain economy, when income is $1000, consumer spending is $800. The value of the multiplier for this economy is 2.5. It follows that, when income is $1020, consumer spending is
A)$816. For this economy, an initial increase of $100 in consumer spending translates into a $250 increase in aggregate demand.
B)$816. For this economy, an initial increase of $100 in consumer spending translates into a $400 increase in aggregate demand.
C)$812. For this economy, an initial increase of $100 in consumer spending translates into a $250 increase in aggregate demand.
D)$812. For this economy, an initial increase of $100 in consumer spending translates into an $800 increase in aggregate demand.

Accepted Answer

Since the multiplier for this economy is 2.5, we can find the increase in aggregate demand by multiplying the initial increase in consumer spending by the multiplier. Thus, an initial increase of $100 in consumer spending would result in a $250 increase in aggregate demand. Therefore, when income increases from $1000 to $1020, consumer spending increases by $20 which would result in a $50 increase in aggregate demand ($20 x 2.5). Thus, the new consumer spending level would be $800 + $50 = $812.

Question 4

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? A)The government cuts taxes, resulting in an increase in people's incomes. B)The government reduces government spending, resulting in a decrease in people's incomes. C)The Federal Reserve increases the supply of money, which decreases the interest rate. D)All of the above are correct.

Accepted Answer

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

Question 5

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)
A)$570 increase in aggregate demand when the crowding-out effect is taken into account.
B)$800 increase in aggregate demand when the crowding-out effect is taken into account.
C)$1,400 increase in aggregate demand in the absence of the crowding-out effect.
D)$800 increase in aggregate demand in the absence of the crowding-out effect.

Accepted Answer

The initial increase in net exports leads to an increase in aggregate demand, which is given by the formula: Change in GDP = (1/MPS + MPI + MPT + MPX) x Change in Net Exports. Here, we do not have any information about MPS (marginal propensity to save), MPI (marginal propensity to invest) or MPT (marginal propensity to tax), so we assume that they are constant. Therefore, the change in aggregate demand is simply (1/MPS + MPX) x Change in Net Exports. Here, we are given the relationship between income and consumption spending, which can be used to calculate MPS: MPS = (Change in Consumption / Change in Income) = (7,250 - 6,500) / (11,000 - 10,000) = 0.75. We are also given an initial increase in net exports of $200. Therefore, the change in aggregate demand is (1/0.75 + 1) x 200 = $800. Note that we are not given any information about the crowding-out effect, so we assume that it is absent.

Question 6

An increase in government spending initially and primarily shifts
A)aggregate demand to the right.
B)aggregate demand to the left.
C)aggregate supply to the right.
D)neither aggregate demand nor aggregate supply in either direction.

Accepted Answer

An increase in government spending means that the government is injecting more money into the economy which leads to higher demand for goods and services. As a result, aggregate demand shifts to the right.

Question 7

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 A)$15 billion. B)$40 billion. C)$35 billion. D)$95 billion.

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 8

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then A)1 + MPC + MPC ² + MPC ³ = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 1.96. B)1 + MPC + MPC ² + MPC ³ = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3. C)1 + MPC + MPC ² + MPC ³ = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3. D)1 + MPC + MPC ² + MPC ³ = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 2.5.

Accepted Answer

The answer of Suppose an economy's marginal propensity to consume...

Question 9

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is
A)$60.25.
B)$60.75.
C)$61.33.
D)$64.00.

Accepted Answer

The answer of In a certain economy, when income is...

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 A)$75 billion. B)$40 billion. C)$30 billion. D)$20 billion.

Accepted Answer

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

Question 11

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?
A)the quantity of output
B)the amount of crowding out
C)the interest rate
D)the price level

Accepted Answer

The vertical axis of the graph represents the interest rate, which is the price of borrowing money. This is shown by the intersection of the money supply (MS) and money demand (MD) curves.

Question 12

Government purchases are said to have a
A)multiplier effect on aggregate supply.
B)multiplier effect on aggregate demand.
C)liquidity-enhancing effect on aggregate supply.
D)liquidity-enhancing effect on aggregate demand.

Accepted Answer

Government purchases have a multiplier effect on aggregate demand because they directly increase the demand for goods and services in the economy, which then leads to increases in production, employment, and income. This multiplier effect can further stimulate consumption and investment, leading to even more increases in aggregate demand.

Question 13

The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it
A)reduces investment and thereby increases consumer spending.
B)increases the money supply and thereby reduces interest rates.
C)increases income and thereby increases consumer spending.
D)decreases income and thereby increases consumer spending.

Accepted Answer

The multiplier effect is the phenomenon where an initial increase in aggregate demand leads to a larger increase in real GDP. This is because the increase in aggregate demand leads to an increase in income, which then leads to an increase in consumer spending. As consumers spend more, businesses generate more revenue and can hire additional workers or invest in capital. This cycle leads to a further increase in aggregate demand, resulting in a multiplier effect that magnifies the initial impact of the fiscal policy. Therefore, the correct choice is C as it directly refers to an increase in income and subsequent increase in consumer spending.

Question 14

Which of the following policy actions shifts the aggregate-demand curve?
A)an increase in the money supply
B)an increase in taxes
C)an increase in government spending
D)All of the above are correct.

Accepted Answer

An increase in the money supply would increase spending and shift the aggregate-demand curve to the right. An increase in government spending would also increase aggregate demand and shift the curve to the right. Additionally, an increase in taxes would decrease disposable income and reduce spending, shifting the aggregate-demand curve to the left. Therefore, all of the options listed would shift the aggregate-demand curve.

Question 15

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 A)there would be no crowding out. B)the full multiplier effect of the increase in government purchases would be realized. C)the AD curves that actually apply, before and after the change in government purchases, would be separated horizontally by the distance equal to the multiplier times the change in government purchases. D)All of the above are correct.

Accepted Answer

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

Question 16

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 A)a decrease in taxes. B)an increase in government spending. C)an increase in the price level. D)All of the above are correct.

Accepted Answer

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

Question 17

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
A)0.650.
B)0.750.
C)0.650 or 0.664, depending on whether income is $10,000 or $11,000.
D)0.800.

Accepted Answer

The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income. From the given data, when income increases from $10,000 to $11,000 (a change of $1,000), consumption spending increases from $6,500 to $7,250 (a change of $750). Therefore, MPC = $750 / $1,000 = 0.750.

Question 18

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
A)2.85.
B)1.53.
C)4.00.
D)7.00.

Accepted Answer

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

Question 19

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the
A)assumption that increases in government purchases have no effect on consumer spending.
B)assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred.
C)empirical evidence that points to a value of about 3/4 for the MPC.
D)fact that the multiplier effect is represented by an infinite geometric series.

Accepted Answer

The fact that the multiplier effect is represented by an infinite geometric series allows us to simplify the equation for the multiplier to its familiar form of 1/(1-MPC) where MPC is the marginal propensity to consume. This simplification assumes that the initial increase in spending leads to a series of secondary increases as the recipients of the initial increase in spending spend their additional income, and so on.

Question 20

In a certain economy, when income is $400, consumer spending is $325. The value of the multiplier for this economy is 3.33. It follows that, when income is $450, consumer spending is
A)$360. For this economy, an initial increase of $50 in consumer spending translates into a $266.67 increase in aggregate demand.
B)$360. For this economy, an initial increase of $50 in consumer spending translates into a $166.50 increase in aggregate demand.
C)$341.67. For this economy, an initial increase of $50 in consumer spending translates into a $266.67 increase in aggregate demand.
D)$341.67. For this economy, an initial increase of $50 in consumer spending translates into a $166.25 increase in aggregate demand.

Accepted Answer

The answer of In a certain economy, when income is...

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

In a certain economy, when income is $500, consumer spending is $375. The value of the multiplier for this economy is 5. It follows that, when income is $510, consumer spending is

The logic of the multiplier effect applies

In a certain economy, when income is $1000, consumer spending is $800. The value of the multiplier for this economy is 2.5. It follows that, when income is $1020, consumer spending is

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?

An increase in government spending initially and primarily shifts

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is

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?

Government purchases are said to have a

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

Which of the following policy actions shifts the aggregate-demand curve?

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

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

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

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

In a certain economy, when income is $400, consumer spending is $325. The value of the multiplier for this economy is 3.33. It follows that, when income is $450, consumer spending is

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?

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