Question 1

An increase in the MPC
A)increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
B)increases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.
C)decreases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
D)decreases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.

Accepted Answer

An increase in the MPC (marginal propensity to consume) means that consumers spend a larger proportion of any additional income they receive. This leads to a larger multiplier effect as each increase in government expenditures leads to more spending by consumers, which in turn leads to more production and more income. Therefore, an increase in the MPC would result in a larger effect on aggregate demand.

Question 2

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 3

If the MPC is 3/5 then the multiplier is
A)4, so a $100 increase in government spending increases aggregate demand by $400.
B)1.5, so a $100 increase in government spending increases output by $150.
C)2.5, so a $100 increase in government spending increases aggregate demand by $250.
D)1.67, so a $100 increase in government spending increases output by $166.67.

Accepted Answer

The multiplier is calculated as 1/(1-MPC). With an MPC of 3/5, the multiplier is 1/(1-3/5) = 1/(2/5) = 2.5. Therefore, a $100 increase in government spending increases aggregate demand by $250.

Question 4

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 (the effect of increased demand on investment) is larger than the crowding-out effect (the decrease in private spending due to increased government spending), then the overall effect is to increase output and income by a larger amount than just the increase in government spending alone. This means the multiplier is larger than one, indicating a greater impact on the economy.

Question 5

Assume the multiplier is 5 and that the crowding-out effect is $30 billion. An increase in government purchases of $20 billion will shift the aggregate-demand curve to the
A)right by $130 billion.
B)right by $70 billion.
C)right by $50 billion.
D)right by $10 billion.

Accepted Answer

The formula for calculating the total impact of an increase in government spending is:
Total Impact = Initial Increase in Spending x Multiplier
Total Impact = $20 billion x 5
Total Impact = $100 billion
However, we have to account for the crowding-out effect of $30 billion. Therefore, the net increase in aggregate demand is $70 billion ($100 billion - $30 billion). Therefore, the correct answer is B, which represents a rightward shift in the aggregate-demand curve by $70 billion.

Question 6

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

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures will shift aggregate demand to the right by the same amount, $100 billion. The increase in government spending leads to an increase in total spending in the economy, causing a ripple effect of increased output, income, and consumption, which further increases aggregate demand.

Question 7

Assume the MPC is 0.8. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the
A)left by $180 billion.
B)left by $500 billion.
C)right by $180 billion.
D)right by $400 billion.

Accepted Answer

The formula for calculating the change in equilibrium output due to a change in government spending is:
Change in output = multiplier x change in government spending
The multiplier is calculated as 1 / (1 - MPC), which in this case is 5 (1 / (1 - 0.8) = 5). Therefore, a decrease in government spending of $100 billion would result in a decrease in equilibrium output of $500 billion (5 x $100 billion). This means the aggregate demand curve would shift to the left by $500 billion. Therefore, the correct choice is B.

Question 8

If the MPC is 0, then the multiplier is
A)0.
B)1.
C)infinite.
D)None of the above is correct.

Accepted Answer

If the MPC (Marginal Propensity to Consume) is 0, it means that there is no change in consumption with a change in income. In this case, the multiplier formula would be 1/(1-MPC), which becomes 1/(1-0) = 1. Therefore, the correct answer is B. The multiplier would be 1.

Question 9

Assume the MPC is 0.625. Assume there is a multiplier effect and that the total crowding-out effect is $12 billion. An increase in government purchases of $30 billion will shift aggregate demand to the
A)left by $60 billion.
B)left by $36 billion.
C)right by $68 billion.
D)right by $36 billion.

Accepted Answer

The answer of Assume the MPC is 0.625. Assume there...

Question 10

Suppose that the MPC is 0.7, there is no investment accelerator, and there are no crowding-out effects. If government expenditures increase by $30 billion, then aggregate demand
A)shifts rightward by $100 billion.
B)shifts rightward by $51 billion.
C)shifts rightward by $170 billion.
D)shifts rightward by $72.8 billion.

Accepted Answer

The answer of Suppose that the MPC is 0.7, there...

Question 11

As the MPC gets close to 1, the value of the multiplier approaches
A)0.
B)1.
C)infinity.
D)None of the above is correct.

Accepted Answer

The multiplier is calculated as 1/(1-MPC). As the MPC gets close to 1, the denominator in the multiplier equation (1-MPC) approaches zero. Therefore the multiplier approaches infinity.

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...

Question 13

Assume the MPC is 0.72. The multiplier is
A)4.53.
B)1.39.
C)2.57.
D)3.57.

Accepted Answer

The answer of Assume the MPC is 0.72. The multiplier...

Question 14

Scenario 34-2. The following facts apply to a small, imaginary economy.
• Consumption spending is $6,720 when income is $8,000.
• Consumption spending is $7,040 when income is $8,500.
-Refer to Scenario 34-2. The marginal propensity to consume for this economy is
A)0.64.
B)0.83.
C)0.56.
D)0.840.

Accepted Answer

The answer of Scenario 34-2. The following facts apply to...

Question 15

Assume the MPC is 0.65. Assuming only the multiplier effect matters, a decrease in government purchases of $20 billion will shift the aggregate demand curve to the
A)left by about $30.77 billion.
B)left by about $57.1 billion.
C)right by about $57.1 billion.
D)right by about $30.77 billion.

Accepted Answer

The formula for the multiplier effect is 1/(1-MPC). 
Given that MPC is 0.65, the multiplier effect is 1/(1-0.65) = 2.86. 
Therefore, a decrease in government purchases of $20 billion will decrease aggregate demand by $20 billion x 2.86 = $57.1 billion. 
Since the question asked for the direction of the shift, the answer is left, as the decrease in government purchases decreases aggregate demand.

Question 16

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 answer of If the marginal propensity to consume is...

Question 17

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, government expenditures will increase aggregate demand by a multiple of the initial increase in expenditures. So, if the multiplier is 2, for example, the $100 billion increase in government expenditure will ultimately shift aggregate demand rightward by $200 billion. Therefore, the correct choice is A.

Question 18

If the MPC is 5/6 then the multiplier is
A)6/5, so a $200 increase in government spending increases aggregate demand by $240.
B)5, so a $200 increase in government spending increases aggregate supply by $1000.
C)6, so a $200 increase in government spending increases aggregate demand by $1200.
D)6/5, so a $200 increase in government spending increases aggregate supply by $1200.

Accepted Answer

The multiplier is the inverse of the MPC, so the multiplier would be 1/MPC or 1/(5/6) = 6/5. Therefore, a $200 increase in government spending would increase aggregate demand by 6/5*200 = $240.

Question 19

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 answer of If net exports fall $40 billion, the...

Question 20

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 answer of If the MPC is 0.8 and there...

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

An increase in the MPC

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

If the MPC is 3/5 then the multiplier is

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

Assume the multiplier is 5 and that the crowding-out effect is $30 billion. An increase in government purchases of $20 billion will shift the aggregate-demand curve to the

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

Assume the MPC is 0.8. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

If the MPC is 0, then the multiplier is

Assume the MPC is 0.625. Assume there is a multiplier effect and that the total crowding-out effect is $12 billion. An increase in government purchases of $30 billion will shift aggregate demand to the

Suppose that the MPC is 0.7, there is no investment accelerator, and there are no crowding-out effects. If government expenditures increase by $30 billion, then aggregate demand

As the MPC gets close to 1, the value of the multiplier approaches

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

Assume the MPC is 0.72. The multiplier is

Scenario 34-2. The following facts apply to a small, imaginary economy. • Consumption spending is $6,720 when income is $8,000. • Consumption spending is $7,040 when income is $8,500. -Refer to Scenario 34-2. The marginal propensity to consume for this economy is

Assume the MPC is 0.65. Assuming only the multiplier effect matters, a decrease in government purchases of $20 billion will shift the aggregate demand curve to the

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

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

If the MPC is 5/6 then the multiplier is

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

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