Question 1

Unemployment insurance and welfare programs work as automatic stabilizers.

Accepted Answer

Unemployment insurance and welfare programs provide financial assistance to individuals during times of economic hardship, which can help stimulate spending and stabilize the economy. As the unemployment rate increases, more individuals become eligible for these programs, which can provide a safety net and help prevent a further downturn. This makes them automatic stabilizers in the economy.

Question 2

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

Accepted Answer

The multiplier is equal to 1/(1-MPC), so in this case it would be 1/(1-6/7) = 7.

Question 3

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

If the marginal propensity to consume is 4/5, then for every $1 decrease in government spending, consumption will decrease by $0.8 (4/5). Using the formula for the multiplier, which is 1/(1-MPC), we get 1/(1-4/5) = 1/(1/5) = 5. Therefore, a decrease in government spending by $1 billion will lead to a total decrease in demand for goods and services by $5 billion (5 times the initial decrease in government spending).

Question 4

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 government expenditures can stimulate the economy and counteract pessimism. This approach is a form of fiscal policy.

Question 5

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 6

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 7

During recessions,unemployment insurance payments tend to rise.

Accepted Answer

During recessions, more people lose their jobs, resulting in an increase in the number of individuals eligible for unemployment insurance payments.

Question 8

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 larger than the tax cut itself. However, if the multiplier effect is small and the crowding-out effect is large, the rightward shift in aggregate demand could be smaller than the tax cut.

Question 9

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), so if the multiplier is 8, then 1/(1-MPC) = 8, solving for MPC gives MPC = 7/8.

Question 10

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

Accepted Answer

Permanent tax cuts provide households and businesses with greater certainty regarding future incomes, making them more likely to increase consumption spending in the long run. Temporary tax cuts, on the other hand, may lead to only short-term increases in consumption as households may anticipate that their incomes will fall in the future once the tax cuts expire.

Question 11

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 Fed changes the interest rate it pays to banks on their reserves, it can encourage or discourage the banks from lending or holding onto their reserves, and this can impact the overall money supply in the economy.

Question 12

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

Accepted Answer

Supply-side economics emphasizes the importance of factors such as tax policy, regulation, and incentives to production, rather than changes in the money supply, in influencing aggregate supply. Changes in the money supply are more closely associated with the Keynesian school of thought, which emphasizes the role of demand-side factors in shaping the economy.

Question 13

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

Accepted Answer

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

Question 14

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.

Question 15

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 true as there is a significant time lag between a change in the money supply (such as through open market operations) and its effect on the broader economy. Similarly, it takes time for fiscal policy changes (such as increased government spending or tax cuts) to be authorized by legislation and implemented, which can also lead to a significant time lag in their impact on the economy.

Question 16

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 amplify the impact of an initial increase in government spending, leading to a bigger shift in the aggregate-demand curve.

Question 17

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

Accepted Answer

The liquidity preference theory argues that individuals and firms have a demand for money, which is determined by their preferences for holding onto liquid assets rather than illiquid assets. This demand for money affects the overall level of interest rates in the economy, according to the theory.

Question 18

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

Accepted Answer

The formula for the multiplier is 1/MPC, which in this case would be 1/(4/5) = 1.25 or 5/4.

Question 19

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 20

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.

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