Quiz 536

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Quiz 536

Related: Economics, Microeconomics

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Quiz 536

1. In the long run, fiscal policy influences
a. saving, investment, and growth; in the short run, fiscal policy primarily influences technology and the production function.
b. saving, investment, and growth; in the short run, fiscal policy primarily influences the aggregate demand for goods and services.
c. technology and the production function; in the short run, fiscal policy primarily influences saving, investment, and growth.
d. the aggregate demand for goods and services; in the short run, fiscal policy primarily influences technology and the production function.

2. Fiscal policy refers to the idea that aggregate demand is affected by changes in
a. the money supply.
b. government spending and taxes.
c. trade policy.
d. All of the above are correct.

3. Which of the following is an example of an increase in government purchases?
a. The government builds new roads.
b. The Federal Reserve purchases government bonds.
c. The government decreases personal income taxes.
d. The government increases unemployment insurance benefit payments.

Figure 34-8

4. Refer to Figure 34-8. An increase in government purchases will
a. shift aggregate demand from AD1 to AD2.
b. shift aggregate demand from AD1 to AD3.
c. cause movement from point A to point B along AD1.
d. have no effect on aggregate demand.

5. Refer to Figure 34-8. An increase in taxes will
a. shift aggregate demand from AD1 to AD2.
b. shift aggregate demand from AD1 to AD3.
c. cause movement from point A to point B along AD1.
d. have no effect on aggregate demand.

6. The marginal propensity to consume (MPC) is defined as the fraction of
a. extra income that a household consumes rather than saves.
b. extra income that a household either consumes or saves.
c. total income that a household consumes rather than saves.
d. total income that a household either consumes or saves.

7. The multiplier for changes in government spending is calculated as
a. 1/(1+MPC).
b. (1 – MPC)/MPC.
c. 1/MPC.
d. 1/(1 – MPC).

8. If the MPC = 4/5, then the government purchases multiplier is
a. 5/4.
b. 4/5.
c. 5.
d. 20.

9. If the MPC = 0.75, then the government purchases multiplier is about
a. 1.33.
b. 7.
c. 4.
d. 3.

10. If the multiplier is 3, then the MPC is
a. 1/3.
b. 3/4.
c. 4/3.
d. 2/3.

11. If the multiplier is 6, then the MPC is
a. 0.16.
b. 0.83.
c. 0.71.
d. 0.86.

12. If the multiplier is 5.25, then the MPC is
a. 0.19.
b. 0.68.
c. 0.81.
d. 0.84.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.

Scenario 34-1. Take the following information as given for a small, imaginary economy:
β€’ When income is $10,000, consumption spending is $6,500.
β€’ When income is $11,000, consumption spending is $7,250.

23. 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.

24. Refer to Scenario 34-1. The multiplier for this economy is
a. 2.85.
b. 1.53.
c. 4.00.
d. 7.00.

25. 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.

Figure 34-5. On the figure, MS represents money supply and MD represents money demand.

26. 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

27. 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.

28. 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.

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.

29. 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.

30. 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.

31. 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.

32. 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.

33. A decrease 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.

34. Which of the following events shifts aggregate demand rightward?
a. an increase in government expenditures or a decrease in the price level
b. a decrease in government expenditures or an increase in the price level
c. an increase in government expenditures, but not a change in the price level
d. a decrease in the price level, but not an increase in government expenditures

35. Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?
a. the crowding-out effect
b. the multiplier effect
c. the exchange-rate effect
d. the interest-rate effect

36. The multiplier effect is exemplified by the multiplied impact on
a. the money supply of a given increase in government purchases.
b. tax revenues of a given increase in government purchases.
c. investment of a given increase in interest rates.
d. aggregate demand of a given increase in government purchases.

37. Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures?
a. an increase in government expenditures
b. an increase in net exports
c. an increase in investment spending
d. All of the above are correct.

38. The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates
a. the multiplier effect.
b. the crowding-out effect.
c. the Fisher effect.
d. the wealth effect.

39. The idea that expansionary fiscal policy has a positive affect on investment is known as
a. monetary policy.
b. crowding out.
c. the investment accelerator.
d. the multiplier.

40. The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates
a. the accelerator effect.
b. the multiplier effect.
c. the chain effect.
d. the bandwagon effect.

41. 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.

42. 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.

43. 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.

44. 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.

45. 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.

46. 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.

47. 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.

48. 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.

49. 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.

50. 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.

51. 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.

52. 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.

53. 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.

54. 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.

55. 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.

56. 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.

57. 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.

58. 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.

59. 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.

60. 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.

61. 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.

62. Assume the MPC is 0.72. The multiplier is
a. 4.53.
b. 1.39.
c. 2.57.
d. 3.57.

63. 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.

64. 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.

65. 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.

66. 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.

67. 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.

68. 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.

69. If the MPC is 0, then the multiplier is
a. 0.
b. 1.
c. infinite.
d. None of the above is correct.

70. 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.

71. 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.

Scenario 34-2. The following facts apply to a small, imaginary economy.
β€’ Consumption spending is $6,720 when income is $8,000.
β€’ Consumption spending is $7,040 when income is $8,500.

72. 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.

73. Refer to Scenario 34-2. The multiplier for this economy is
a. 1.31.
b. 6.25.
c. 2.78.
d. 2.27.

74. Refer to Scenario 34-2. For this economy, an initial increase of $500 in government purchases translates into a
a. $1,388.89 increase in aggregate demand in the absence of the crowding-out effect.
b. $3,125.00 increase in aggregate demand in the absence of the crowding-out effect.
c. $1,135 increase in aggregate demand when the crowding-out effect is taken into account.
d. $3,125.00 increase in aggregate demand when the crowding-out effect is taken into account.

75. Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500?
a. A stock-market boom stimulates consumer spending by $300, and there is an operative crowding-out effect.
b. A stock-market boom stimulates consumer spending by $550, and there is a small operative crowding-out effect.
c. An economic boom overseas increases the demand for U.S. net exports by $550, and there is no crowding-out effect.
d. An economic boom overseas increases the demand for U.S. net exports by $300, and there is no crowding-out effect.

76. Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500?
a. A stock-market boom increases households’ wealth by $500, and there is an operative crowding-out effect.
b. A stock-market boom increases households’ wealth by $575, and there is an operative crowding-out effect.
c. An economic boom overseas increases the demand for U.S. net exports by $600, and there is no crowding-out effect.
d. Aggregate demand could increase by $1,500 in response to any of these events.

77. An increase in government purchases is likely to
a. decrease interest rates.
b. reduce money demand.
c. crowd out investment spending by business firms.
d. All of the above are correct.

78. The multiplier effect
a. and the crowding-out effect both amplify the effects of an increase in government expenditures.
b. and the crowding-out effect both diminish the effects of an increase in government expenditures.
c. diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects.
d. amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.

79. Tax increases
a. and increases in government expenditures shift aggregate demand right.
b. and increases in government expenditures shift aggregate demand left.
c. shift aggregate demand right while increases in government expenditures shift aggregate demand left.
d. shift aggregate demand left while increases in government expenditures shift aggregate demand right.

80. If taxes
a. increase, then consumption increases, and aggregate demand shifts leftward.
b. increase, then consumption decreases, and aggregate demand shifts rightward.
c. decrease, then consumption increases, and aggregate demand shifts rightward.
d. decrease, then consumption decreases, and aggregate demand shifts leftward.

81. A reduction in personal income taxes increases Aggregate Demand through
a. an increase in investment spending.
b. an increase in national savings.
c. an increase in private savings.
d. an increase in personal consumption.

82. When the government reduces taxes, which of the following decreases?
a. consumption
b. take-home pay
c. household saving
d. None of the above is correct.

83. Which of the following tends to make the size of a shift in aggregate demand resulting from an increase in government purchases smaller than it otherwise would be?
a. the multiplier effect
b. the crowding-out effect
c. the accelerator effect
d. All of the above are correct.

84. Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?
a. both the multiplier effect and the crowding-out effect
b. the multiplier effect, but not the crowding-out effect
c. the crowding-out effect, but not the multiplier effect
d. neither the crowding out effect nor the multiplier effect

85. When there is an increase in government expenditures, which of the following raises investment spending?
a. the investment accelerator and crowding out
b. the investment accelerator but not crowding out
c. crowding out but not the investment accelerator
d. neither the investment accelerator or crowding out

86. If the multiplier is 6 and if there is no crowding-out effect, then a $60 billion increase in government expenditures causes aggregate demand to
a. increase by $250 billion.
b. increase by $333 billion.
c. increase by $360 billion.
d. None of the above are correct.

87. If a $1,000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is
a. 0.2 and the multiplier is 1.25.
b. 0.8 and the multiplier is 5.
c. 0.2 and the multiplier is 1.25.
d. 0.8 and the multiplier is 8.

88. As real GDP falls,
a. money demand rises, so the interest rate rises.
b. money demand rises, so the interest rate falls
c. money demand falls, so the interest rate rises.
d. money demand falls, so the interest rate falls.

89. A tax increase has
a. a multiplier effect but not a crowding out effect
b. a crowding out effect but not a multiplier effect
c. both a crowding out and multiplier effect
d. neither a multiplier or crowding out effect

90. Which of the following sequences best represents the crowding-out effect?
a. government purchases ↑ β‡’ GDP ↑ β‡’ supply of money ↓
β‡’ equilibrium interest rate ↑ β‡’ quantity of goods and services demanded ↓
b. government purchases ↓ β‡’ GDP ↓ β‡’ demand for money ↓
β‡’ equilibrium interest rate ↓ β‡’ quantity of goods and services demanded ↓
c. government purchases ↑ β‡’ GDP ↑ β‡’ demand for money ↑
β‡’ equilibrium interest rate ↑ β‡’ quantity of goods and services demanded ↓
d. taxes ↑ β‡’ GDP ↓ β‡’ demand for money ↓ β‡’ equilibrium interest rate ↑
β‡’ quantity of goods and services demanded ↓

91. An aide to a U.S. Congressman computes the effect on aggregate demand of a $20 billion tax cut. The actual increase in aggregate demand is less than the aide expected. Which of the following errors in the aide’s computation would be consistent with an overestimation of the impact on aggregate demand?
a. The actual MPC was larger than the MPC the aide used to compute the multiplier.
b. The aide thought the tax cut would be permanent, but the actual tax cut was temporary.
c. The increase in income shifted money demand less than the aide had anticipated.
d. The increase in income resulted in investment rising more than the aide had anticipated.

92. Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?
a. by $90 billion
b. by $60 billion
c. by $20 billion
d. by $30 billion

93. Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $50 billion to the left. The government wants to change its spending to offset this decrease in demand. The MPC is 0.80. Suppose the effect on aggregate demand from a change in taxes is 4/5 the size of the change from government expenditures. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in aggregate demand?
a. Raise both taxes and expenditures by $5.56 billion dollars.
b. Raise taxes by $40 billion dollars and increase expenditures by $50 billion dollars.
c. Reduce taxes by $10 billion dollars and increase expenditures by $10 billion dollars.
d. Reduce taxes by $5.56 billion dollars and increase expenditures by $5.56 billion dollars.

94. Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $80 billion to the left. The government wants to change spending to offset this decrease in demand. The MPC is 0.75. Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in real GDP?
a. Raise both taxes and expenditures by $80 billion dollars.
b. Raise both taxes and expenditures by $10 billion dollars.
c. Reduce both taxes and expenditures by $80 billion dollars.
d. Reduce both taxes and expenditures by $10 billion dollars.

95. Suppose the MPC is 0.9. There are no crowding out or investment accelerator effects. If the government increases its expenditures by $30 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion, then by how far does aggregate demand shift to the right?
a. $283 billion and $254.7 billion
b. $283 billion and $283 billion
c. $300 billion and $270 billion
d. $300 billion and $300 billion

96. Suppose the MPC is 0.60. Assume there are no crowding out or investment accelerator effects. If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion, then by how much does aggregate demand shift to the right?
a. $300 billion and $180 billion
b. $300 billion and $300 billion
c. $500 billion and $300 billion
d. $500 billion and $500 billion

97. A tax cut shifts aggregate demand
a. by more than the amount of the tax cut.
b. by the same amount as the tax cut.
c. by less than the tax cut.
d. None of the above is necessarily correct.

98. If households view a tax cut as temporary, then the tax cut
a. has no effect on aggregate demand.
b. has more of an effect on aggregate demand than if households view it as permanent.
c. has the same effect as when households view the cut as permanent.
d. has less of an effect on aggregate demand than if households view it as permanent.

99. A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was
a. zero.
b. likely smaller than if the cut had been permanent.
c. likely about the same as if the cut had been permanent.
d. likely larger than if the cut had been permanent.

100. Permanent tax cuts shift the AD curve
a. farther to the right than do temporary tax cuts.
b. not as far to the right as do temporary tax cuts.
c. farther to the left than do temporary tax cuts.
d. not as far to the left as do temporary tax cuts.

101. A tax cut shifts the aggregate demand curve the farthest if
a. the MPC is large and if the tax cut is permanent.
b. the MPC is large and if the tax cut is temporary.
c. the MPC is small and if the tax cut is permanent.
d. the MPC is small and if the tax cut is temporary.

102. Most economists believe that fiscal policy
a. only affects aggregate demand and not aggregate supply.
b. primarily affects aggregate demand.
c. primarily effects aggregate supply.
d. only affects aggregate supply and not aggregate demand.

103. Supply-side economists focus more than other economists on
a. how fiscal policy affects consumption.
b. the multiplier effect of fiscal policy.
c. how fiscal policy affects aggregate supply.
d. the money supply.

104. If the government cuts the tax rate, workers get to keep
a. less of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
b. less of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.
c. more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
d. more of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.

105. Supply-side economists believe that a reduction in the tax rate
a. always decrease government tax revenue.
b. shifts the aggregate supply curve to the right.
c. provides no incentive for people to work more.
d. would decrease consumption.

106. Supply-side economists believe that changes in government purchases affect
a. only aggregate demand.
b. only aggregate supply.
c. both aggregate demand and aggregate supply.
d. neither aggregate demand nor aggregate supply.

107. Most economists believe that a cut in tax rates
a. would generally increase government tax revenue.
b. would have no effect on aggregate demand.
c. has a relatively small effect on the aggregate-supply curve.
d. All of the above are correct.

108. An increase in government spending on goods to build or repair infrastructure
a. shifts the aggregate demand curve to the right.
b. has a multiplier effect.
c. shifts the aggregate supply curve to the right, but this effect is likely more important in the long run.
d. All of the above are correct.

109. An decrease in taxes shifts aggregate demand
a. to the right. The larger the multiplier is, the farther it shifts.
b. to the right. The larger the multiplier is, the less it shifts.
c. to the left. The larger the multiplier is, the farther it shifts.
d. to the left. The larger the multiplier is, the less it shifts.

110. If Congress increases taxes to balance the federal budget, then to prevent additional unemployment and a recession the Fed can
a. reduce interest rates by increasing the money supply.
b. increase interest rates by decreasing the money supply.
c. increase interest rates by increasing the money supply.
d. reduce interest rates by decreasing the money supply.

111. An increase in government spending shifts aggregate demand
a. to the right. The larger the multiplier is, the farther it shifts.
b. to the right. The larger the multiplier is, the less it shifts.
c. to the left. The larger the multiplier is, the farther it shifts.
d. to the left. The larger the multiplier is, the less it shifts.

112. When government expenditures increase, the interest rate
a. increases, making the change in aggregate demand larger.
b. increases, making the change in aggregate demand smaller
c. decreases, making the change in aggregate demand larger.
d. decreases, making the change in aggregate demand smaller.

113. When taxes increase, the interest rate
a. increases, making the change in aggregate demand larger.
b. increases, making the change in aggregate demand smaller
c. decreases, making the change in aggregate demand larger.
d. decreases, making the change in aggregate demand smaller.

114. In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?
a. the interest rate falls and aggregate supply is relatively flat
b. the interest rate falls and aggregate supply is relatively steep
c. the interest rate rises and aggregate supply is relatively flat
d. the interest rate rises and aggregate supply is relatively steep

115. In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?
a. the MPC is small and changes in the interest rate have a small effect on investment
b. the MPC is small and changes in the interest rate have a large effect on investment
c. the MPC is large and changes in the interest rate have a small effect on investment
d. the MPC is large and changes in the interest rate have a large effect on investment

116. Which of the following effects results from the change in the interest rate created by an increase in government spending?
a. the investment accelerator and crowding out
b. the investment accelerator but not crowding out
c. crowding out but not the investment accelerator
d. neither crowding out nor the investment accelerator

117. Which of the following are effects of an increase in government spending financed by a tax increase?
a. the tax increase reduces consumption; the change in the interest rate reduces residential construction
b. the tax increase reduces consumption; the change in the interest rate raises residential construction
c. the tax increase raises consumption; the change in the interest rate reduces residential construction
d. the tax increase raises consumption; the change in the interest rate reduces residential construction

118. There is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct?
a. By themselves, both the change in output and the change in the interest rate increase desired investment.
b. By themselves, both the change in output and the change in the interest rate decrease desired investment.
c. By itself, the change in output increases desired investment spending and by itself the change in the interest rate decreases desired investment spending.
d. By itself, the change in output decreases desired investment spending and by itself the change in the interest rate increases desired investment spending.

119. The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?
a. MPC = 1/2, and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures.
b. MPC = 2/3, and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures
c. MPC = 3/4, and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures
d. All of the above are correct.

120. Assume that there is no accelerator affect. The MPC = 3/4. The government increases both expenditures and taxes by $600. The effect of taxes on aggregate demand is 3/4 the size of that created by government expenditures alone. The crowding out effect is 1/5 as strong as the combined effect of government expenditures and taxes on aggregate demand. How much does aggregate demand shift by?
a. $1480
b. $480
c. $160
d. None of the above is correct.

121. Assume the following.

β€’ The MPC has a value of 0.8.
β€’ The relationship between the interest rate, r, and investment, I, is given by the
equation,
,
where b is a positive constant.
β€’ Government purchases, G, are increased by $1,000.

In which of the following cases would there be no crowding out?
a.
b.
c.
d.

122. Which of the following is an example of a decrease in government purchases?
a. The government cancels an order for new military equipment.

b. The Federal Reserve sells government bonds.

c. The government increases personal income taxes.

d. The government decreases unemployment insurance benefit payments.

123. If the MPC = 0.5 and there is no crowding out, then the spending multiplier is
a. 2

b. 1

c. 4

d. 0.5

124. If the MPC changed from 0.8 to 0.6, then the spending multiplier would change from
a. 5 to 2.5.

b. 2.5 to 5.

c. 0.8 to 0.6.
d. 8 to 6.

125. Which of the following events shifts the aggregate-demand curve leftward?
a. A decrease in government expenditures, but not a change in the price level.
b. An increase in government expenditures or a decrease in the price level.

c. A decrease in government expenditures or an increase in the price level.

d. An increase in the price level, but not a decrease in government expenditures.

126. When taxes increase, interest rates
a. increase, making the change in aggregate demand smaller.
b. increase, making the change in aggregate demand larger.
c. decrease, making the change in aggregate demand smaller.
d. decrease, making the change in aggregate demand larger.

Quiz 536