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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.
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:
• When income is $10,000, consumption spending is $6,500.
• 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.
