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.
b.
c.
d.
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.
• Consumption spending is $6,720 when income is $8,000.
• 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 ↑ ⇒ GDP ↑ ⇒ supply of money ↓
⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
b.
government purchases ↓ ⇒ GDP ↓ ⇒ demand for money ↓
⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↓
c.
government purchases ↑ ⇒ GDP ↑ ⇒ demand for money ↑
⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
d.
taxes ↑ ⇒ GDP ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑
⇒ 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.