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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.
• The MPC has a value of 0.8.
• The relationship between the interest rate, r, and investment, I, is given by the
equation,
,
where b is a positive constant.
• 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.
