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.
31. 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.
32. 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.
33. 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.
34. 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.
35. 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.
36. 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
37. 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
38. 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.
39. 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.
40. 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.
41. 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.
42. 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.
43. 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.
44. 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.
45. 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.
46. 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.
47. 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.
48. 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.
49. 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.
50. 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.
51. 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.
52. 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.
53. 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.
54. 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.
55. Suppose there are both multiplier and crowding out effects but without any accelerator effects.
An increase in government expenditures would definitely
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.
56. 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.
57. 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.
58. 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.
59. 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.
60. 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.
61. 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.
62. 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.
63. 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.
64. Assume the MPC is 0.72. The multiplier is
a. 4.53.
b. 1.39.
c. 2.57.
d. 3.57.
65. 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.
66. 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.
67. 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.
68. 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.
69. 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.
70. 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.