The Influence of Monetary and Fiscal Policy on Aggregate Demand 8363
71. If the MPC is 0, then the multiplier is
a. 0.
b. 1.
c. infinite.
d. None of the above is correct.
72. 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.
8364 The Influence of Monetary and Fiscal Policy on Aggregate Demand
73. 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.
74. 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.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8365
75. Refer to Scenario 34-2. The multiplier for this economy is
a. 1.31.
b. 6.25.
c. 2.78.
d. 2.27.
76. 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.
8366 The Influence of Monetary and Fiscal Policy on Aggregate Demand
77. 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.
78. 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.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8367
79. 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.
80. 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.
8368 The Influence of Monetary and Fiscal Policy on Aggregate Demand
81. 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.
82. 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.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8369
83. 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.
84. 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.
8370 The Influence of Monetary and Fiscal Policy on Aggregate Demand
85. 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.
86. 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
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8371
87. 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
88. 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.
8372 The Influence of Monetary and Fiscal Policy on Aggregate Demand
89. 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.
90. 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.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8373
91. 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
92. 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 ↓
8374 The Influence of Monetary and Fiscal Policy on Aggregate Demand
93. 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.
94. 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
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8375
95. 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.
96. 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.
8376 The Influence of Monetary and Fiscal Policy on Aggregate Demand
97. 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
98. 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
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8377
99. 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.
100. 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.
8378 The Influence of Monetary and Fiscal Policy on Aggregate Demand
101. 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.
102. 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.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8379
103. 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.
104. 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.
105. 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.
8380 The Influence of Monetary and Fiscal Policy on Aggregate Demand
106. 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.
107. 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.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8381
108. 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.
109. 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.
8382 The Influence of Monetary and Fiscal Policy on Aggregate Demand
110. 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.
111. 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.