Chapter 21

A tax increase has A.) both B.) a multiplier effect but not a crowding out effect C.) neither D.) a crowding out effect but not a multiplier effect

A

An increase in gov. purchases is likely to A.) crowd out investment spending by business firms B.) decrease interest rates C.) reduce money demand D.) All of the above are correct

A

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 gov. purchases of $30 billion will shift AD to the A.) right by $68 billion B.) right by $36 billion C.) left by $36 billion D.) left by $60 billion

A

If net exports fall by $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then A.) AD falls by 11/2 x $40 billion B.) AD falls by 11/9 x $40 billion C.) AD falls by 9/11 x $40 billion D.) AD falls by 2 x $40 billion

A

Monetary and Fiscal Policy influence A.) output in the short run only B.) output and prices in the short run and the long run C.) output in the short run and long run D.) output and prices in the short run only

A

Monetary policy is determined by A.) the Federal Reserve and involves changing the money supply B.) the president and Congress and involves changing the money supply C.) the president and congress and involves changing gov. spending and taxation D.) the Federal Reserve and involves changing gov. spending and taxation

A

The goal of monetary policy and fiscal policy is to A.) offset shifts in AD and thereby stabilize the economy B.) enhance the shifts in AD and thereby increase economic growth C.) enhance the shifts in AD and thereby create fluctuations in output and employment D.) offset the shifts in AD and thereby eliminate unemployment

A

Which of the following is an example of an increase in gov. purchases? A.) the gov. builds new roads B.) the gov. decreases personal income tax C.) the gov. increases unemployment insurance benefit payments D.) the Federal Reserve purchases gov. bonds

A

According to liquidity preference theory, a decrease in money demand for some reason other than a change in the price level causes A.) the interest rate to fall, so AD shifts left B.) the interest rate to fall, so AD shifts right C.) the interest rate to rise, so AD shifts right D.) the interest rate to rise, so AD shifts left

B

According to liquidity preference theory, if the quantity of money demanded is greater than the quantity supplied, then the interest rate will A.) increase and the quantity of money demanded will increase B.) increase and the quantity of money demanded will decrease C.) decrease and the quantity of money demanded will increase D.) decrease and quantity of money demanded will decrease

B

According to the liquidity preference theory, the slope of the money demand curve is explained as follows: A.) interest rates rise as the Fed reduces the quantity of money demanded B.) People will want to hold more money as the cost of holding it falls C.) interest rates will fall as the Fed reduces the supply of money D.) people will want to hold less money as the cost of holding it falls

B

As real GDP falls, A.) money demand rises, so the interest rate falls B.) money demand falls, so the interest rate falls C.) money demand rises, so the interest rate rises D.) money demand falls, so the interest rate rises

B

If a $1000 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

B

If the MPC is 5/6 then the multiplier is A.) 6/5, so a $200 increase in gov. spending increases AD by $240 B.) 6, so a $200 increase in gov. spending increases AD by $1200 C.) 5, so a $200 increase in gov. spending increases AS by $1000 D.) 6/5, so a $200 increase in gov. spending increases AS by $1200

B

If the multiplier is 5.25, then the MPC is A.) 0.84 B.) 0.81 C.) 0.68 D.) 0.19

B

If the multiplier is 6, then MPC is A.) 0.16 B.) 0.83 C.) 0.86 D.) 0.71

B

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 AD B.) $360. For this economy, an initial increase of $50 in consumer spending translates into a $166.50 increase in AD C.) $341.67. For this economy, an initial increase of $50 in consumer spending translates into a $266.67 increase in AD D.) $341.67. For this economy, an initial increase of $50 in consumer spending translates into a $166.25 increase in AD

B

The idea that expansionary fiscal policy has a positive affect on investment is known as A.) crowding out B.) the investment accelerator C.) monetary supply D.) the multiplier

B

The process of the investment accelerator involves A.) negative feedback from AD to investment B.) positive feedback from AD to investment C.) positive feedback from AS to investment D.) negative feedback from AS to investment

B

When taxes increases increase, the interest rate A.) increases, making the change in AD larger B.) decreases, making the change in AD smaller C.) decreases, making the change in AD larger D.) increases, making the change in AD smaller

B

Which of the following effects results from the change in the interest rate created by an increase in gov. spending? A.) the investment accelerator and crowding out B.) crowding out but not the investment accelerator C.) the investment accelerator but not crowding out D.) neither

B

•consumption spending is $6,720 when income is $8,000 •consumption spending is $7,040 when income is $8,500 The multiplier for this economy is A.) 1.31 B.) 2.78 C.) 2.27 D.) 6.25

B

A decrease in gov. spending A.) increases the interest rate and so decreases investment spending decreases B.) decreases the interest rate and so investment spending decreases C.) decreases the interest rate and so investment spending increases D.) increases the interest rate and so investment spending increases

C

A tax cut shifts AD A.) by the same amount as the tax cut B.) by less than the tax cut C.) none of the above is necessarily correct D.) by more than the amount of the tax cut

C

AD shifts right if A.) gov. purchases decrease and shifts left if stock prices fall B.) gov. purchases increase and shifts left if stock prices rise C.) gov. purchases increase and shifts left if stock prices fall D.) gov. purchases decrease and shifts left if stock prices rise

C

AD shifts right when the gov. A.) none of the above is correct B.) repeals an investment tax credit C.) decreases taxes D.) cuts military expenditures

C

According to liquidity preference theory, the money-supply curve would shift rightward A.) All of the above are correct B.) if the interest rate increased C.) if the Federal Reserve chose to increase the money supply D.) if the money demand curve shifted right

C

As the MPC gets close to 1, the value of the multiplier approaches A.) 0 B.) none of the above is correct C.) infinity D.) 1

C

If the Federal Reserve decided to raise interest rates, it could A.) buy bonds to lower the money supply B.) sell bonds to raise the money supply C.) sell bonds to lower the money supply D.) buy bonds to raise the money supply

C

If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $15 billion increase in gov. expenditures would shift the AD curve right by A.) $45 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.) $60 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

C

If the multiplier is 3, then the MPC is A.) 1/3 B.) 4/3 C.) 2/3 D.) 3/4

C

In 2009 President Obama and Congress increased gov. spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in gov. expenditures on AD smaller? A.) the MPC is small and changes in the interest rate have a small effect on investment B.) the MPC is large and changes in the interest rate have a large effect on investment C.) the MPC is small and changes in the interest rate have a large effect on investment D.) the MPC is large and changes in the interest rate have a small effect on investment

C

The Marginal Propensity to Consume (MPC) is defined as the A.) total income that a household consumes rather than saves B.) total income that a household either consumes or saves C.) extra income that a household consumes rather than saves D.) extra income that a household either consumes or saves

C

The multiplier for changes in government spending is calculated as A.) (1-MPC)/MPC B.) 1/MPC C.) 1/(1-MPC) D.) 1/(1+MPC)

C

To reduce the effects of crowding out caused by an increase in gov. expenditures, the Federal Reserve could A.) increase the money supply by selling bonds B.) decrease the money supply by buying bonds C.) increase the money supply by buying bonds D.) increase the money supply by selling bonds

C

Which of the following are effects of an increase in gov. spending financed by a tax increase? A.) the tax increase raises consumption; the change in the interest rate reduces residential construction B.) the tax increase raises consumption; the change in the interest rate raises residential construction C.) the tax increase reduces consumption; the change in the interest rate reduces residential construction D.) the tax increase reduces consumption; the change in the interest rate raises residential construction

C

•consumption spending is $6,720 when income is $8,000 •consumption spending is $7,040 when income is $8,500 For this economy, an initial increase of $500 in gov. purchases translates into a A.) $3,125 increase in AD in the absence of the crowding-out effect B.) $1,135 increase in AD when the crowding-out effect is taken into account C.) $1,388.89 increase in AD in the absence of the crowding-out effect D.) $3,125 increase in AD when the crowding-out effect is taken into account

C

•consumption spending is $6,720 when income is $8,000 •consumption spending is $7,040 when income is $8,500 In response to which of the following events could AD increase by $1,500? A.) An economic boom overseas increased the demand for U.S. net exports by $600, and there is no crowding-out effect B.) A stock-market boom increases household's wealth by $500, and there is an operative crowding-out effect C.) A stock-market boom increases household's wealth by $575, and there is an operative crowding-out effect

C

A decrease in U.S. interest rates leads to A.) a depreciation of the dollar that leads to smaller net exports B.) an appreciation of the dollar that leads to smaller net exports C.) an appreciation of the dollar that leads to greater net exports D.) a depreciation of the dollar that leads to greater net exports

D

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a A.) liquidity preference B.) open-market trap C.) interest- rate contraction D.) liquidity trap

D

An increase in gov. spending shifts AD A.) to the left. The larger the multiplier is, the less it shifts B.) to the left. The larger the multiplier is, the farther it shifts C.) to the right. The larger the multiplier is, the less it shifts D.) to the right. The larger the multiplier is, the farther it shifts

D

An increase in the MPC A.) decreases the multiplier, so that changes in gov. expenditures have a smaller effect on AD B.) decreases the multiplier, so that changes in gov. expenditures have a larger effect on AD C.) increases the multiplier, so that changes in gov. expenditures have a smaller effect on AD D.) increases the multiplier, so that changes in gov. expenditures have a larger effect on AD

D

Assume a multiplier effect, but no crowding-out or investment-accelerator effects, a $100 billion increase in gov. expenditures shifts aggregate A.) supply leftward by more than $100 billion B.) demand rightward by less than $100 billion C.) supply leftward by less than $100 billion D.) demand rightward by more than $100 billion

D

If households view a tax cut as temporary, then the tax cut A.) has no effect on AD B.) has the same effect as when households view the cuts as permanent C.) has more of an effect on AD than if households view it as permanent D.) has less of an effect on AD than if households view it as permanent

D

If there is excess money supply, people will A.) withdraw money from interest-bearing accounts, and the interest rate will fall B.) deposit more into interest-bearing accounts, and the interest rate will rise C.) withdraw money from interest-bearing accounts, and interest rate will rise D.) deposit more into interest-bearing accounts, and the interest rate will fall

D

Imagine that the gov. increases its spending by $75 billion. Which of the following by itself would tend to make the change in AD different from $75 billion? A.) the crowding-out effect, but not the multiplier effect B.) the multiplier effect, but not the crowding-out effect C.) neither D.) both

D

In 2009 President Obama and Congress increased gov. spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in gov. expenditures on AD smaller? A.) the interest rate rises and AS is relatively flat B.) the interest rate falls and AS is relatively flat C.) the interest rate falls and AS is relatively steep D.) the interest rate rises and AS is relatively steep

D

Opponents of active stabilization policy A.) none of correct B.) argue that fiscal policy is unable to change AD or AS C.) advocate a monetary policy designed to offset changes in the unemployment rate D.) believe that the political process creates lag in the implementation of fiscal policy

D

The Central Bank of Wiknam increases the money supply at the same time Parliament of Wiknam passes a new investment tax credit. Which of these policies shift AD to the right? A.) the money supply increase but not the investment tax credit B.) neither the investment tax credit nor the money supply increase C.) the investment tax credit but not the money supply increase D.) both the money supply increase and the investment tax credit

D

Which of the following correctly explains the crowding-out effect? A.) A decrease in gov. expenditures decreases the interest rate and so reduces investment spending B.) A increase in gov. expenditures decreases the interest rate and so increases investment spending C.) A decrease in gov. expenditures increases the interest rate and so increases investment spending D.) A increase in gov. expenditures increases the interest rate and so reduces investment spending

D