Question 1

Assuming that the crowding-out effect is $100 billion and the multiplier effect of an increase in government purchases is $120 billion, then the total effect on aggregate demand will be:

Accepted Answer

A)   an $80 billion increase
B)   an $80 billion decrease
C)   a $20 billion increase
D)   a $20 billion decreaseE) All of the above
F) C) and D)

Question 2

Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.9. What is the total effect of this increase in government purchases?

Accepted Answer

A)   $90 billion
B)   $111 billion
C)   $900 billion
D)   $1000 billionE) B) and D)
F) B) and C)

Question 3

The liquidity of money explains the demand for money. People own or hold money because money:

Accepted Answer

A)   offers a high nominal return
B)   can directly be used to buy goods and services
C)   protects the owner against unforeseen inflation
D)   all of the aboveE) None of the above
F) A) and B)

Question 4

In the long run, the interest rate adjusts to balance the supply and demand for money, whereas in the short run, the interest rate adjusts to balance national saving and desired investment.

Accepted Answer

A) True 
 B)False

Question 5

Suppose the government reduces taxes by $200 million, that there is no crowding-out effect, and that the marginal propensity to consume is 0.75. What is the total effect on aggregate demand?

Accepted Answer

A)   $150 million
B)   $600 million
C)   $267 million
D)   $800 millionE) All of the above
F) None of the above

Question 6

An increase in the price level would:

Accepted Answer

A)   shift the money demand to the left
B)   shift the money demand to the right
C)   shift the money supply to the right
D)   shift the money supply to the leftE) B) and C)
F) B) and D)

Question 7

If MPC = 0.6, then the government purchases multiplier is:

Accepted Answer

A)   0.4
B)   4
C)   2.5
D)   25E) All of the above
F) None of the above

Question 8

The multiplier effect suggests that the increase in aggregate demand could be smaller than the increase in government purchases, while the crowding-out effect suggests that the increase in aggregate demand could be larger than the increase in government purchases.

Accepted Answer

A) True 
 B)False

Question 9

The notion that when the government increases its purchases of aeroplanes, the owners and employees of the aeroplane manufacturing companies will also purchase more as their incomes rise, and hence total purchases will increase by more than the initial change in government purchases, is known as the:

Accepted Answer

A)   crowding-out effect
B)   Keynesian effect
C)   multiplier effect
D)   acceleration effectE) A) and B)
F) All of the above

Question 10

The theory of liquidity preference states that the interest rate adjusts to bring money supply and money demand into balance.

Accepted Answer

A) True 
 B)False

Question 11

The government-purchases multiplier is defined as:

Accepted Answer

A)   1 - (1/MP
C)  
B)   1/(MPC - 1) 
C)   1 - (MPC - 1) 
D)   1/(1 - MP
C)  E) A) and B)
F) C) and D)

Question 12

Money pays no interest - if you keep a hundred-dollar bill for a year, then next year you will have a hundred dollars. Other assets earn interest - if you place $100 in a savings account or in government bonds, you will have more than $100 next year. Why, then, are people ever willing to hold money?

Accepted Answer

Because money is the most conv...

Question 13

What are the key determinants of the interest rate in the short run? What are the key determinants of the interest rate in the long run?

Accepted Answer

In the short run, we can think of the in...

Question 14

Personal income tax and government outlays act as automatic stabilisers.

Accepted Answer

A) True 
 B)False

Question 15

The two macroeconomic effects that make the size of the shift in aggregate demand differ from the change in government purchases are:

Accepted Answer

A)   the multiplier effect and the crowding-out effect
B)   the multiplier effect and the Doppler effect
C)   the Keynes effect and the crowding-out effect
D)   the accelerator effect and the multiplier effectE) C) and D)
F) B) and D)

Question 16

If an increase in interest rates reduces investment spending by $25m:

Accepted Answer

A)   real GDP will decrease by $25 million
B)   GDP will decrease by $25 million
C)   GDP will decrease by more than $25 million
D)   GDP will decrease by less than $25 millionE) B) and C)
F) None of the above

Question 17

An increase in Australia's marginal propensity to import will:

Accepted Answer

A)   have no effect on GDP, because GDP only includes spending in Australia
B)   cause an increase in GDP, because Australians have risen their spending
C)   cause a decrease in GDP, because some existing spending will demand production overseas instead of in Australia
D)   always be bad for the economyE) B) and C)
F) None of the above

Question 18

Is the effect of an election cycle (every three years) putting at risk long-term structural changes to the economy?

Accepted Answer

In an effort to win elections, politicia...

Question 19

Any change in government spending has a multiplier effect on the level of economic activity.

Accepted Answer

A) True 
 B)False

Question 20

If the economy is producing a real output that is less than capacity output, a(n) :

Accepted Answer

A)   expansionary monetary policy could be used to decrease aggregate demand and decrease the general price level
B)   contractionary monetary policy could be used to increase aggregate demand and increase the general price level
C)   contractionary monetary policy could be used to decrease aggregate demand and decrease the general price level
D)   expansionary monetary policy could be used to increase aggregate demand and increase the general price levelE) A) and B)
F) B) and C)

Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Suppose the government reduces taxes by $200 million, that there is no crowding-out effect, and that the marginal propensity to consume is 0.75. What is the total effect on aggregate demand?

Correct Answer
verified

Money pays no interest - if you keep a hundred-dollar bill for a year, then next year you will have a hundred dollars. Other assets earn interest - if you place $100 in a savings account or in government bonds, you will have more than $100 next year. Why, then, are people ever willing to hold money?

Correct Answer
verified
Because money is the most conv...
View Answer

The two macroeconomic effects that make the size of the shift in aggregate demand differ from the change in government purchases are:

Correct Answer
verified

If the economy is producing a real output that is less than capacity output, a(n) :

Correct Answer
verified

Any change in government spending has a multiplier effect on the level of economic activity.

Correct Answer
verified

Correct Answer
verified

Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.9. What is the total effect of this increase in government purchases?

Correct Answer
verified

Assuming that the crowding-out effect is $100 billion and the multiplier effect of an increase in government purchases is $120 billion, then the total effect on aggregate demand will be:

Correct Answer
verified

Is the effect of an election cycle (every three years) putting at risk long-term structural changes to the economy?

Correct Answer
verified
In an effort to win elections, politicia...
View Answer

The multiplier effect suggests that the increase in aggregate demand could be smaller than the increase in government purchases, while the crowding-out effect suggests that the increase in aggregate demand could be larger than the increase in government purchases.

Correct Answer
verified

The government-purchases multiplier is defined as:

Correct Answer
verified

The theory of liquidity preference states that the interest rate adjusts to bring money supply and money demand into balance.

Correct Answer
verified

Personal income tax and government outlays act as automatic stabilisers.

Correct Answer
verified

What are the key determinants of the interest rate in the short run? What are the key determinants of the interest rate in the long run?

Correct Answer
verified
In the short run, we can think of the in...
View Answer

If MPC = 0.6, then the government purchases multiplier is:

Correct Answer
verified

In the long run, the interest rate adjusts to balance the supply and demand for money, whereas in the short run, the interest rate adjusts to balance national saving and desired investment.

Correct Answer
verified

An increase in Australia's marginal propensity to import will:

Correct Answer
verified

An increase in the price level would:

Correct Answer
verified

The liquidity of money explains the demand for money. People own or hold money because money:

Correct Answer
verified

If an increase in interest rates reduces investment spending by $25m:

Correct Answer
verified

Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Suppose the government reduces taxes by $200 million, that there is no crowding-out effect, and that the marginal propensity to consume is 0.75. What is the total effect on aggregate demand?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedBecause money is the most conv...View AnswerShow Answer

The two macroeconomic effects that make the size of the shift in aggregate demand differ from the change in government purchases are:

Correct AnswerverifiedShow Answer

If the economy is producing a real output that is less than capacity output, a(n) :

Correct AnswerverifiedShow Answer

Any change in government spending has a multiplier effect on the level of economic activity.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.9. What is the total effect of this increase in government purchases?

Correct AnswerverifiedShow Answer

Assuming that the crowding-out effect is $100 billion and the multiplier effect of an increase in government purchases is $120 billion, then the total effect on aggregate demand will be:

Correct AnswerverifiedShow Answer

Is the effect of an election cycle (every three years) putting at risk long-term structural changes to the economy?

Correct AnswerverifiedIn an effort to win elections, politicia...View AnswerShow Answer

The multiplier effect suggests that the increase in aggregate demand could be smaller than the increase in government purchases, while the crowding-out effect suggests that the increase in aggregate demand could be larger than the increase in government purchases.

Correct AnswerverifiedShow Answer

The government-purchases multiplier is defined as:

Correct AnswerverifiedShow Answer

The theory of liquidity preference states that the interest rate adjusts to bring money supply and money demand into balance.

Correct AnswerverifiedShow Answer

Personal income tax and government outlays act as automatic stabilisers.

Correct AnswerverifiedShow Answer

What are the key determinants of the interest rate in the short run? What are the key determinants of the interest rate in the long run?

Correct AnswerverifiedIn the short run, we can think of the in...View AnswerShow Answer

If MPC = 0.6, then the government purchases multiplier is:

Correct AnswerverifiedShow Answer

In the long run, the interest rate adjusts to balance the supply and demand for money, whereas in the short run, the interest rate adjusts to balance national saving and desired investment.

Correct AnswerverifiedShow Answer

An increase in Australia's marginal propensity to import will:

Correct AnswerverifiedShow Answer

An increase in the price level would:

Correct AnswerverifiedShow Answer

The liquidity of money explains the demand for money. People own or hold money because money:

Correct AnswerverifiedShow Answer

If an increase in interest rates reduces investment spending by $25m:

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified
Because money is the most conv...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
In an effort to win elections, politicia...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
In the short run, we can think of the in...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified