(solution) Question 1 The expenditure multiplier is 1/MPC 1/(1-MPC)

(solution) Question 1 The expenditure multiplier is 1/MPC 1/(1-MPC)

Question 1

  1.  

    The expenditure multiplier is

    1/MPC

    1/(1-MPC)

    (1-MPC)/1

    1/ change MPC

6 points  

Question 2

  1.  

    An increase in taxes combined with a decrease in government purchases would

    increase AD

    decrease AD

    leave AD unchanged

    have an indeterminate effect on AD

6 points  

Question 3

  1.  

    The federal government buys $20 million worth of computers from Dell. If the MPC is 0.60, what will be the impact on aggregate demand, other things being equal?

    Aggregate demand will increase $12 million.

    Aggregate demand will increase $13.33

    Aggregate demand will increase $50 million

    Aggregate demand will increase $20 million

6 points  

Question 4

  1.  

    The multiplier effect is based on the fact that ————– by one person is (are)————————-to another

    income;income

    expenditures;expenditures

    expenditures;incomes

    income;expenditures

6 points  

Question 5

  1.  

    Higher budget deficits would tend to

    raise interest rates

    reduce investment

    reduce the growth rate of the capital stock

    do all of the above

5 points  

Question 6

  1.  

    If the marginal propensity to consume is two-thirds, the multiplier is

    30

    66

    1.5

    3

6 points  

Question 7

  1.  

    If the government wanted to move the economy out of a current recession, which of the following might be an appropriate policy action?

    Decrease taxes

    Increase government purchases of goods and services

    increase transfer payments

    any of the above

6 points  

Question 8

  1.  

    AD will shift to the right, other things being equal, when

    the government budget deficit increases because government purchases rose

    the government budget deficit increases because taxes fell

    the government budget deficit increases because transfer payment rose

    any of the above circumstances exists

6 points  

Question 9

  1.  

    If government policy makers were worried about the inflationary potential of the economy, which of the following would be a correct fiscal policy change?

    increase taxes

    reduce transfer payments

    reduce government purchases

    all of the above

6 points  

Question 10

  1.  

    Traditionally, government has used—————to influence———————

    Taxing and spending; the demand side of the economy

    Spending; the supply side of the economy

    Supply management; the demand side of the economy

    demand management; the supply side of the economy

6 points  

Question 11

  1.  

    How does the government finance budget deficits?

    The Federal Reserve creates new money

    It issues debt to government aagencies, private institutions, and private investors

    It is pprimarily financed by foreign investors

    It does nothing to finance budget deficits

5 points  

Question 12

  1.  

    If the economy was in a recessionary gap, in order to return to RGDP (NR), the government could

    decrease taxes and increase government purchases

    increase taxes and increase government purchases

    decrease taxes and decrease government purchases

    decrease taxes and increase government purchases

6 points  

Question 13

  1.  

    Contractionary Fiscal policy consists of

    Increased government spending and increased taxes

    decreased government spending and decreased taxes

    decreased government spending and increased taxes

    Increased government spending and decreased taxes

6 points  

Question 14

  1.  

    When the crowing-out effect of an increase in government purchases is included in the analysis,

    AD shifts left

    AD doesn’t change

    AD shifts right, but by more than the simple multiplier analysis would imply

    AD shifts right, but by less than the simple multiplier analysis would imply

6 points  

Question 15

  1.  

    When taxes are increased, disposable income_________, and hence consumption_________________

    increases;increases

    increases;decreases

    decreases;increases

    decreases;decreases

6 points  

Question 16

  1.  

    According to the crowding-out effect, if the federal, if the federal government borrows to finance deficit spending,

    the demand for money will decrease, driving interest rates down

    the demand for money will increase, driving interest rates up

    the supply of money will increase, driving interest rate up

    the supply of money will decrease, driving interest rates down

6 points  

            Question 17

  1.  

    If the government wanted to offset the effect of a boom in consumer and investor confidence on AD, it might

    decrease government purchases

    decrease taxes

    increase taxes

    do either (a) or (c)