Question 1

Which statement best illustrates how the investment accelerator works for the Sleepwell Hotel chain?

Accepted Answer

A)  an increase in government expenditures increases the interest rate so that the chain decides to build fewer new hotels 
B)  an increase in government expenditures increases aggregate spending so that the chain finds it profitable to build more new hotels 
C)  an increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by the chain rises 
D)  an increase in government expenditures decreases the interest rate so that the chain decides to build more new hotels 
A)  an increase in government expenditures increases the interest rate so that the chain decides to build fewer new hotels 
B)  an increase in government expenditures increases aggregate spending so that the chain finds it profitable to build more new hotels 
C)  an increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by the chain rises 
D)  an increase in government expenditures decreases the interest rate so that the chain decides to build more new hotels

Question 2

During recessions, what do taxes tend to do, and to what effect?

Accepted Answer

A)  They rise and so shift aggregate demand right. 
B)  They rise and so shift aggregate demand left. 
C)  They fall and so shift aggregate demand right. 
D)  They fall and so shift aggregate demand left. 
A)  They rise and so shift aggregate demand right. 
B)  They rise and so shift aggregate demand left. 
C)  They fall and so shift aggregate demand right. 
D)  They fall and so shift aggregate demand left.

Question 3

Which of the following best defines the marginal propensity to consume (MPC)?

Accepted Answer

A)  the fraction of extra income that a household consumes rather than saves 
B)  the fraction of extra income that a household either consumes or saves 
C)  the fraction of total income that a household consumes rather than saves 
D)  the fraction of total income that a household either consumes or saves 
A)  the fraction of extra income that a household consumes rather than saves 
B)  the fraction of extra income that a household either consumes or saves 
C)  the fraction of total income that a household consumes rather than saves 
D)  the fraction of total income that a household either consumes or saves

Question 4

Which statement is consistent with the Keynesian theory?

Accepted Answer

A)  Short-run economic fluctuations are caused by unstable aggregate demand; therefore, policy instruments should be used to stabilize the economy. 
B)  Irrational waves of optimism would cause a reduction in aggregate demand and decrease unemployment. 
C)  Changes in business and consumer expectations generally stabilize the economy. 
D)  Changes in consumer confidence are irrelevant for the economy. 
A)  Short-run economic fluctuations are caused by unstable aggregate demand; therefore, policy instruments should be used to stabilize the economy. 
B)  Irrational waves of optimism would cause a reduction in aggregate demand and decrease unemployment. 
C)  Changes in business and consumer expectations generally stabilize the economy. 
D)  Changes in consumer confidence are irrelevant for the economy.

Question 5

Let x be the marginal propensity to consume, MPC. The principle of spending multiplier involves calculating the infinite sum 1 + x + x2 + x3+… Show that this sum is equal to 1/(1 - x).

Accepted Answer

Let the sum be m = 1 + x + x2 + x3+… We

Question 6

Which policy would stabilization policy activists support when the economy is experiencing unemployment above the natural rate?

Accepted Answer

A)  a decrease in the money supply 
B)  a reduction in tax rates 
C)  a decrease in government purchases 
D)  an increase in taxes 
A)  a decrease in the money supply 
B)  a reduction in tax rates 
C)  a decrease in government purchases 
D)  an increase in taxes

Question 7

Which statement best explains the crowding-out effect?

Accepted Answer

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. 
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.

Question 8

Fiscal policy refers to the idea that aggregate demand is changed by changes in what?

Accepted Answer

A)  the money supply 
B)  government spending and taxes 
C)  trade policy 
D)  interest rates 
A)  the money supply 
B)  government spending and taxes 
C)  trade policy 
D)  interest rates

Question 9

Which of the following tends to make aggregate demand shift right farther than the amount that government expenditures increase?

Accepted Answer

A)  the crowding-out effect 
B)  the multiplier effect 
C)  the wealth effect 
D)  the investment accelerator effect 
A)  the crowding-out effect 
B)  the multiplier effect 
C)  the wealth effect 
D)  the investment accelerator effect

Question 10

According to Keynes, what concept did aggregate demand play a key role in explaining?

Accepted Answer

A)  debates by politicians concerning fiscal policy 
B)  arbitrary changes in attitudes of households and firms 
C)  short-run economic fluctuations 
D)  long-run economic fluctuations 
A)  debates by politicians concerning fiscal policy 
B)  arbitrary changes in attitudes of households and firms 
C)  short-run economic fluctuations 
D)  long-run economic fluctuations

Question 11

Which policy alternative would be an appropriate response to an increase in investment demand by a government that wants to stabilize output?

Accepted Answer

A)  increasing taxes 
B)  increasing the money supply 
C)  increasing government expenditures 
D)  increasing the government deficit 
A)  increasing taxes 
B)  increasing the money supply 
C)  increasing government expenditures 
D)  increasing the government deficit

Question 12

If the federal government cuts spending to balance the federal budget, how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?

Accepted Answer

A)  by increasing the money supply 
B)  by decreasing the money supply 
C)  by raising taxes 
D)  by cutting expenditures 
A)  by increasing the money supply 
B)  by decreasing the money supply 
C)  by raising taxes 
D)  by cutting expenditures

Question 13

If the Bank of Canada maintains a fixed exchange rate, which effect will an expansionary fiscal policy have?

Accepted Answer

A)  It will cause a large and permanent rightward shift in the AD curve. 
B)  It will cause a large and permanent leftward shift in the AD curve. 
C)  It will have no permanent effect on the position of the AD curve, but it will cause interest rates to rise. 
D)  It will have no permanent effect on either the position of the AD curve or the interest rate. 
A)  It will cause a large and permanent rightward shift in the AD curve. 
B)  It will cause a large and permanent leftward shift in the AD curve. 
C)  It will have no permanent effect on the position of the AD curve, but it will cause interest rates to rise. 
D)  It will have no permanent effect on either the position of the AD curve or the interest rate.

Question 14

Which term refers to the reduction in demand that results when a fiscal expansion raises the interest rate?

Accepted Answer

A)  multiplier effect 
B)  crowding-out effect 
C)  accelerator effect 
D)  catch-up effect 
A)  multiplier effect 
B)  crowding-out effect 
C)  accelerator effect 
D)  catch-up effect

Question 15

Suppose the closed economy is in long-run equilibrium. Advances in technology shift the long-run aggregate-supply curve $80 billion to the right. Optimistic investors have shifted the aggregate-demand curve $150 billion to the right. In order to stabilize the price level at its original value, the government wants to reduce its spending. If the crowding-out effect is always half of the multiplier effect, and if the MPC equals 0.75, by how much must the government cut its spending?

Accepted Answer

A)  $4 billion 
B)  $40 billion 
C)  $75 billion 
D)  $150 billion 
A)  $4 billion 
B)  $40 billion 
C)  $75 billion 
D)  $150 billion

Question 16

Assume that the MPC is 0.8. Assume that there is a multiplier effect and that the total crowding-out effect is $8 billion. How will an increase in government purchases of $10 billion shift aggregate demand?

Accepted Answer

A)  It will shift aggregate demand left by $2 billion. 
B)  It will shift aggregate demand left by $42 billion. 
C)  It will shift aggregate demand right by $2 billion. 
D)  It will shift aggregate demand right by $42 billion. 
A)  It will shift aggregate demand left by $2 billion. 
B)  It will shift aggregate demand left by $42 billion. 
C)  It will shift aggregate demand right by $2 billion. 
D)  It will shift aggregate demand right by $42 billion.

Question 17

According to the crowding-out effect, how do the interest rate and investment spending change when government spending increases?

Accepted Answer

A)  The interest rate and investment spending both increase. 
B)  The interest rate increases and investment spending decreases. 
C)  The interest rate decreases and investment spending increases. 
D)  The interest rate and investment spending both decrease. 
A)  The interest rate and investment spending both increase. 
B)  The interest rate increases and investment spending decreases. 
C)  The interest rate decreases and investment spending increases. 
D)  The interest rate and investment spending both decrease.

Question 18

What is the most important automatic stabilizer?

Accepted Answer

A)  government spending 
B)  the tax system 
C)  unemployment compensation 
D)  welfare benefits 
A)  government spending 
B)  the tax system 
C)  unemployment compensation 
D)  welfare benefits

Question 19

What does fiscal policy primarily affect in the short run?

Accepted Answer

A)  growth 
B)  investment 
C)  aggregate demand 
D)  aggregate supply 
A)  growth 
B)  investment 
C)  aggregate demand 
D)  aggregate supply

Question 20

What is an effect of an increase in government purchases?

Accepted Answer

A)  It decreases interest rates. 
B)  It results in a decrease in the government deficit. 
C)  It crowds out investment spending by business. 
D)  It decreases money demand. 
A)  It decreases interest rates. 
B)  It results in a decrease in the government deficit. 
C)  It crowds out investment spending by business. 
D)  It decreases money demand.

Which statement best illustrates how the investment accelerator works for the Sleepwell Hotel chain?

During recessions, what do taxes tend to do, and to what effect?

Which of the following best defines the marginal propensity to consume (MPC)?

Which statement is consistent with the Keynesian theory?

Let x be the marginal propensity to consume, MPC. The principle of spending multiplier involves calculating the infinite sum 1 + x + x2 + x3+… Show that this sum is equal to 1/(1 - x).

Which policy would stabilization policy activists support when the economy is experiencing unemployment above the natural rate?

Which statement best explains the crowding-out effect?

Fiscal policy refers to the idea that aggregate demand is changed by changes in what?

Which of the following tends to make aggregate demand shift right farther than the amount that government expenditures increase?

According to Keynes, what concept did aggregate demand play a key role in explaining?

Which policy alternative would be an appropriate response to an increase in investment demand by a government that wants to stabilize output?

If the federal government cuts spending to balance the federal budget, how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?

If the Bank of Canada maintains a fixed exchange rate, which effect will an expansionary fiscal policy have?

Which term refers to the reduction in demand that results when a fiscal expansion raises the interest rate?

Assume that the MPC is 0.8. Assume that there is a multiplier effect and that the total crowding-out effect is $8 billion. How will an increase in government purchases of $10 billion shift aggregate demand?

According to the crowding-out effect, how do the interest rate and investment spending change when government spending increases?

What is the most important automatic stabilizer?

What does fiscal policy primarily affect in the short run?

What is an effect of an increase in government purchases?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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Exam 16: The Influence of Fiscal Policy on Aggregate Demand

Which statement best illustrates how the investment accelerator works for the Sleepwell Hotel chain?

During recessions, what do taxes tend to do, and to what effect?

Which of the following best defines the marginal propensity to consume (MPC)?

Which statement is consistent with the Keynesian theory?

Let x be the marginal propensity to consume, MPC. The principle of spending multiplier involves calculating the infinite sum 1 + x + x2 + x3+… Show that this sum is equal to 1/(1 - x).

Which policy would stabilization policy activists support when the economy is experiencing unemployment above the natural rate?

Which statement best explains the crowding-out effect?

Fiscal policy refers to the idea that aggregate demand is changed by changes in what?

Which of the following tends to make aggregate demand shift right farther than the amount that government expenditures increase?

According to Keynes, what concept did aggregate demand play a key role in explaining?

Which policy alternative would be an appropriate response to an increase in investment demand by a government that wants to stabilize output?

If the federal government cuts spending to balance the federal budget, how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?

If the Bank of Canada maintains a fixed exchange rate, which effect will an expansionary fiscal policy have?

Which term refers to the reduction in demand that results when a fiscal expansion raises the interest rate?

Assume that the MPC is 0.8. Assume that there is a multiplier effect and that the total crowding-out effect is $8 billion. How will an increase in government purchases of $10 billion shift aggregate demand?

According to the crowding-out effect, how do the interest rate and investment spending change when government spending increases?

What is the most important automatic stabilizer?

What does fiscal policy primarily affect in the short run?

What is an effect of an increase in government purchases?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

Filters