3.1 & 3.2 - Aggregate Demand and Multipliers

Which of the following will shift the aggregate demand curve to the right?

• A report that corporate earnings were lower than expected

• An increase in interest rates caused by a tightening of monetary policy

• Increased imports caused by appreciation of the dollar

• Increased spending by businesses on computers

• An increase in the government’s budget surplus

Which of the following will most likely result from a decrease in government spending?

• An increase in output

• An increase in the price level

• An increase in employment

• A decrease in aggregate supply

• A decrease in aggregate demand

Which of the following statements best describes the impact of a decrease in Japanese income on aggregate demand in the United States?

• There will be no change in aggregate demand because United States aggregate demand depends only on the income of United States consumers.

• Aggregate demand will decrease because the demand for United States exports decreases.

• Aggregate demand will decrease because the value of the United States dollar decreases relative to the Japanese yen.

• Aggregate demand will increase because a decrease in income in Japan causes an increase in income in the United States.

• Aggregate demand will increase because interest rates in the United States decrease.

Which of the following changes would cause an economy’s aggregate demand curve to shift to the right?

• An increase in spending on imports

• An increase in autonomous consumption spending

• An increase in interest rates

• A decrease in the money supply

• A decrease in the overall price level in the economy

Under which of the following conditions would consumer spending most likely increase?

• Consumers have large unpaid balances on their credit cards.

• Consumers’ wealth is increased by changes in the stock market.

• The government encourages consumers to increase their savings.

• Social security taxes are increased.

• Consumers believe they will not receive pay increases next year.

Which of the following will result in the greatest increase in aggregate demand?

• A $100 increase in taxes

• A $100 decrease in taxes

• A $100 increase in government expenditures

• A $100 increase in government expenditures, coupled with a $100 increase in taxes

• A $100 increase in government expenditures, coupled with a $100 decrease in taxes

Which of the following is true about the marginal propensity to consume?

• It is the percentage of total income that is spent on consumption.

• It determines the size of the simple spending multiplier.

• It increases as incomes increase because increases in income cause people to spend more.

• It is the same as the money multiplier.

• It is equal to the average propensity to consume for people with low incomes.

Which of the following changes will have the smallest expansionary effect on aggregate demand in the short run?

• An increase in exports of $100

• An increase in government spending of $100

• A decrease in taxes of $100

• A decrease in imports of $100

• A decrease in savings of $100

Which of the following best explains why equilibrium income will rise by more than $100 in response to a $100 increase in government spending?

• Incomes will rise, resulting in a tax decrease.

• Incomes will rise, resulting in higher consumption.

• The increased spending raises the aggregate price level.

• The increased spending increases the money supply, lowering interest rates.

• The higher budget deficit reduces investment.

Which of the following best explains the increase in national income that results from equal increases in government spending and taxes?

• Consumers do not reduce their spending by the full amount of the tax increase.

• The government purchases some goods that consumers would have purchased on their own anyway.

• Consumers believe all tax cuts are transitory.

• The increase in government spending causes a decrease in investment.

• Consumers are aware of tax increases but not of increases in government spending.