Impact of Monetary and Fiscal Policies on Aggregate Demand-B

If the marginal propensity to consume MPC is 0.75, the value of the multiplier is

• 0.75

• 7.5

• 5

• 4

Suppose the government increases its purchases by $16 billion. If the multiplier effect exceeds the crowding­ out effect, then

• the aggregate supply curve shifts to the right by more than $16 billion

• the aggregate demand curve shifts to the left by more than $16 billion.

• the aggregate demand curve shifts to the right by more than $16 billion.

• the aggregate supply curve shifts to the left by more than $16 billion.

An increase in the marginal propensity to consume (MPC)

• raises the value of the multiplier.

• has no impact on the value of the multiplier.

• rarely occurs because the MPC is set by government laws.

• lowers the value of the multiplier.

Crowding out occurs when an increase in government spending increases incomes, shifts money demand to the right, raises the interest rate, and reduces private investment.

• True

• False

Fiscal policy refers to the idea that aggregate demand is affected by changes in

• the money supply.

• government spending and taxes.

• trade policy.

• All of the above are correct

If a $1,000 increase in income leads to a $750 increase in consumption expenditures, then the marginal propensity to consume is

• 0.75 and the multiplier is 1 1/3.

• 0.75 and the multiplier is 4.

• 0.25 and the multiplier is 1 1/3.

• 0.25 and the multiplier is 4.

Which of the following is an automatic stabilizer?

• Spending on public schools

• Military spending

• Unemployment benefits

• All of these answers are automatic stabilizers.

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

• True

• False

Supply-side economists focus more than other economists on

• how fiscal policy affects consumption

• the multiplier affect of fiscal policy.

• how fiscal policy affects aggregate supply

• the money supply

Monetary policy

• can be implemented quickly and most of its impact on aggregate demand occurs very soon after policy is implemented.

• can be implemented quickly, but most of its impact on aggregate demand occurs months after policy is implemented.