Question

5. According to the textbook, which of the following statements is (are) correct?
(x) The multiplier effect is the multiplied impact on aggregate demand of a given increase in government purchases of goods and services.
(y) The marginal propensity to consume (MPC) is defined as the fraction of extra income that a household consumes rather than saves and the larger the MPC the larger the multiplier effect.
(z) According to the multiplier effect, an increase in government purchases causes interest rates to increase which increases investment spending.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only.
E. (y) only

6. Which of the following statements is (are) correct?
(x) According to the textbook, an increase in government spending on goods to build or repair transportation infrastructure and education facilities shifts the aggregate demand curve to the right and, in the long run, shifts the aggregate supply curve to the right.
(y) According to the crowding-out effect, an increase in government purchases causes interest rates to rise and the interest rate increase causes an increase in investment spending.
(z) The multiplier effect amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only.
E. (z) only

7. If consumer confidence diminishes and causes a reduction in household spending, then aggregate demand ________, which the government could offset by _________ government expenditures or ________ taxes.
A. decreases, increasing; increasing.
B. increases, increasing, decreasing.
C. increases, decreasing; increasing.
D. decreases, decreasing; increasing.
E. decreases, increasing; decreasing

Answer 1

Que5: Option E is correct. MPC is the change in consumption due to change in income. Higher the MPC higher will be the multiplier effect because higher part of the income being spend in the economy which increases the effect of multiplier and also increase the equilibroum GDP

Multiplier effect multiplies the effect of increase in autonomous spending on Equilibrium output not on AD. Hence x is false

Ques6: Option E is correct. Multiplier effect amplifies the effect of increase in government expenditure on GDP, while crowding out which refers to the decline in investment spending due to increase in interest rate as government spending increase lowers the effect.

Ques7: Option E is correct. As consumer confidence diminishes the AD curve shifts to the left, to restore the effect of AD government have to use expansionary fiscal policy which is either increase in government spending or decrease in taxes.