Question

Suppose the MPC = .5 when government purchases decrease by $200 billion. How much and in which direction would the aggregate demand curve shift as a result of the shock and all rounds of the multiplier process?

		shift to the left by $100 billion
		shift to the left by $400 billion
		shift to right by $200 billion
		shift to the left by $200 billion

Suppose the MPC = .75 when the stock market values increase causing consumption spending to increase by $50 billion. How much and in which direction would the aggregate demand curve shift as a result of the shock and all rounds of the multiplier process?

		shift to the left by $200 billion
		shift to the right by $200 billion
		shift to the right by $50 billion
		shift to the right by $37.5 billion

Higher interest rates in the U.S. cause

		demand for U.S. bonds by foreigners to increase
		demand for U.S. currency to increase
		the U.S. dollar to appreciate in the foreign exchange market
		all of the above

When the U.S. dollar appreciates in the foreign exchange market,

		U.S. goods become more expensive for foreigners
		foreign goods become cheaper for U.S. residents
		U.S. exports decline and U.S. imports increase
		all of the above

Answer 1

Q-1 :: ANSWER :: (B) Shift to the left by $400 billion

=> Explanation ::

Multiplier = 1/(1-MPC)

= 1/(1-0.5)

= 1/0.5

= 2

So, Demand Increase = $200 *  2

= $400

=> So As Government Spending Is The Component Of Aggregate Demand so Decrease in The Government Spending Shift The Aggregate Demand curve to the Left So As Multiplier Process Aggregate Demand Curve Shift To The Left By $400 Billion

Q-2 :: ANSWER ::(B) Shift to the right by $200 billion

=> Explanation ::   

Multiplier = 1/(1-MPC)

= 1/(1-0.75)

= 1/0.25

= 4

So, Demand Decrease = $50*4

= $200

=> So As Consumption Spending Is The Component Of Aggregate demand Because The Stock Market Value Increase So It Leads To Increase in The Consumption Spending so It Shift The Aggregate Demand curve to the Right So As Multiplier Process Aggregate Demand Curve Shift To The Right By $200 Billion.

Q-3 :: ANSWER :: (D) All Of The Above

=> Explanation ::

Higher Interest Rate Attract Foreigner To Purchase US Bonds Which Provide Higher Return so It Attract The Investment In The Country So Currency Value And Its Demand Both increase In The Foreign Market. So higher Interest Rate Attract New Investment In The Country

Q-4 :: ANSWER :: (D) All Of The Above

=> Explanation ::

As US Dollar Appreciate It Means The Value Of US dollar Increase So US Goods Become More Expensive For Foreigners And Foreign Goods Become Cheaper for US So It Decline The Export Of US and Increase The Import Of US Because Foreign Goods Is Cheaper For US and US goods Become Expensive For Foreign Countries.