Principles of Economics
7th Edition
ISBN: 9781305156043
Author: N. Gregory Mankiw
Publisher: Cengage Learning US
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Chapter 34, Problem 4QCMC
To determine
Multiplier effect.
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As interest rates rise, the effect on aggregate demand is to
Select one:
a. increase firm borrowing and investment spending.
b. increase only firm borrowing.
c. reduce consumer borrowing and consumption spending.
d. increase consumer borrowing and saving.
The tax rate is 0.4. The marginal propensity to import is 0.5 .
When real GDP increases from $20,000 to $20,198, consumption increases from $18,000 to $18,050. What is the marginal propensity to consume?
d. Now G assumes its original value of G = 800. Congress decreases the tax rate from (1/2) to (1/4). i) Use a model to sketch the effect of the decrease in the tax rate when the price level is held constant. ii) What is the new marginal propensity to consume? iii) Calculate the new equilibrium level of income.
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- Calculate the total change in aggregate spending if investment decreases by $250 billion and the marginal propensity to consume is 0.9. Instructions: Enter your response as a whole number. Aggregate demand decreases by $ ________billion.arrow_forwardOne way that the government can increase aggregate demand is by: A. reducing income taxes. B. increasing the interest rates. C. reducing government spending. D. increasing business taxes.arrow_forwardWhich of the following would be most likely to increase consumption spending? Selected answer will be automatically saved. For keyboard navigation, press up/down arrow keys to select an answer. a A reduction in consumer credit card debt b A drop in stock prices c A higher interest rate d The expectation of lower future pricesarrow_forward
- Explanationarrow_forwardQuestion:4,5arrow_forwardWhich of the following would be most likely to increase consumption spending? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a A reduction in consumer credit card debt b A drop in stock prices A higher interest rate d The expectation of lower future pricesarrow_forward
- Which of the following tax policies is most likely to increase investment and long-run aggregate supply? a. a cut in the corporate profit tax b. an increase in the corporate profit tax c. a generous investment tax credit d. a cut in personal income taxesarrow_forwardExamine the following policies and determine which would decrease the level of aggregate demand. Group of answer choices A. Decreasing in government spending and decreasing taxes B. Increasing investment and increasing government spending C. Decreasing in government spending and increasing in taxes D. Increasing consumption and decreasing taxesarrow_forwardIf the government increases expenditures on goods and services and increases taxation by the same amount, which of the following will occur? A. Aggregate demand will be unchanged. B. Aggregate demand will increase. C. Interest rates will decrease. D. The money supply will decrease.arrow_forward
- One explanation for the negative slope of the aggregate demand curve is the "wealth effect" (aka the "real‑balances" effect). What is this effect? a. As inflation occurs, consumers buy fewer goods and services because the value of their accumulated wealth declines. b. Interest rates increase when prices rise as consumers try to borrow larger amounts of money to maintain their consumption. The higher interest rate discourages spending. c. As inflation occurs, the purchasing power of consumers increases as accumulated wealth increases in value. d. For normal goods, people buy more of a product if their income increases. According to the wealth effect, what happens as the price level falls? a. Consumption spending decreases and investment spending increases. b. Consumption spending decreases. c. Consumption spending increases and investment spending decreases. d. Consumption and investment spending increase. e. Consumption and investment spending…arrow_forwardThe graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by increasing government purchases to reduce the burden of this recession. Fiscal Policy 180 LRAS AS 160 140 120 100 80 60 40 AD 20 AD, 100 200 300 400 500 600 700 800 900 Real GDP (billions of dollars) Inctructions: Enter your answers as a whole number. Price Levelarrow_forward3. When the following event occurs, the change in Real GDP = Event: The government increases its education funding by $60 billion; the marginal propensity to consume is 0.6. the multiplier.arrow_forward
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