AP Macroeconomics chapter practice15 questions

09 Aggregate Demand and the Spending Multiplier

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 15

Aggregate demand shifts only when something other than the price level changes. Which of the following changes shifts it to the right?

Government purchases are a component of aggregate demand, so raising them moves the whole curve right. Choice A changes the variable on the vertical axis and produces movement along the curve, B and E each cut a component and pull the curve left, and C shifts aggregate supply rather than demand.
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D. A rise in government purchases

Government purchases are a component of aggregate demand, so raising them moves the whole curve right. Choice A changes the variable on the vertical axis and produces movement along the curve, B and E each cut a component and pull the curve left, and C shifts aggregate supply rather than demand.

Question 2

Question 2 of 15

The marginal propensity to consume is 0.8. In the simple fixed-price model, the spending multiplier equals

The multiplier is (1)/(1-0.8)=5. Choice A divides by the consumption propensity instead of the saving propensity, B works from a consumption propensity of 0.75, D divides by 0.10 rather than 0.20, and E squares the saving propensity in the denominator.
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C. 5

The multiplier is (1)/(1-0.8)=5. Choice A divides by the consumption propensity instead of the saving propensity, B works from a consumption propensity of 0.75, D divides by 0.10 rather than 0.20, and E squares the saving propensity in the denominator.

Question 3

Question 3 of 15

Planned investment increases by 30 in a model whose simple spending multiplier is 4. Equilibrium output changes by

The change is 30 4=120. Choice B never applies the multiplier, C adds it to the initial change, D applies a multiplier of 2, and A gets the size right and the sign wrong, as though the injection had been a tax increase.
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E. 120

The change is 30 4=120. Choice B never applies the multiplier, C adds it to the initial change, D applies a multiplier of 2, and A gets the size right and the sign wrong, as though the injection had been a tax increase.

Question 4

Question 4 of 15

The tax multiplier is smaller in absolute value than the spending multiplier. Which of the following explains that difference?

A tax change reaches spending only after households decide how much of the change in disposable income to spend, so the first round is smaller than a purchase of equal size. Choice B assumes the whole amount is spent at once, C strips out induced rounds that both multipliers share, D sends the change to the wrong component, and E swaps the two propensities.
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A. Only the consumed part of a tax cut starts the chain.

A tax change reaches spending only after households decide how much of the change in disposable income to spend, so the first round is smaller than a purchase of equal size. Choice B assumes the whole amount is spent at once, C strips out induced rounds that both multipliers share, D sends the change to the wrong component, and E swaps the two propensities.

Question 5

Question 5 of 15

The overall price level rises while every determinant of aggregate demand other than the price level is unchanged. That change causes

The price level is the vertical-axis variable, so a change in it walks the economy along the curve rather than relocating it. Choices A and B relocate the curve, which takes a determinant off the axes, C moves a capacity curve that spending does not touch, and D reverses the response of money demand to a higher price level.
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E. movement upward along aggregate demand

The price level is the vertical-axis variable, so a change in it walks the economy along the curve rather than relocating it. Choices A and B relocate the curve, which takes a determinant off the axes, C moves a capacity curve that spending does not touch, and D reverses the response of money demand to a higher price level.

Question 6

Question 6 of 15

A household spends 60 cents of each additional dollar of disposable income. Of that same extra dollar, the share not spent is

Because MPC+MPS=1, the saving propensity is 1-0.6=0.4. Choice A squares the consumption propensity, C repeats it, D reports the sum of the two, and E reports this economy's spending multiplier rather than a propensity.
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B. 0.4

Because MPC+MPS=1, the saving propensity is 1-0.6=0.4. Choice A squares the consumption propensity, C repeats it, D reports the sum of the two, and E reports this economy's spending multiplier rather than a propensity.

Question 7

Question 7 of 15

What development shifts aggregate demand to the left while leaving potential output unchanged?

Weaker foreign income cuts purchases of domestic exports, which lowers net exports and pulls aggregate demand left. Choices B and D each raise a component and move the curve the other way, A raises potential output rather than spending, and E produces movement along the curve instead of a shift.
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C. A fall in trading partners' income

Weaker foreign income cuts purchases of domestic exports, which lowers net exports and pulls aggregate demand left. Choices B and D each raise a component and move the curve the other way, A raises potential output rather than spending, and E produces movement along the curve instead of a shift.

Question 8

Question 8 of 15

The marginal propensity to consume is 0.75. An increase of 12 in autonomous consumption raises equilibrium output by

With a consumption propensity of 0.75 the multiplier is (1)/(0.25)=4, so output rises by 12 4=48. Choice A multiplies by the consumption propensity, B omits the multiplier, C uses a multiplier of 3, and E reports the propensity itself as a level of output.
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D. 48

With a consumption propensity of 0.75 the multiplier is (1)/(0.25)=4, so output rises by 12 4=48. Choice A multiplies by the consumption propensity, B omits the multiplier, C uses a multiplier of 3, and E reports the propensity itself as a level of output.

Question 9

Question 9 of 15

Two economies differ only in the fraction of extra income households save. A larger marginal propensity to save makes the simple spending multiplier

More saving leaks out of each round, so successive rounds shrink and the multiplier falls. Choice A reverses the relationship, E denies that the saving fraction enters the formula at all, and B and C assign the multiplier values the formula never produces.
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D. smaller than before

More saving leaks out of each round, so successive rounds shrink and the multiplier falls. Choice A reverses the relationship, E denies that the saving fraction enters the formula at all, and B and C assign the multiplier values the formula never produces.

Question 10

Question 10 of 15

The domestic currency appreciates against the currencies of trading partners. Which of the following explains the leftward shift of aggregate demand?

A stronger currency makes domestic goods dearer abroad and foreign goods cheaper at home, so net exports fall and aggregate demand shifts left. Choice E has imports moving the wrong way, B names a budget decision no exchange rate makes, C confuses spending with capacity, and D belongs to the banking system.
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A. It reduces net exports.

A stronger currency makes domestic goods dearer abroad and foreign goods cheaper at home, so net exports fall and aggregate demand shifts left. Choice E has imports moving the wrong way, B names a budget decision no exchange rate makes, C confuses spending with capacity, and D belongs to the banking system.

Question 11

Question 11 of 15

Which of the following conditions makes the simple spending multiplier overstate the actual change in equilibrium output?

The simple multiplier assumes a fixed price level and no interest-rate response; let either one move and the final change in output comes in smaller. Choices B and D describe the conditions under which the simple arithmetic holds, C describes the mechanism that creates the multiplier, and E restates a feature of every multiplier problem.
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A. Rising prices and interest rates damp output.

The simple multiplier assumes a fixed price level and no interest-rate response; let either one move and the final change in output comes in smaller. Choices B and D describe the conditions under which the simple arithmetic holds, C describes the mechanism that creates the multiplier, and E restates a feature of every multiplier problem.

Question 12

Question 12 of 15

In the simple fixed-price model the spending multiplier equals 2.5. The implied marginal propensity to save is

The multiplier is (1)/(MPS), so MPS=(1)/(2.5)=0.4. Choice A misplaces the decimal, C reports the consumption propensity, D subtracts one from the multiplier, and E repeats the multiplier itself.
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B. 0.4

The multiplier is (1)/(MPS), so MPS=(1)/(2.5)=0.4. Choice A misplaces the decimal, C reports the consumption propensity, D subtracts one from the multiplier, and E repeats the multiplier itself.

Question 13

Question 13 of 15

Real output is 100 below potential and the marginal propensity to consume is 0.5. Ignoring crowding out, government purchases must rise by

A consumption propensity of 0.5 gives a multiplier of 2, so closing a gap of 100 takes (100)/(2)=50 in new purchases. Choice A divides by 4, C skips the multiplier, D multiplies by 1.5, and E multiplies by 2 where the arithmetic calls for division.
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B. 50

A consumption propensity of 0.5 gives a multiplier of 2, so closing a gap of 100 takes (100)/(2)=50 in new purchases. Choice A divides by 4, C skips the multiplier, D multiplies by 1.5, and E multiplies by 2 where the arithmetic calls for division.

Question 14

Question 14 of 15

Different parts of spending respond to borrowing costs differently. Which of the following is most directly sensitive to the interest rate?

Firms weigh a project's expected return against the cost of borrowing, so investment tracks the interest rate more closely than anything else listed. Choices A and B are set in the budget, C follows current income far more than rates, and D depends on resources and technology.
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E. Business investment

Firms weigh a project's expected return against the cost of borrowing, so investment tracks the interest rate more closely than anything else listed. Choices A and B are set in the budget, C follows current income far more than rates, and D depends on resources and technology.

Question 15

Question 15 of 15

Which of the following explains why an initial change in autonomous spending produces a larger change in equilibrium output?

Spending by one household is income for another, who then spends part of it, and the rounds accumulate into a change larger than the first. Choice B names the leakage that limits the process rather than the process itself, and A, D, and E describe mechanisms no version of the multiplier uses.
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C. One person's spending becomes another person's income.

Spending by one household is income for another, who then spends part of it, and the rounds accumulate into a change larger than the first. Choice B names the leakage that limits the process rather than the process itself, and A, D, and E describe mechanisms no version of the multiplier uses.

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