CLEP Macroeconomics chapter practice4 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 4

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 4

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 4

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 4

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.

Quiz complete