Aggregate Demand and Government Spending Quiz

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What happens to the aggregate demand curve when government purchases are decreased?

It shifts to the right

It becomes steeper

It shifts to the left (correct)

It remains unchanged

Which factor helps explain the multiplier effect in economics?

Government austerity measures

Increase in interest rates

Re-spending of income in the circular flow model (correct)

Decrease in consumer confidence

What is the role of money in a transaction involving purchasing jeans at the mall?

Unit of account

Medium of exchange (correct)

Store of value

Standard of deferred payment

What action can a bank take if it doesn't have enough reserves to meet requirements?

Borrow reserves from the discount window Signup and view all the answers

Which policy tool is the principal mechanism for directly changing banking system reserves?

Open-market operations Signup and view all the answers

What term refers to the fraction of each additional dollar of disposable income spent on consumption?

Marginal propensity to consume Signup and view all the answers

What will happen to the aggregate demand curve if there is a decrease in government spending?

Shift leftward Signup and view all the answers

In the context of the text, what would be the effect of a tax cut on the aggregate demand curve?

Shift rightward Signup and view all the answers

If there is a decrease in consumer spending, what will happen to the aggregate demand curve?

Shift leftward Signup and view all the answers

What is the impact of an increase in government spending by an amount less than the GDP gap on closing the GDP gap?

Remains unchanged Signup and view all the answers

Assuming a MPC of 0.75, what would be the total change in spending for the economy due to a $20 billion new government spending injection?

$60 billion Signup and view all the answers

Based on the text, what is the appropriate change in the U.S. economy given that the stock market's value more than doubled between 1921 and 1927?

Growth in household and business wealth Signup and view all the answers

What is the Keynesian approach to achieving full employment during a recession?

Increase tax cuts or government spending, or both Signup and view all the answers

Which of the following accurately defines inflation?

An increase in the average level of prices of goods and services Signup and view all the answers

What would be the result of an increase in the cost of natural gas on the aggregate supply curve?

Leftward shift in the aggregate supply curve Signup and view all the answers

Which action would not be recommended by the classical approach for achieving full employment during a recession?

Waiting for natural market forces to improve the economy Signup and view all the answers

What policy would reduce a budget deficit and provide fiscal restraint?

Raising taxes Signup and view all the answers

What does Say's Law imply about long-term output changes in the economy?

The economy will not experience a long-term decrease in output Signup and view all the answers