Answer True or False 1. If MPC = 0.5 and there is no crowding out, an increase i

ID: 1198210 • Letter: A

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Answer True or False

1. If MPC = 0.5 and there is no crowding out, an increase in G by $50 would increase income by $100.

2. In the 1980s the increased unemployment to reduce inflation. This eventually would cause a decrease in the price level lowering money demand, raising the interest rate which increases investment which increases the aggregate quantity of goods & services demanded.

3. If the Fed increases the money supply it causes the interest rate to fall, which stimulates investment and shifts the aggregate demand curve rightward.

4. An increase in G will increases AD by the multiplier, but the resulting higher Y will increased money demand and r lowering AD. This is called crowding out.

5. A bigger MPC means changes in Y cause bigger changes in C, which in turn cause bigger changes in Y.

6. The multiplier is the additional shifts in AD that result when an increase in G increases income and thereby increases consumer spending

7. The Fed can raise r by reducing the money supply. An increase in r increases the quantity of goods and services demanded

Explanation / Answer

1. Cannot say.

Crowding out effect is decrease in private investment due to increase in government expenditure. Though it is right income has increased due to government expenditure but cannot say about private investment.

2. False

Lower money demand will lower the interest rate, instead of rising it.

Increase in interest rate will not boost investment, instead it will lead to decline in investment.

3. True

Increase in money supply will lead to decrease in interest rate which in turn will boost investment. Thus it will boost aggregate demand.

4. True

As money demand increases, r will increase which in turn lowers private investment. Thus no real effect on AD due to increase in G.

5. True

MPC is the propensity to consume out of change in income. Higher MPC means higher propensity to consume out of change in income.

6. False

Not necessarily when G increases.

7. False

Increase in r will reduce investment and thus demand.

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Answer True or False 1. If MPC = 0.5 and there is no crowding out, an increase i

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Answer True or False 1. If MPC = 0.5 and there is no crowding out, an increase i

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