Question 1

The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.

Accepted Answer

A) True 
 B)False

Question 2

Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures?

Accepted Answer

A)   an increase in government expenditures
B)   an increase in net exports
C)   an increase in investment spending
D)   All of the above are correct.E) B) and C)
F) None of the above

Question 3

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

Accepted Answer

A)   a decrease in the money supply
B)   an increase in tax rates
C)   an increase in government purchases
D)   an increase in interest rates.E) A) and B)
F) A) and C)

Question 4

According to the liquidity preference theory, an increase in the overall price level of 10 percent

Accepted Answer

A)   increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded.
B)   decreases the equilibrium interest rate, which in turn increases the quantity of goods and services demanded.
C)   increases the quantity of money supplied by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged.
D)   decreases the quantity of money demanded by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged.E) None of the above
F) All of the above

Question 5

When the Fed lowers the growth rate of the money supply, it must take into account

Accepted Answer

A)   only the short-run effect on production.
B)   only the short-run effects on inflation and production.
C)   only the long-run effect on inflation.
D)   the long-run effect on inflation as well as the short-run effect on production.E) None of the above
F) C) and D)

Question 6

The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?

Accepted Answer

A)   increase government expenditures or increase the money supply
B)   increase government expenditures or decrease the money supply
C)   decrease government expenditures or increase the money supply
D)   decrease government expenditures or decrease the money supplyE) All of the above
F) A) and D)

Question 7

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Suppose the current equilibrium interest rate is r3. Which of the following events would cause the equilibrium interest rate to decrease?

Accepted Answer

A)   The Federal Reserve increases the money supply.
B)   Money demand decreases.
C)   The price level decreases.
D)   All of the above are correct.E) All of the above
F) B) and C)

Question 8

Assume the MPC is 0.8. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

Accepted Answer

A)   left by $180 billion.
B)   left by $500 billion.
C)   right by $180 billion.
D)   right by $400 billion.E) A) and C)
F) B) and C)

Question 9

Which of the following are effects of an increase in government spending financed by a tax increase?

Accepted Answer

A)   the tax increase reduces consumption; the change in the interest rate reduces residential construction
B)   the tax increase reduces consumption; the change in the interest rate raises residential construction
C)   the tax increase raises consumption; the change in the interest rate reduces residential construction
D)   the tax increase raises consumption; the change in the interest rate reduces residential constructionE) All of the above
F) A) and B)

Question 10

Which of the following Fed actions would both decrease the money supply?

Accepted Answer

A)   buy bonds and raise the reserve requirement
B)   buy bonds and lower the reserve requirement
C)   sell bonds and raise the reserve requirement
D)   sell bonds and lower the reserve requirementE) A) and B)
F) A) and C)

Question 11

According to liquidity preference theory,

Accepted Answer

A)   an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right.
B)   an increase in the interest rate increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand leftward.
C)   an increase in the price level reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand rightward.
D)   an increase in the price level increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand leftward.E) B) and D)
F) C) and D)

Question 12

In recent years, the Fed has chosen to target interest rates rather than the money supply because

Accepted Answer

A)   Congress passed a law requiring them to do so.
B)   the President requested them to do so.
C)   the money supply is hard to measure with sufficient precision.
D)   changes in the interest rate change aggregate demand, but changes in the money supply do not.E) A) and B)
F) None of the above

Question 13

Critics of stabilization policy argue that monetary and fiscal policies affect the economy with .

Accepted Answer

The answer of Critics of stabilization policy argue that monetary...

Question 14

Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate-demand curve?

Accepted Answer

A)   When interest rates fall, In-and-Out Convenience Stores decides to build some new stores.
B)   The exchange rate falls, so French restaurants in Paris buy more Kansas beef.
C)   Tyler feels wealthier because of the price-level decrease and so he decides to remodel his kitchen.
D)   With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers.E) None of the above
F) A) and B)

Question 15

If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, it could

Accepted Answer

A)   buy bonds to increase the money supply.
B)   buy bonds to decrease the money supply.
C)   sell bonds to increase the money supply.
D)   sell bonds to decrease the money supply.E) B) and D)
F) A) and C)

Question 16

In the short run, open-market sales

Accepted Answer

A)   increase the price level and real GDP.
B)   decrease the price level and real GDP.
C)   increases the price level and decreases real GDP.
D)   decreases the price level and increases real GDP.E) A) and C)
F) A) and B)

Question 17

The primary argument against active monetary and fiscal policy is that

Accepted Answer

A)   attempts to stabilize the economy do not constitute a proper role for government in a democratic society.
B)   these policies affect the economy with a long lag.
C)   these policies affect the economy too quickly and with too much impact.
D)   history demonstrates that interest rates respond unpredictably to active policies, leading to unpredictable effects on income.E) A) and B)
F) A) and C)

Question 18

During recessions, the government tends to run a budget deficit.

Accepted Answer

A) True 
 B)False

Question 19

Suppose that there are no crowding-out effects and the MPC is .9. By how much must the government increase expenditures to shift the aggregate demand curve right by $10 billion?

Accepted Answer

An MPC of .9 means the multiplier = 1/(1...

Question 20

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Accepted Answer

A) True 
 B)False

Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

According to liquidity preference theory,

Correct AnswerverifiedShow Answer

Which of the following Fed actions would both decrease the money supply?

Correct AnswerverifiedShow Answer

Which of the following are effects of an increase in government spending financed by a tax increase?

Correct AnswerverifiedShow Answer

According to the liquidity preference theory, an increase in the overall price level of 10 percent

Correct AnswerverifiedShow Answer

Suppose that there are no crowding-out effects and the MPC is .9. By how much must the government increase expenditures to shift the aggregate demand curve right by $10 billion?

Correct AnswerverifiedAn MPC of .9 means the multiplier = 1/(1...View AnswerShow Answer

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the current equilibrium interest rate is r3. Which of the following events would cause the equilibrium interest rate to decrease?

Correct AnswerverifiedShow Answer

When the Fed lowers the growth rate of the money supply, it must take into account

Correct AnswerverifiedShow Answer

During recessions, the government tends to run a budget deficit.

Correct AnswerverifiedShow Answer

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Correct AnswerverifiedShow Answer

In recent years, the Fed has chosen to target interest rates rather than the money supply because

Correct AnswerverifiedShow Answer

The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.

Correct AnswerverifiedShow Answer

Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures?

Correct AnswerverifiedShow Answer

If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, it could

Correct AnswerverifiedShow Answer

Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate-demand curve?

Correct AnswerverifiedShow Answer

Critics of stabilization policy argue that monetary and fiscal policies affect the economy with .

Correct AnswerverifiedShow Answer

The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?

Correct AnswerverifiedShow Answer

The primary argument against active monetary and fiscal policy is that

Correct AnswerverifiedShow Answer

Assume the MPC is 0.8. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

Correct AnswerverifiedShow Answer

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

Correct AnswerverifiedShow Answer

In the short run, open-market sales

Correct AnswerverifiedShow Answer

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An MPC of .9 means the multiplier = 1/(1...
View Answer

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