Question 1

During the economic downturn of 2008-2009,the Federal Reserve

Accepted Answer

A)  used open-market operations to purchase mortgages and corporate debt,just as it frequently does even when the economy is functioning normally. 
B)  took the unusual step of using open-market operations to purchase mortgages and corporate debt. 
C)  explicitly set its target rate of inflation at zero. 
D)  explicitly set its target rate of inflation well above zero. 
A)  used open-market operations to purchase mortgages and corporate debt,just as it frequently does even when the economy is functioning normally. 
B)  took the unusual step of using open-market operations to purchase mortgages and corporate debt. 
C)  explicitly set its target rate of inflation at zero. 
D)  explicitly set its target rate of inflation well above zero.

Question 2

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending,assuming policymakers want to stabilize output?

Accepted Answer

A)  increase taxes 
B)  increase the money supply 
C)  increase government expenditures 
D)  All of the above are correct. 
A)  increase taxes 
B)  increase the money supply 
C)  increase government expenditures 
D)  All of the above are correct.

Question 3

If the stock market booms,then

Accepted Answer

A)  aggregate demand increases,which the Fed could offset by increasing the money supply. 
B)  aggregate supply increases,which the Fed could offset by increasing the money supply. 
C)  aggregate demand increases,which the Fed could offset by decreasing the money supply. 
D)  aggregate supply increases,which the Fed could offset by decreasing the money supply. 
A)  aggregate demand increases,which the Fed could offset by increasing the money supply. 
B)  aggregate supply increases,which the Fed could offset by increasing the money supply. 
C)  aggregate demand increases,which the Fed could offset by decreasing the money supply. 
D)  aggregate supply increases,which the Fed could offset by decreasing the money supply.

Question 4

Figure 21-1  
-Refer to Figure 21-1.If the current interest rate is 2 percent,

Accepted Answer

A)  there is an excess supply of money. 
B)  people will sell more bonds,which drives interest rates up. 
C)  as the money market moves to equilibrium,people will buy more goods. 
D)  All of the above are correct. 
A)  there is an excess supply of money. 
B)  people will sell more bonds,which drives interest rates up. 
C)  as the money market moves to equilibrium,people will buy more goods. 
D)  All of the above are correct.

Question 5

Assume the money market is initially in equilibrium.If the price level decreases,then according to liquidity preference theory there is an excess

Accepted Answer

A)  supply of money until the interest rate increases. 
B)  supply of money until the interest rate decreases. 
C)  demand for money until the interest rate increases. 
D)  demand for money until the interest rate decreases. 
A)  supply of money until the interest rate increases. 
B)  supply of money until the interest rate decreases. 
C)  demand for money until the interest rate increases. 
D)  demand for money until the interest rate decreases.

Question 6

If the investment accelerator from an increase in government purchases is larger than the crowding-out effect,then

Accepted Answer

A)  the multiplier is probably zero. 
B)  the multiplier is probably equal to one. 
C)  the multiplier is probably greater than one. 
D)  the multiplier is probably less than one. 
A)  the multiplier is probably zero. 
B)  the multiplier is probably equal to one. 
C)  the multiplier is probably greater than one. 
D)  the multiplier is probably less than one.

Question 7

Other things the same,an increase in taxes shifts aggregate demand to the left.In the short run this makes output fall which makes the interest rate rise.

Accepted Answer

A) True 
 B)False

Question 8

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

Accepted Answer

A)  shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate. 
B)  the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an interest rate. 
C)  changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate. 
D)  the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate. 
A)  shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate. 
B)  the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an interest rate. 
C)  changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate. 
D)  the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate.

Question 9

According to the theory of liquidity preference,an increase in the price level causes the

Accepted Answer

A)  interest rate and investment to rise. 
B)  interest rate and investment to fall. 
C)  interest rate to rise and investment to fall. 
D)  interest rate to fall and investment to rise. 
A)  interest rate and investment to rise. 
B)  interest rate and investment to fall. 
C)  interest rate to rise and investment to fall. 
D)  interest rate to fall and investment to rise.

Question 10

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

Question 11

The multiplier is computed as MPC / (1 - MPC).

Accepted Answer

A) True 
 B)False

Question 12

Which particular interest rate(s)do we attempt to explain using the theory of liquidity preference?

Accepted Answer

A)  only the nominal interest rate 
B)  both the nominal interest rate and the real interest rate 
C)  only the interest rate on long-term bonds 
D)  only the interest rate on short-term government bonds 
A)  only the nominal interest rate 
B)  both the nominal interest rate and the real interest rate 
C)  only the interest rate on long-term bonds 
D)  only the interest rate on short-term government bonds

Question 13

Assume the multiplier is 5 and that the crowding-out effect is $20 billion.An increase in government purchases of $10 billion will shift the aggregate-demand curve to the

Accepted Answer

A)  right by $150 billion. 
B)  right by $70 billion. 
C)  right by $30 billion. 
D)  None of the above is correct. 
A)  right by $150 billion. 
B)  right by $70 billion. 
C)  right by $30 billion. 
D)  None of the above is correct.

Question 14

Which of the following events would shift money demand to the left?

Accepted Answer

A)  an increase in the price level 
B)  a decrease in the price level 
C)  an increase in the interest rate 
D)  a decrease in the interest rate 
A)  an increase in the price level 
B)  a decrease in the price level 
C)  an increase in the interest rate 
D)  a decrease in the interest rate

Question 15

People choose to hold a smaller quantity of money if

Accepted Answer

A)  the interest rate rises,which causes the opportunity cost of holding money to rise. 
B)  the interest rate falls,which causes the opportunity cost of holding money to rise. 
C)  the interest rate rises,which causes the opportunity cost of holding money to fall. 
D)  the interest rate falls,which causes the opportunity cost of holding money to fall. 
A)  the interest rate rises,which causes the opportunity cost of holding money to rise. 
B)  the interest rate falls,which causes the opportunity cost of holding money to rise. 
C)  the interest rate rises,which causes the opportunity cost of holding money to fall. 
D)  the interest rate falls,which causes the opportunity cost of holding money to fall.

Question 16

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Accepted Answer

A) True 
 B)False

Question 17

Permanent tax cuts shift the AD curve

Accepted Answer

A)  farther to the right than do temporary tax cuts. 
B)  not as far to the right as do temporary tax cuts. 
C)  farther to the left than do temporary tax cuts. 
D)  not as far to the left as do temporary tax cuts. 
A)  farther to the right than do temporary tax cuts. 
B)  not as far to the right as do temporary tax cuts. 
C)  farther to the left than do temporary tax cuts. 
D)  not as far to the left as do temporary tax cuts.

Question 18

An increase in government spending on goods to build or repair infrastructure

Accepted Answer

A)  shifts the aggregate demand curve to the right. 
B)  has a multiplier effect. 
C)  shifts the aggregate supply curve to the right,but this effect is likely more important in the long run. 
D)  All of the above are correct. 
A)  shifts the aggregate demand curve to the right. 
B)  has a multiplier effect. 
C)  shifts the aggregate supply curve to the right,but this effect is likely more important in the long run. 
D)  All of the above are correct.

Question 19

Suppose there is an increase in government spending.To stabilize output,the Federal Reserve would

Accepted Answer

A)  increase government spending. 
B)  increase the money supply. 
C)  decrease government spending. 
D)  decrease the money supply. 
A)  increase government spending. 
B)  increase the money supply. 
C)  decrease government spending. 
D)  decrease the money supply.

Question 20

Which of the following raises the interest rate?

Accepted Answer

A)  an increase in government expenditures and an increase in the money supply 
B)  an increase in government expenditures and a decrease in the money supply 
C)  a decrease in government expenditures and an increase in the money supply 
D)  a decrease in government expenditures and a decrease in the money supply 
A)  an increase in government expenditures and an increase in the money supply 
B)  an increase in government expenditures and a decrease in the money supply 
C)  a decrease in government expenditures and an increase in the money supply 
D)  a decrease in government expenditures and a decrease in the money supply

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

During the economic downturn of 2008-2009,the Federal Reserve

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending,assuming policymakers want to stabilize output?

If the stock market booms,then

Figure 21-1 -Refer to Figure 21-1.If the current interest rate is 2 percent,

Assume the money market is initially in equilibrium.If the price level decreases,then according to liquidity preference theory there is an excess

If the investment accelerator from an increase in government purchases is larger than the crowding-out effect,then

Other things the same,an increase in taxes shifts aggregate demand to the left.In the short run this makes output fall which makes the interest rate rise.

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

According to the theory of liquidity preference,an increase in the price level causes the

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.

The multiplier is computed as MPC / (1 - MPC).

Which particular interest rate(s)do we attempt to explain using the theory of liquidity preference?

Assume the multiplier is 5 and that the crowding-out effect is $20 billion.An increase in government purchases of $10 billion will shift the aggregate-demand curve to the

Which of the following events would shift money demand to the left?

People choose to hold a smaller quantity of money if

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Permanent tax cuts shift the AD curve

An increase in government spending on goods to build or repair infrastructure

Suppose there is an increase in government spending.To stabilize output,the Federal Reserve would

Which of the following raises the interest rate?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply,demand,and Government Policies

Consumers,producers,and the Efficiency of Markets

Application: The Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Market for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving,investment,and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomic Models

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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