Question 1

Automatic stabilizers

Accepted Answer

A)  increase the problems that lags cause in using fiscal policy as a stabilization tool. 
B)  are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession. 
C)  are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession. 
D)  All of the above are correct. 
A)  increase the problems that lags cause in using fiscal policy as a stabilization tool. 
B)  are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession. 
C)  are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession. 
D)  All of the above are correct.

Question 2

In which of the following cases would the quantity of money demanded be largest?

Accepted Answer

A)  r = 0.03,P = 1.2 
B)  r = 0.03,P = 1.3 
C)  r = 0.04,P = 1.2 
D)  r = 0.05,P = 0.9 
A)  r = 0.03,P = 1.2 
B)  r = 0.03,P = 1.3 
C)  r = 0.04,P = 1.2 
D)  r = 0.05,P = 0.9

Question 3

Suppose the MPC is 0.60.Assume there are no crowding out or investment accelerator effects.If the government increases expenditures by $200 billion,then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion,then by how much does aggregate demand shift to the right?

Accepted Answer

A)  $300 billion and $180 billion 
B)  $300 billion and $300 billion 
C)  $500 billion and $300 billion 
D)  $500 billion and $500 billion 
A)  $300 billion and $180 billion 
B)  $300 billion and $300 billion 
C)  $500 billion and $300 billion 
D)  $500 billion and $500 billion

Question 4

According to a 2009 article in The Economist,the multiplier effect and crowding-out effect would exactly offset each other when the economy is

Accepted Answer

A)  operating at full capacity. 
B)  in recession. 
C)  experiencing zero inflation. 
D)  experiencing high rates of inflation. 
A)  operating at full capacity. 
B)  in recession. 
C)  experiencing zero inflation. 
D)  experiencing high rates of inflation.

Question 5

In order to simplify the equation for the multiplier to its familiar,relatively simple form,we make use of the

Accepted Answer

A)  assumption that increases in government purchases have no effect on consumer spending. 
B)  assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred. 
C)  empirical evidence that points to a value of aboutfor the MPC. 
D)  fact that the multiplier effect is represented by an infinite geometric series. 
A)  assumption that increases in government purchases have no effect on consumer spending. 
B)  assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred. 
C)  empirical evidence that points to a value of aboutfor the MPC. 
D)  fact that the multiplier effect is represented by an infinite geometric series.

Question 6

The interest-rate effect

Accepted Answer

A)  depends on the idea that increases in interest rates decrease the quantity of goods and services demanded. 
B)  depends on the idea that increases in interest rates decrease the quantity of goods and services supplied. 
C)  is responsible for the downward slope of the money-demand curve. 
D)  is the least important reason,in the case of the United States,for the downward slope of the aggregate-demand curve. 
A)  depends on the idea that increases in interest rates decrease the quantity of goods and services demanded. 
B)  depends on the idea that increases in interest rates decrease the quantity of goods and services supplied. 
C)  is responsible for the downward slope of the money-demand curve. 
D)  is the least important reason,in the case of the United States,for the downward slope of the aggregate-demand curve.

Question 7

To reduce the effects of crowding out caused by an increase in government expenditures,the Federal Reserve could

Accepted Answer

A)  increase the money supply by buying bonds . 
B)  increase the money supply by selling bonds. 
C)  decrease the money supply by buying bonds 
D)  increase the money supply by selling bonds . 
A)  increase the money supply by buying bonds . 
B)  increase the money supply by selling bonds. 
C)  decrease the money supply by buying bonds 
D)  increase the money supply by selling bonds .

Question 8

During recessions,unemployment insurance payments tend to rise.

Accepted Answer

A) True 
 B)False

Question 9

Monetary policy

Accepted Answer

A)  can be implemented quickly and most of its impact on aggregate demand occurs very soon after policy is implemented. 
B)  can be implemented quickly,but most of its impact on aggregate demand occurs months after policy is implemented. 
C)  cannot be implemented quickly,but once implemented most of its impact on aggregate demand occurs very soon afterward. 
D)  cannot be implemented quickly and most of its impact on aggregate demand occurs months after policy is implemented. 
A)  can be implemented quickly and most of its impact on aggregate demand occurs very soon after policy is implemented. 
B)  can be implemented quickly,but most of its impact on aggregate demand occurs months after policy is implemented. 
C)  cannot be implemented quickly,but once implemented most of its impact on aggregate demand occurs very soon afterward. 
D)  cannot be implemented quickly and most of its impact on aggregate demand occurs months after policy is implemented.

Question 10

According to liquidity preference theory,the money-supply curve would shift if the Fed

Accepted Answer

A)  engaged in open-market transactions. 
B)  changed the discount rate. 
C)  changed the reserve requirement. 
D)  did any of the above. 
A)  engaged in open-market transactions. 
B)  changed the discount rate. 
C)  changed the reserve requirement. 
D)  did any of the above.

Question 11

The change in aggregate demand that results from fiscal expansion changing the interest rate is called the

Accepted Answer

A)  multiplier effect. 
B)  crowding-out effect. 
C)  accelerator effect. 
D)  Ricardian equivalence effect. 
A)  multiplier effect. 
B)  crowding-out effect. 
C)  accelerator effect. 
D)  Ricardian equivalence effect.

Question 12

Sometimes,changes in monetary policy and/or fiscal policy are intended to offset changes to aggregate demand over which policymakers have little or no control.

Accepted Answer

A) True 
 B)False

Question 13

Figure 21-6.On the left-hand graph,MS represents the supply of money and MD represents the demand for money;on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs.
 
-Refer to Figure 21-6.Suppose the multiplier is 3 and the government increases its purchases by $25 billion.Also,suppose the AD curve would shift from AD1 to AD2 if there were no crowding out;the AD curve actually shifts from AD1 to AD3 with crowding out.Finally,assume the horizontal distance between the curves AD1 and AD3 is $30 billion.The extent of crowding out,for any particular level of the price level,is

Accepted Answer

A)  $25 billion. 
B)  $30 billion. 
C)  $45 billion. 
D)  $60 billion. 
A)  $25 billion. 
B)  $30 billion. 
C)  $45 billion. 
D)  $60 billion.

Question 14

If the marginal propensity to consume is 6/7,then the multiplier is 7.

Accepted Answer

A) True 
 B)False

Question 15

According to liquidity preference theory,the opportunity cost of holding money is

Accepted Answer

A)  the interest rate on bonds. 
B)  the inflation rate. 
C)  the cost of converting bonds to a medium of exchange. 
D)  the difference between the inflation rate and the interest rate on bonds. 
A)  the interest rate on bonds. 
B)  the inflation rate. 
C)  the cost of converting bonds to a medium of exchange. 
D)  the difference between the inflation rate and the interest rate on bonds.

Question 16

If a $1,000 increase in income leads to a $750 increase in consumption expenditures,then the marginal propensity to consume is

Accepted Answer

A)  0.75 and the multiplier is 1 1/3. 
B)  0.75 and the multiplier is 4. 
C)  0.25 and the multiplier is 1 1/3. 
D)  0.25 and the multiplier is 4. 
A)  0.75 and the multiplier is 1 1/3. 
B)  0.75 and the multiplier is 4. 
C)  0.25 and the multiplier is 1 1/3. 
D)  0.25 and the multiplier is 4.

Question 17

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are

Accepted Answer

A)  smaller in closed economies than in open economies. 
B)  larger in closed economies than in open economies. 
C)  smaller in capitalist economies than in socialist economies. 
D)  larger in capitalist economies than in socialist economies. 
A)  smaller in closed economies than in open economies. 
B)  larger in closed economies than in open economies. 
C)  smaller in capitalist economies than in socialist economies. 
D)  larger in capitalist economies than in socialist economies.

Question 18

Suppose aggregate demand shifts to the left and policymakers want to stabilize output.What can they do?

Accepted Answer

A)  repeal an investment tax credit or increase the money supply 
B)  repeal an investment tax credit or decrease the money supply 
C)  institute an investment tax credit or increase the money supply 
D)  institute an investment tax credit or decrease the money supply 
A)  repeal an investment tax credit or increase the money supply 
B)  repeal an investment tax credit or decrease the money supply 
C)  institute an investment tax credit or increase the money supply 
D)  institute an investment tax credit or decrease the money supply

Question 19

According to liquidity preference theory,if the quantity of money demanded is greater than the quantity supplied,then the interest rate will

Accepted Answer

A)  increase and the quantity of money demanded will decrease. 
B)  increase and the quantity of money demanded will increase. 
C)  decrease and the quantity of money demanded will decrease. 
D)  decrease and the quantity of money demanded will increase. 
A)  increase and the quantity of money demanded will decrease. 
B)  increase and the quantity of money demanded will increase. 
C)  decrease and the quantity of money demanded will decrease. 
D)  decrease and the quantity of money demanded will increase.

Question 20

In the short run,

Accepted Answer

A)  the price level alone adjusts to balance the supply and demand for money. 
B)  output responds to changes in the aggregate demand for goods and services. 
C)  changes in the money supply cause a proportional change in the price level. 
D)  increases in the money supply shift the aggregate supply curve causing output to rise. 
A)  the price level alone adjusts to balance the supply and demand for money. 
B)  output responds to changes in the aggregate demand for goods and services. 
C)  changes in the money supply cause a proportional change in the price level. 
D)  increases in the money supply shift the aggregate supply curve causing output to rise.

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

Automatic stabilizers

In which of the following cases would the quantity of money demanded be largest?

According to a 2009 article in The Economist,the multiplier effect and crowding-out effect would exactly offset each other when the economy is

In order to simplify the equation for the multiplier to its familiar,relatively simple form,we make use of the

The interest-rate effect

To reduce the effects of crowding out caused by an increase in government expenditures,the Federal Reserve could

During recessions,unemployment insurance payments tend to rise.

Monetary policy

According to liquidity preference theory,the money-supply curve would shift if the Fed

The change in aggregate demand that results from fiscal expansion changing the interest rate is called the

Sometimes,changes in monetary policy and/or fiscal policy are intended to offset changes to aggregate demand over which policymakers have little or no control.

If the marginal propensity to consume is 6/7,then the multiplier is 7.

According to liquidity preference theory,the opportunity cost of holding money is

If a $1,000 increase in income leads to a $750 increase in consumption expenditures,then the marginal propensity to consume is

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are

Suppose aggregate demand shifts to the left and policymakers want to stabilize output.What can they do?

According to liquidity preference theory,if the quantity of money demanded is greater than the quantity supplied,then the interest rate will

In the short run,

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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