Question 1

If the Fed conducts open-market sales,the money supply

Accepted Answer

A)  increases and aggregate demand shifts right. 
B)  increases and aggregate demand shifts left. 
C)  decreases and aggregate demand shifts right. 
D)  decreases and aggregate demand shifts left. 
A)  increases and aggregate demand shifts right. 
B)  increases and aggregate demand shifts left. 
C)  decreases and aggregate demand shifts right. 
D)  decreases and aggregate demand shifts left.

Question 2

Opponents of active stabilization policy

Accepted Answer

A)  advocate a monetary policy designed to offset changes in the unemployment rate. 
B)  argue that fiscal policy is unable to change aggregate demand or aggregate supply. 
C)  believe that the political process creates lags in the implementation of fiscal policy. 
D)  None of the above is correct. 
A)  advocate a monetary policy designed to offset changes in the unemployment rate. 
B)  argue that fiscal policy is unable to change aggregate demand or aggregate supply. 
C)  believe that the political process creates lags in the implementation of fiscal policy. 
D)  None of the above is correct.

Question 3

If the spending multiplier is 8,then the marginal propensity to consume must be 7/8.

Accepted Answer

A) True 
 B)False

Question 4

Figure 21-4.On the figure,MS represents money supply and MD represents money demand.  
-Refer to Figure 21-4.Suppose the money-demand curve is currently MD1.If the current interest rate is r2,then

Accepted Answer

A)  the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. 
B)  people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. 
C)  bond issuers and banks will respond by raising the interest rates they offer. 
D)  in response,the money-demand curve will shift upward from its current position to establish equilibrium in the money market. 
A)  the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. 
B)  people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. 
C)  bond issuers and banks will respond by raising the interest rates they offer. 
D)  in response,the money-demand curve will shift upward from its current position to establish equilibrium in the money market.

Question 5

Assume the MPC is 0.75.Assume there is a multiplier effect and that the total crowding-out effect is $6 billion.An increase in government purchases of $10 billion will shift aggregate demand to the

Accepted Answer

A)  left by $24 billion. 
B)  left by $36 billion. 
C)  right by $34 billion. 
D)  right by $36 billion. 
A)  left by $24 billion. 
B)  left by $36 billion. 
C)  right by $34 billion. 
D)  right by $36 billion.

Question 6

The interest-rate effect

Accepted Answer

A)  depends on the idea that increases in interest rates increase the quantity of money demanded. 
B)  depends on the idea that increases in interest rates increase the quantity of money supplied. 
C)  is the most important reason,in the case of the United States,for the downward slope of the aggregate-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 increase the quantity of money demanded. 
B)  depends on the idea that increases in interest rates increase the quantity of money supplied. 
C)  is the most important reason,in the case of the United States,for the downward slope of the aggregate-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

Monetary policy affects the economy with a long lag,in part because

Accepted Answer

A)  proposals to change monetary policy must go through both the House and Senate before being sent to the president. 
B)  monetary policy works through changes in interest rates,and the Fed does not have the ability to change interest rates quickly. 
C)  changes in interest rates primarily influence consumption spending,and households make consumption plans far in advance. 
D)  changes in interest rates primarily influence investment spending,and firms make investment plans far in advance. 
A)  proposals to change monetary policy must go through both the House and Senate before being sent to the president. 
B)  monetary policy works through changes in interest rates,and the Fed does not have the ability to change interest rates quickly. 
C)  changes in interest rates primarily influence consumption spending,and households make consumption plans far in advance. 
D)  changes in interest rates primarily influence investment spending,and firms make investment plans far in advance.

Question 8

Figure 21-4.On the figure,MS represents money supply and MD represents money demand.  
-Refer to Figure 21-4.Suppose the current equilibrium interest rate is r1.Let Y1 represent the corresponding quantity of goods and services demanded,and let P1 represent the corresponding price level.Starting from this situation,if the Federal Reserve increases the money supply and if the price level remains at P1,then

Accepted Answer

A)  there will be an increase in the equilibrium quantity of goods and services demanded. 
B)  there will be a decrease in the equilibrium quantity of goods and services demanded. 
C)  there will be an increase in the equilibrium interest rate. 
D)  fewer firms will choose to borrow to build new factories and buy new equipment. 
A)  there will be an increase in the equilibrium quantity of goods and services demanded. 
B)  there will be a decrease in the equilibrium quantity of goods and services demanded. 
C)  there will be an increase in the equilibrium interest rate. 
D)  fewer firms will choose to borrow to build new factories and buy new equipment.

Question 9

An increase in the MPC

Accepted Answer

A)  increases the multiplier,so that changes in government expenditures have a larger effect on aggregate demand. 
B)  increases the multiplier,so that changes in government expenditures have a smaller effect on aggregate demand. 
C)  decreases the multiplier,so that changes in government expenditures have a larger effect on aggregate demand. 
D)  decreases the multiplier,so that changes in government expenditures have a smaller effect on aggregate demand. 
A)  increases the multiplier,so that changes in government expenditures have a larger effect on aggregate demand. 
B)  increases the multiplier,so that changes in government expenditures have a smaller effect on aggregate demand. 
C)  decreases the multiplier,so that changes in government expenditures have a larger effect on aggregate demand. 
D)  decreases the multiplier,so that changes in government expenditures have a smaller effect on aggregate demand.

Question 10

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 graphs are drawn to show the effects of an increase in government purchases.If it were not for the increase in r from r1 to r2,then

Accepted Answer

A)  there would be no crowding out. 
B)  the full multiplier effect of the increase in government purchases would be realized. 
C)  the AD curves that actually apply,before and after the change in government purchases,would be separated horizontally by the distance equal to the multiplier times the change in government purchases. 
D)  All of the above are correct. 
A)  there would be no crowding out. 
B)  the full multiplier effect of the increase in government purchases would be realized. 
C)  the AD curves that actually apply,before and after the change in government purchases,would be separated horizontally by the distance equal to the multiplier times the change in government purchases. 
D)  All of the above are correct.

Question 11

Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion.Suppose that the MPC is .80 and that there are no crowding out or accelerator effects.What is the combined effects of these changes? Why is the combined change not equal to zero?

Accepted Answer

The multiplier is 1/(1-MPC)= 1/(1-.8)= 1

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

If the Fed conducts open-market sales,the money supply

Opponents of active stabilization policy

If the spending multiplier is 8,then the marginal propensity to consume must be 7/8.

Figure 21-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 21-4.Suppose the money-demand curve is currently MD1.If the current interest rate is r2,then

Assume the MPC is 0.75.Assume there is a multiplier effect and that the total crowding-out effect is $6 billion.An increase in government purchases of $10 billion will shift aggregate demand to the

The interest-rate effect

Monetary policy affects the economy with a long lag,in part because

An increase in the MPC

Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion.Suppose that the MPC is .80 and that there are no crowding out or accelerator effects.What is the combined effects of these changes? Why is the combined change not equal to zero?

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

Filters

Figure 21-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 21-4.Suppose the money-demand curve is currently MD₁.If the current interest rate is r₂,then