Question 1

An increase in government purchases is likely to

Accepted Answer

A)  decrease interest rates. 
B)  result in a net decrease in aggregate demand. 
C)  crowd out investment spending by business firms. 
D)  decrease money demand. 
A)  decrease interest rates. 
B)  result in a net decrease in aggregate demand. 
C)  crowd out investment spending by business firms. 
D)  decrease money demand.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

According to liquidity preference theory,a decrease in the price level causes the interest rate to

Accepted Answer

A)  increase,which increases the quantity of goods and services demanded. 
B)  increase,which decreases the quantity of goods and services demanded. 
C)  decrease,which increases the quantity of goods and services demanded. 
D)  decrease,which decreases the quantity of goods and services demanded. 
A)  increase,which increases the quantity of goods and services demanded. 
B)  increase,which decreases the quantity of goods and services demanded. 
C)  decrease,which increases the quantity of goods and services demanded. 
D)  decrease,which decreases the quantity of goods and services demanded.

Question 4

In response to the sharp decline in stock prices in October 1987,the Federal Reserve

Accepted Answer

A)  increased interest rates,and the economy avoided a recession. 
B)  increased interest rates,but the economy was unable to avoid a recession. 
C)  decreased interest rates,and the economy avoided a recession. 
D)  decreased interest rates,but the economy was unable to avoid a recession. 
A)  increased interest rates,and the economy avoided a recession. 
B)  increased interest rates,but the economy was unable to avoid a recession. 
C)  decreased interest rates,and the economy avoided a recession. 
D)  decreased interest rates,but the economy was unable to avoid a recession.

Question 5

Assume the MPC is 0.75.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 $200 billion. 
B)  left by $400 billion. 
C)  right by $800 billion. 
D)  None of the above is correct. 
A)  left by $200 billion. 
B)  left by $400 billion. 
C)  right by $800 billion. 
D)  None of the above is correct.

Question 6

Changes in the interest rate bring the money market into equilibrium according to

Accepted Answer

A)  both liquidity preference theory and classical theory. 
B)  neither liquidity preference theory nor classical theory. 
C)  liquidity preference theory,but not classical theory. 
D)  classical theory,but not liquidity preference theory. 
A)  both liquidity preference theory and classical theory. 
B)  neither liquidity preference theory nor classical theory. 
C)  liquidity preference theory,but not classical theory. 
D)  classical theory,but not liquidity preference theory.

Question 7

Keynes argued that

Accepted Answer

A)  irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment. 
B)  irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply. 
C)  changes in business and consumer expectations generally stabilize the economy. 
D)  All of the above are correct. 
A)  irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment. 
B)  irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply. 
C)  changes in business and consumer expectations generally stabilize the economy. 
D)  All of the above are correct.

Question 8

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Accepted Answer

If the interest rate is above equilibriu

Question 9

The theory of liquidity preference is most helpful in understanding

Accepted Answer

A)  the wealth effect. 
B)  the exchange-rate effect. 
C)  the interest-rate effect. 
D)  misperceptions theory. 
A)  the wealth effect. 
B)  the exchange-rate effect. 
C)  the interest-rate effect. 
D)  misperceptions theory.

Question 10

If the Fed increases the money supply,

Accepted Answer

A)  the interest rate increases,which tends to raise stock prices. 
B)  the interest rate increases,which tends to reduce stock prices. 
C)  the interest rate decreases,which tends to raise stock prices. 
D)  the interest rate decreases,which tends to reduce stock prices. 
A)  the interest rate increases,which tends to raise stock prices. 
B)  the interest rate increases,which tends to reduce stock prices. 
C)  the interest rate decreases,which tends to raise stock prices. 
D)  the interest rate decreases,which tends to reduce stock prices.

Question 11

If it were not for the automatic stabilizers in the U.S.economy,

Accepted Answer

A)  the Federal Reserve would have less reason than it has now to monitor stock prices. 
B)  it would be more desirable than it is now for the Federal Reserve to target an interest rate. 
C)  a strict balanced-budget rule would be more desirable than it is now. 
D)  output and employment would probably be more volatile than they are now. 
A)  the Federal Reserve would have less reason than it has now to monitor stock prices. 
B)  it would be more desirable than it is now for the Federal Reserve to target an interest rate. 
C)  a strict balanced-budget rule would be more desirable than it is now. 
D)  output and employment would probably be more volatile than they are now.

Question 12

Assume the MPC is 0.80.The multiplier is

Accepted Answer

A)  0.80. 
B)  1.25. 
C)  4.25. 
D)  5.00. 
A)  0.80. 
B)  1.25. 
C)  4.25. 
D)  5.00.

Question 13

Which of the following claims concerning the importance of effects that explain the slope of the U.S.aggregate-demand curve is correct?

Accepted Answer

A)  The exchange-rate effect is relatively small because exports and imports are a small part of real GDP. 
B)  The interest-rate effect is relatively small because investment spending is not very responsive to interest rate changes. 
C)  The wealth effect is relatively large because money holdings are a significant portion of most households' wealth. 
D)  None of the above is correct. 
A)  The exchange-rate effect is relatively small because exports and imports are a small part of real GDP. 
B)  The interest-rate effect is relatively small because investment spending is not very responsive to interest rate changes. 
C)  The wealth effect is relatively large because money holdings are a significant portion of most households' wealth. 
D)  None of the above is correct.

Question 14

Figure 21-5.On the figure,MS represents money supply and MD represents money demand.  
-Refer to Figure 21-5.What is measured along the vertical axis of the graph?

Accepted Answer

A)  the quantity of output 
B)  the amount of crowding out 
C)  the interest rate 
D)  the price level 
A)  the quantity of output 
B)  the amount of crowding out 
C)  the interest rate 
D)  the price level

Question 15

In which of the following cases does the aggregate-demand curve shift to the right?

Accepted Answer

A)  The price level rises,causing the interest rate to fall. 
B)  The price level falls,causing the interest rate to fall. 
C)  The money supply increases,causing the interest rate to fall. 
D)  The money supply decreases,causing the interest rate to fall. 
A)  The price level rises,causing the interest rate to fall. 
B)  The price level falls,causing the interest rate to fall. 
C)  The money supply increases,causing the interest rate to fall. 
D)  The money supply decreases,causing the interest rate to fall.

Question 16

According to John Maynard Keynes,

Accepted Answer

A)  the demand for money in a country is determined entirely by that nation's central bank. 
B)  the supply of money in a country is determined by the overall wealth of the citizens of that country. 
C)  the interest rate adjusts to balance the supply of,and demand for,money. 
D)  the interest rate adjusts to balance the supply of,and demand for,goods and services. 
A)  the demand for money in a country is determined entirely by that nation's central bank. 
B)  the supply of money in a country is determined by the overall wealth of the citizens of that country. 
C)  the interest rate adjusts to balance the supply of,and demand for,money. 
D)  the interest rate adjusts to balance the supply of,and demand for,goods and services.

Question 17

If the inflation rate is zero,then the nominal and real interest rate are the same.

Accepted Answer

A) True 
 B)False

Question 18

Who asserted that "the Federal Reserve's job is to take away the punch bowl just as the party gets going?"

Accepted Answer

A)  president George W.Bush 
B)  president John F.Kennedy 
C)  economist John Maynard Keynes 
D)  former chairman of the Federal Reserve System William McChesney Martin 
A)  president George W.Bush 
B)  president John F.Kennedy 
C)  economist John Maynard Keynes 
D)  former chairman of the Federal Reserve System William McChesney Martin

Question 19

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well.Most economists would say that Marcus's opinion is

Accepted Answer

A)  Keynesian in nature,and that his view is more valid for the long run than for the short run. 
B)  classical in nature,and that his view is more valid for the long run than for the short run. 
C)  Keynesian in nature,and that his view is more valid for the short run than for the long run. 
D)  classical in nature,and that his view is more valid for the short run than for the long run. 
A)  Keynesian in nature,and that his view is more valid for the long run than for the short run. 
B)  classical in nature,and that his view is more valid for the long run than for the short run. 
C)  Keynesian in nature,and that his view is more valid for the short run than for the long run. 
D)  classical in nature,and that his view is more valid for the short run than for the long run.

Question 20

Other things the same,a decrease in the U.S.interest rate

Accepted Answer

A)  induces firms to invest more. 
B)  shifts money demand to the left. 
C)  makes the U.S.dollar appreciate. 
D)  increases the opportunity cost of holding dollars. 
A)  induces firms to invest more. 
B)  shifts money demand to the left. 
C)  makes the U.S.dollar appreciate. 
D)  increases the opportunity cost of holding dollars.

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

An increase in government purchases is likely to

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

According to liquidity preference theory,a decrease in the price level causes the interest rate to

In response to the sharp decline in stock prices in October 1987,the Federal Reserve

Assume the MPC is 0.75.Assuming only the multiplier effect matters,a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

Changes in the interest rate bring the money market into equilibrium according to

Keynes argued that

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

The theory of liquidity preference is most helpful in understanding

If the Fed increases the money supply,

If it were not for the automatic stabilizers in the U.S.economy,

Assume the MPC is 0.80.The multiplier is

Which of the following claims concerning the importance of effects that explain the slope of the U.S.aggregate-demand curve is correct?

Figure 21-5.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 21-5.What is measured along the vertical axis of the graph?

In which of the following cases does the aggregate-demand curve shift to the right?

According to John Maynard Keynes,

If the inflation rate is zero,then the nominal and real interest rate are the same.

Who asserted that "the Federal Reserve's job is to take away the punch bowl just as the party gets going?"

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well.Most economists would say that Marcus's opinion is

Other things the same,a decrease in the U.S.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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