Question 1

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

Accepted Answer

A) the equilibrium interest rate increases. 
B) the aggregate-demand curve shifts to the right. 
C) the quantity of goods and services demanded is unchanged for a given price level. 
D) the short-run aggregate-supply curve shifts to the left. 
A) the equilibrium interest rate increases. 
B) the aggregate-demand curve shifts to the right. 
C) the quantity of goods and services demanded is unchanged for a given price level. 
D) the short-run aggregate-supply curve shifts to the left.

Question 2

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

Accepted Answer

A) by $90 billion 
B) by $60 billion 
C) by $20 billion 
D) by $30 billion 
A) by $90 billion 
B) by $60 billion 
C) by $20 billion 
D) by $30 billion

Question 3

If the multiplier is 3, then the MPC is

Accepted Answer

A) 1/3. 
B) 3/4. 
C) 4/3. 
D) 2/3. 
A) 1/3. 
B) 3/4. 
C) 4/3. 
D) 2/3.

Question 4

Changes in aggregate demand can cause fluctuations in _____ and _____ in the short run, and only ____ in the long run.

Accepted Answer

output, pr

Question 5

Fiscal policy affects the economy

Accepted Answer

A) only in the short run. 
B) only in the long run. 
C) in both the short and long run. 
D) in neither the short nor the long run. 
A) only in the short run. 
B) only in the long run. 
C) in both the short and long run. 
D) in neither the short nor the long run.

Question 6

If the price level rises, then

Accepted Answer

A) the interest rate falls and spending on goods and services falls. 
B) the interest rate falls and spending on goods and services rises. 
C) the interest rate rises and spending on goods and services falls. 
D) the interest rate rises and spending on goods and services rises. 
A) the interest rate falls and spending on goods and services falls. 
B) the interest rate falls and spending on goods and services rises. 
C) the interest rate rises and spending on goods and services falls. 
D) the interest rate rises and spending on goods and services rises.

Question 7

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures shifts aggregate demand

Accepted Answer

A) right by more than $100 billion. 
B) right by $100 billion. 
C) left by more than $100 billion. 
D) left by $100 billion. 
A) right by more than $100 billion. 
B) right by $100 billion. 
C) left by more than $100 billion. 
D) left by $100 billion.

Question 8

Scenario 34-2. The following facts apply to a small, imaginary economy.
• Consumption spending is $6,720 when income is $8,000.
• Consumption spending is $7,040 when income is $8,500.
-Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500?

Accepted Answer

A) A stock-market boom increases households' wealth by $500, and there is an operative crowding-out effect. 
B) A stock-market boom increases households' wealth by $575, and there is an operative crowding-out effect. 
C) An economic boom overseas increases the demand for U.S. net exports by $600, and there is no crowding-out effect. 
D) Aggregate demand could increase by $1,500 in response to any of these events. 
A) A stock-market boom increases households' wealth by $500, and there is an operative crowding-out effect. 
B) A stock-market boom increases households' wealth by $575, and there is an operative crowding-out effect. 
C) An economic boom overseas increases the demand for U.S. net exports by $600, and there is no crowding-out effect. 
D) Aggregate demand could increase by $1,500 in response to any of these events.

Question 9

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Accepted Answer

A) True 
 B)False

Question 10

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is

Accepted Answer

A) relatively important in the United States because expenditures on consumer durables is very responsive to changes in wealth. 
B) relatively important in the United States because consumption spending is a large part of GDP. 
C) relatively unimportant in the United States because money holdings are a small part of consumer wealth. 
D) relatively unimportant because it takes a large change in wealth to cause a significant change in interest rates. 
A) relatively important in the United States because expenditures on consumer durables is very responsive to changes in wealth. 
B) relatively important in the United States because consumption spending is a large part of GDP. 
C) relatively unimportant in the United States because money holdings are a small part of consumer wealth. 
D) relatively unimportant because it takes a large change in wealth to cause a significant change in interest rates.

Question 11

Because the liquidity-preference framework focuses on the

Accepted Answer

A) short run, it assumes the price level adjusts to bring the money market to equilibrium. 
B) short run, it assumes the interest rate adjusts to bring the money market to equilibrium. 
C) long run, it assumes the price level adjusts to bring the money market to equilibrium. 
D) long run, it assumes the interest rate adjusts to bring the money market to equilibrium. 
A) short run, it assumes the price level adjusts to bring the money market to equilibrium. 
B) short run, it assumes the interest rate adjusts to bring the money market to equilibrium. 
C) long run, it assumes the price level adjusts to bring the money market to equilibrium. 
D) long run, it assumes the interest rate adjusts to bring the money market to equilibrium.

Question 12

Figure 34-10  
-Refer to Figure 34-10. Suppose the multiplier is 4 and the economy is currently at point A. An increase in government purchases of $10 will increase aggregate demand to $_____ if there is no crowding-out. If crowding-out exists, then aggregate demand will likely to increase to $_____.

Accepted Answer

The answer of Figure 34-10  
-Refer to Figure 34-10....

Question 13

Which of the following statements is correct for the short run?

Accepted Answer

A) Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for money; the price level adjusts to balance the supply and demand for loanable funds. 
B) Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money. 
C) Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for money; the price level is relatively slow to adjust. 
D) Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money. 
A) Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for money; the price level adjusts to balance the supply and demand for loanable funds. 
B) Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money. 
C) Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for money; the price level is relatively slow to adjust. 
D) Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.

Question 14

When the interest rate is below the equilibrium level,

Accepted Answer

A) the quantity of money that the Federal Reserve has supplied exceeds the quantity of money that people want to hold. 
B) people respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. 
C) bond issuers and banks respond by lowering the interest rates they offer. 
D) All of the above are correct. 
A) the quantity of money that the Federal Reserve has supplied exceeds the quantity of money that people want to hold. 
B) people respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. 
C) bond issuers and banks respond by lowering the interest rates they offer. 
D) All of the above are correct.

Question 15

When the Fed buys government bonds, the reserves of the banking system

Accepted Answer

A) increase, so the money supply increases. 
B) increase, so the money supply decreases. 
C) decrease, so the money supply increases. 
D) decrease, so the money supply decreases. 
A) increase, so the money supply increases. 
B) increase, so the money supply decreases. 
C) decrease, so the money supply increases. 
D) decrease, so the money supply decreases.

Question 16

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

Accepted Answer

A) True 
 B)False

Question 17

Assume the following.
• The MPC has a value of 0.8.
• The relationship between the interest rate, r, and investment, I, is given by the
Equation,  
,
Where b is a positive constant.
• Government purchases, G, are increased by $1,000.
In which of the following cases would there be no crowding out?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 18

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. 
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.

Question 19

Consider the following sequence of events:
Price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑
⇒ quantity of goods and services demanded ↓
Τhis sequence explains why the

Accepted Answer

A) money-supply curve is vertical. 
B) aggregate-demand curve shifts leftward in response to a monetary injection. 
C) aggregate-demand curve shifts rightward in response to a monetary injection. 
D) aggregate-demand curve slopes downward. 
A) money-supply curve is vertical. 
B) aggregate-demand curve shifts leftward in response to a monetary injection. 
C) aggregate-demand curve shifts rightward in response to a monetary injection. 
D) aggregate-demand curve slopes downward.

Question 20

Which of the following illustrates how the investment accelerator works?

Accepted Answer

A) An increase in government expenditures increases aggregate spending so that SnoozeBargain Co. decides to modernize its motels. 
B) An increase in government expenditures increases the interest rate so that SnoozeBargain Co. decides to modernize its motels. 
C) An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by SnoozeBargain Co. rises. 
D) An increase in government expenditures decreases the interest rate so that SnoozeBargain Co. decides to modernize its motels. 
A) An increase in government expenditures increases aggregate spending so that SnoozeBargain Co. decides to modernize its motels. 
B) An increase in government expenditures increases the interest rate so that SnoozeBargain Co. decides to modernize its motels. 
C) An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by SnoozeBargain Co. rises. 
D) An increase in government expenditures decreases the interest rate so that SnoozeBargain Co. decides to modernize its motels.

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

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

If the multiplier is 3, then the MPC is

Changes in aggregate demand can cause fluctuations in _____ and _____ in the short run, and only ____ in the long run.

Fiscal policy affects the economy

If the price level rises, then

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures shifts aggregate demand

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is

Because the liquidity-preference framework focuses on the

Figure 34-10 -Refer to Figure 34-10. Suppose the multiplier is 4 and the economy is currently at point A. An increase in government purchases of $10 will increase aggregate demand to $_____ if there is no crowding-out. If crowding-out exists, then aggregate demand will likely to increase to $_____.

Which of the following statements is correct for the short run?

When the interest rate is below the equilibrium level,

When the Fed buys government bonds, the reserves of the banking system

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

The primary argument against active monetary and fiscal policy is that

Consider the following sequence of events: Price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ Τhis sequence explains why the

Which of the following illustrates how the investment accelerator works?

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

Applications: 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 Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers in Microeconomics

Measuring a Nation S Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Tools of Finance

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Tradeoff Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

Filters

Changes in aggregate demand can cause fluctuations in ___ and _ in the short run, and only __ in the long run.

Figure 34-10 -Refer to Figure 34-10. Suppose the multiplier is 4 and the economy is currently at point A. An increase in government purchases of $10 will increase aggregate demand to $_ if there is no crowding-out. If crowding-out exists, then aggregate demand will likely to increase to $_.