Question 1

Economists who are skeptical about the relevance of "liquidity traps" argue that

Accepted Answer

A) a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero. 
B) a central bank continues to have the option of committing itself to future monetary contraction, even after its interest rate target hits its lower bound of zero. 
C) a central bank can greatly reduce the likelihood of a liquidity trap by setting the target rate of inflation at zero. 
D) while the concept of a liquidity trap is theoretically possible, nothing resembling a liquidity trap ever has been observed in the real world. 
A) a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero. 
B) a central bank continues to have the option of committing itself to future monetary contraction, even after its interest rate target hits its lower bound of zero. 
C) a central bank can greatly reduce the likelihood of a liquidity trap by setting the target rate of inflation at zero. 
D) while the concept of a liquidity trap is theoretically possible, nothing resembling a liquidity trap ever has been observed in the real world.

Question 2

Supply-side economists believe that a reduction in the tax rate

Accepted Answer

A) always decrease government tax revenue. 
B) shifts the aggregate supply curve to the right. 
C) provides no incentive for people to work more. 
D) would decrease consumption. 
A) always decrease government tax revenue. 
B) shifts the aggregate supply curve to the right. 
C) provides no incentive for people to work more. 
D) would decrease consumption.

Question 3

An example of an automatic stabilizer is

Accepted Answer

A) unemployment benefits. 
B) a lowering of interest rates by the Fed. 
C) a decrease in money demand. 
D) a decrease in tax rates in response to a recession. 
A) unemployment benefits. 
B) a lowering of interest rates by the Fed. 
C) a decrease in money demand. 
D) a decrease in tax rates in response to a recession.

Question 4

The process of the investment accelerator involves

Accepted Answer

A) positive feedback from aggregate demand to investment. 
B) negative feedback from aggregate demand to investment. 
C) positive feedback from aggregate supply to investment. 
D) negative feedback from aggregate supply to investment. 
A) positive feedback from aggregate demand to investment. 
B) negative feedback from aggregate demand to investment. 
C) positive feedback from aggregate supply to investment. 
D) negative feedback from aggregate supply to investment.

Question 5

The Federal Funds rate is the interest rate

Accepted Answer

A) banks charge each other for short-term loans. 
B) the Fed charges depository institutions for short-term loans. 
C) the Fed pays on deposits. 
D) interest rate on 3 month Treasury bills. 
A) banks charge each other for short-term loans. 
B) the Fed charges depository institutions for short-term loans. 
C) the Fed pays on deposits. 
D) interest rate on 3 month Treasury bills.

Question 6

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

Accepted Answer

A) the crowding-out effect 
B) the multiplier effect 
C) the exchange-rate effect 
D) the interest-rate effect 
A) the crowding-out effect 
B) the multiplier effect 
C) the exchange-rate effect 
D) the interest-rate effect

Question 7

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 8

Which of the following shifts aggregate demand to the left?

Accepted Answer

A) an increase in the price level 
B) an increase in the money supply 
C) a decrease in the price level 
D) a decrease in the money supply 
A) an increase in the price level 
B) an increase in the money supply 
C) a decrease in the price level 
D) a decrease in the money supply

Question 9

Critics of stabilization policy argue that

Accepted Answer

A) policy affects aggregate demand quickly, but the effects on aggregate demand are long-lived. 
B) policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived. 
C) policy affects aggregate demand with a lag, but the effects are short-lived. 
D) policy does not affect aggregate demand. 
A) policy affects aggregate demand quickly, but the effects on aggregate demand are long-lived. 
B) policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived. 
C) policy affects aggregate demand with a lag, but the effects are short-lived. 
D) policy does not affect aggregate demand.

Question 10

Figure 34-4. On the figure, MS represents money supply and MD represents money demand.  
-Refer to Figure 34-4. Suppose the money-demand curve is currently MD2. If the current interest rate is r2, then

Accepted Answer

A) in response, the money-demand curve will shift rightward from its current position to establish equilibrium in the money market. 
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 lowering the interest rates they offer. 
D) there is a shortage of money. 
A) in response, the money-demand curve will shift rightward from its current position to establish equilibrium in the money market. 
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 lowering the interest rates they offer. 
D) there is a shortage of money.

Question 11

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

Accepted Answer

A) True 
 B)False

Question 12

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.

Question 13

In a certain economy, when income is $500, consumer spending is $375. The value of the multiplier for this economy is 5. It follows that, when income is $510, consumer spending is

Accepted Answer

A) $381.67. 
B) $378. 
C) $383. 
D) $383.33. 
A) $381.67. 
B) $378. 
C) $383. 
D) $383.33.

Question 14

In the long run, fiscal policy influences

Accepted Answer

A) saving, investment, and growth; in the short run, fiscal policy primarily influences technology and the production function. 
B) saving, investment, and growth; in the short run, fiscal policy primarily influences the aggregate demand for goods and services. 
C) technology and the production function; in the short run, fiscal policy primarily influences saving, investment, and growth. 
D) the aggregate demand for goods and services; in the short run, fiscal policy primarily influences technology and the production function. 
A) saving, investment, and growth; in the short run, fiscal policy primarily influences technology and the production function. 
B) saving, investment, and growth; in the short run, fiscal policy primarily influences the aggregate demand for goods and services. 
C) technology and the production function; in the short run, fiscal policy primarily influences saving, investment, and growth. 
D) the aggregate demand for goods and services; in the short run, fiscal policy primarily influences technology and the production function.

Question 15

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 16

Assume the MPC is 0.72. The multiplier is

Accepted Answer

A) 4.53. 
B) 1.39. 
C) 2.57. 
D) 3.57. 
A) 4.53. 
B) 1.39. 
C) 2.57. 
D) 3.57.

Question 17

The multiplier effect is exemplified by the multiplied impact on

Accepted Answer

A) the money supply of a given increase in government purchases. 
B) tax revenues of a given increase in government purchases. 
C) investment of a given increase in interest rates. 
D) aggregate demand of a given increase in government purchases. 
A) the money supply of a given increase in government purchases. 
B) tax revenues of a given increase in government purchases. 
C) investment of a given increase in interest rates. 
D) aggregate demand of a given increase in government purchases.

Question 18

Figure 34-5. On the figure, MS represents money supply and MD represents money demand.  
-Refer to Figure 34-5. A shift of the money-demand curve from MD1 to MD2 could be a result of

Accepted Answer

A) a decrease in taxes. 
B) an increase in government spending. 
C) an increase in the price level. 
D) All of the above are correct. 
A) a decrease in taxes. 
B) an increase in government spending. 
C) an increase in the price level. 
D) All of the above are correct.

Question 19

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

Accepted Answer

The nominal interest rate on currency is

Question 20

Unemployment insurance and welfare programs work as automatic stabilizers.

Accepted Answer

A) True 
 B)False

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

Economists who are skeptical about the relevance of "liquidity traps" argue that

Supply-side economists believe that a reduction in the tax rate

An example of an automatic stabilizer is

The process of the investment accelerator involves

The Federal Funds rate is the interest rate

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

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

Which of the following shifts aggregate demand to the left?

Critics of stabilization policy argue that

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the money-demand curve is currently MD2. If the current interest rate is r2, then

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

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

In a certain economy, when income is $500, consumer spending is $375. The value of the multiplier for this economy is 5. It follows that, when income is $510, consumer spending is

In the long run, fiscal policy influences

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

Assume the MPC is 0.72. The multiplier is

The multiplier effect is exemplified by the multiplied impact on

Figure 34-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-5. A shift of the money-demand curve from MD1 to MD2 could be a result of

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

Unemployment insurance and welfare programs work as automatic stabilizers.

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

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the money-demand curve is currently MD₂. If the current interest rate is r₂, then

Figure 34-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-5. A shift of the money-demand curve from MD₁ to MD₂ could be a result of