Question 1

As the MPC gets close to 1, the value of the multiplier approaches

Accepted Answer

A) 0. 
B) 1. 
C) infinity. 
D) None of the above is correct. 
A) 0. 
B) 1. 
C) infinity. 
D) None of the above is correct.

Question 2

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 3

The lag problem associated with fiscal policy is due mostly to

Accepted Answer

A) the fact that business firms make investment plans far in advance. 
B) the political system of checks and balances that slows down the process of implementing fiscal policy. 
C) the time it takes for changes in government spending or taxes to affect the interest rate. 
D) All of the above are correct. 
A) the fact that business firms make investment plans far in advance. 
B) the political system of checks and balances that slows down the process of implementing fiscal policy. 
C) the time it takes for changes in government spending or taxes to affect the interest rate. 
D) All of the above are correct.

Question 4

The Federal Reserve sets _____ policy, while the president and Congress set _____ policy. These two policies influence aggregate _____.

Accepted Answer

monetary,

Question 5

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 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

Suppose the MPC is 0.9. There are no crowding out or investment accelerator effects. If the government increases its expenditures by $30 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion, then by how far does aggregate demand shift to the right?

Accepted Answer

A) $283 billion and $254.7 billion 
B) $283 billion and $283 billion 
C) $300 billion and $270 billion 
D) $300 billion and $300 billion 
A) $283 billion and $254.7 billion 
B) $283 billion and $283 billion 
C) $300 billion and $270 billion 
D) $300 billion and $300 billion

Question 8

Figure 34-6. 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 34-6. 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 $40 billion. The extent of crowding out, for any particular level of the price level, is

Accepted Answer

A) $15 billion. 
B) $40 billion. 
C) $35 billion. 
D) $95 billion. 
A) $15 billion. 
B) $40 billion. 
C) $35 billion. 
D) $95 billion.

Question 9

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

Accepted Answer

A) shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate. 
B) the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an interest rate. 
C) changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate. 
D) the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate. 
A) shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate. 
B) the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an interest rate. 
C) changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate. 
D) the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate.

Question 10

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 11

As real GDP falls,

Accepted Answer

A) money demand rises, so the interest rate rises. 
B) money demand rises, so the interest rate falls 
C) money demand falls, so the interest rate rises. 
D) money demand falls, so the interest rate falls. 
A) money demand rises, so the interest rate rises. 
B) money demand rises, so the interest rate falls 
C) money demand falls, so the interest rate rises. 
D) money demand falls, so the interest rate falls.

Question 12

Macroeconomic forecasts are

Accepted Answer

A) precise; this makes policy lags less relevant. 
B) precise; this makes policy lags more relevant. 
C) imprecise; this makes policy lags less relevant. 
D) imprecise; this makes policy lags more relevant. 
A) precise; this makes policy lags less relevant. 
B) precise; this makes policy lags more relevant. 
C) imprecise; this makes policy lags less relevant. 
D) imprecise; this makes policy lags more relevant.

Question 13

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 14

An increase in the money supply decreases the equilibrium interest rate and shifts the aggregate-demand curve to the right.

Accepted Answer

A) True 
 B)False

Question 15

Fiscal policy refers to the idea that aggregate demand is affected by changes in

Accepted Answer

A) the money supply. 
B) government spending and taxes. 
C) trade policy. 
D) All of the above are correct. 
A) the money supply. 
B) government spending and taxes. 
C) trade policy. 
D) All of the above are correct.

Question 16

Which of the following is an example of crowding out?

Accepted Answer

A) An increase in government spending increases interest rates, causing investment to fall. 
B) A decrease in private savings increases interest rates, causing investment to fall. 
C) A decrease in the money supply increases interest rates, causing investment to fall. 
D) An increase in taxes increases interest rates, causing investment to fall. 
A) An increase in government spending increases interest rates, causing investment to fall. 
B) A decrease in private savings increases interest rates, causing investment to fall. 
C) A decrease in the money supply increases interest rates, causing investment to fall. 
D) An increase in taxes increases interest rates, causing investment to fall.

Question 17

To increase output, policymakers can _____ the money supply, _____ taxes, and/or _____ government purchases.

Accepted Answer

increase,

Question 18

Which of the following are effects of an increase in government spending financed by a tax increase?

Accepted Answer

A) the tax increase reduces consumption; the change in the interest rate reduces residential construction 
B) the tax increase reduces consumption; the change in the interest rate raises residential construction 
C) the tax increase raises consumption; the change in the interest rate reduces residential construction 
D) The tax increase raises consumption; the change in the interest rate reduces residential construction 
A) the tax increase reduces consumption; the change in the interest rate reduces residential construction 
B) the tax increase reduces consumption; the change in the interest rate raises residential construction 
C) the tax increase raises consumption; the change in the interest rate reduces residential construction 
D) The tax increase raises consumption; the change in the interest rate reduces residential construction

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

Figure 34-4. On the figure, MS represents money supply and MD represents money demand.  
-Refer to Figure 34-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?

Accepted Answer

A) The Federal Reserve increases the money supply. 
B) Money demand increases. 
C) The price level decreases. 
D) All of the above are correct. 
A) The Federal Reserve increases the money supply. 
B) Money demand increases. 
C) The price level decreases. 
D) All of the above are correct.

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

As the MPC gets close to 1, the value of the multiplier approaches

Keynes argued that

The lag problem associated with fiscal policy is due mostly to

The Federal Reserve sets _____ policy, while the president and Congress set _____ policy. These two policies influence aggregate _____.

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

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

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

According to John Maynard Keynes,

As real GDP falls,

Macroeconomic forecasts are

The interest-rate effect

An increase in the money supply decreases the equilibrium interest rate and shifts the aggregate-demand curve to the right.

Fiscal policy refers to the idea that aggregate demand is affected by changes in

Which of the following is an example of crowding out?

To increase output, policymakers can _____ the money supply, _____ taxes, and/or _____ government purchases.

Which of the following are effects of an increase in government spending financed by a tax increase?

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

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?

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

The Federal Reserve sets ___ policy, while the president and Congress set _ policy. These two policies influence aggregate ___.

To increase output, policymakers can ___ the money supply, _ taxes, and/or ___ government purchases.

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the current equilibrium interest rate is r₁. Which of the following events would cause the equilibrium interest rate to increase?