Question 1

When the government reduces taxes, which of the following decreases?

Accepted Answer

A) consumption 
B) take-home pay 
C) household saving 
D) None of the above is correct. 
A) consumption 
B) take-home pay 
C) household saving 
D) None of the above is correct.

Question 2

The Employment Act of 1946

Accepted Answer

A) implies that the government should avoid being a cause of economic fluctuations. 
B) implies that the government should respond to changes in the private economy to stabilize aggregate demand. 
C) reflected the ideas promoted in Keynes's influential book, The General Theory of Employment, Interest, and Money. 
D) All of the above are correct 
A) implies that the government should avoid being a cause of economic fluctuations. 
B) implies that the government should respond to changes in the private economy to stabilize aggregate demand. 
C) reflected the ideas promoted in Keynes's influential book, The General Theory of Employment, Interest, and Money. 
D) All of the above are correct

Question 3

The most important automatic stabilizer is

Accepted Answer

A) open-market operations. 
B) the tax system. 
C) unemployment compensation. 
D) welfare benefits. 
A) open-market operations. 
B) the tax system. 
C) unemployment compensation. 
D) welfare benefits.

Question 4

The wealth effect stems from the idea that a higher price level

Accepted Answer

A) increases the real value of households' money holdings. 
B) decreases the real value of households' money holdings. 
C) increases the real value of the domestic currency in foreign-exchange markets. 
D) decreases the real value of the domestic currency in foreign-exchange markets. 
A) increases the real value of households' money holdings. 
B) decreases the real value of households' money holdings. 
C) increases the real value of the domestic currency in foreign-exchange markets. 
D) decreases the real value of the domestic currency in foreign-exchange markets.

Question 5

Suppose the MPC is 0.60. Assume there are no crowding out or investment accelerator effects. If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion, then by how much does aggregate demand shift to the right?

Accepted Answer

A) $300 billion and $180 billion 
B) $300 billion and $300 billion 
C) $500 billion and $300 billion 
D) $500 billion and $500 billion 
A) $300 billion and $180 billion 
B) $300 billion and $300 billion 
C) $500 billion and $300 billion 
D) $500 billion and $500 billion

Question 6

If the interest rate decreases

Accepted Answer

A) or if the price level increases, then people will want to hold more money. 
B) or if the price level increases, then people will want to hold less money. 
C) or if the price level decreases, then people will want to hold more money. 
D) or if the price level decreases, then people will want to hold less money. 
A) or if the price level increases, then people will want to hold more money. 
B) or if the price level increases, then people will want to hold less money. 
C) or if the price level decreases, then people will want to hold more money. 
D) or if the price level decreases, then people will want to hold less money.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Suppose that consumers become pessimistic about the future health of the economy. What will happen to aggregate demand and to output? What might the president and Congress have to do to keep output stable?

Accepted Answer

As consumers become pessimistic about th

Question 9

According to liquidity preference theory, an increase in the price level shifts the

Accepted Answer

A) money demand curve rightward, so the interest rate increases. 
B) money demand curve rightward, so the interest rate decreases. 
C) money demand curve leftward, so the interest rate decreases. 
D) money demand curve leftward, so the interest rate increases. 
A) money demand curve rightward, so the interest rate increases. 
B) money demand curve rightward, so the interest rate decreases. 
C) money demand curve leftward, so the interest rate decreases. 
D) money demand curve leftward, so the interest rate increases.

Question 10

Which of the following is not a reason the aggregate-demand curve slopes downward? As the price level increases,

Accepted Answer

A) firms may believe the relative price of their output has risen. 
B) real wealth declines. 
C) the interest rate increases. 
D) the exchange rate increases. 
A) firms may believe the relative price of their output has risen. 
B) real wealth declines. 
C) the interest rate increases. 
D) the exchange rate increases.

Question 11

According to the Theory of Liquidity Preference, a fall in the _____ reduces the amount of money that people wish to hold. As a result, falling interest rates stimulates investment spending and aggregate _____.

Accepted Answer

The answer of According to the Theory of Liquidity Preference,...

Question 12

Which of the following events would shift money demand to the right?

Accepted Answer

A) an increase in the interest rate or an increase in the price level 
B) an increase in the interest rate, but not an increase in the price level 
C) an increase in the price level, but not an increase in the interest rate 
D) neither an increase in the interest rate nor an increase in the price level 
A) an increase in the interest rate or an increase in the price level 
B) an increase in the interest rate, but not an increase in the price level 
C) an increase in the price level, but not an increase in the interest rate 
D) neither an increase in the interest rate nor an increase in the price level

Question 13

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

Accepted Answer

A) MPC = 1/2, and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures. 
B) MPC = 2/3, and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures 
C) MPC = 3/4, and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures 
D) All of the above are correct. 
A) MPC = 1/2, and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures. 
B) MPC = 2/3, and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures 
C) MPC = 3/4, and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures 
D) All of the above are correct.

Question 14

A tax cut targeted at ____ people may have a bigger effect because ​

Accepted Answer

A) ​poorer; poorer people tend to spend a higher share of their income. 
B) ​poorer; poorer people tend to spend a lower share of their income. 
C) ​wealthier; wealthier people tend to spend a higher share of their income. 
D) ​wealthier; wealthier people tend to spend a lower share of their income. 
A) ​poorer; poorer people tend to spend a higher share of their income. 
B) ​poorer; poorer people tend to spend a lower share of their income. 
C) ​wealthier; wealthier people tend to spend a higher share of their income. 
D) ​wealthier; wealthier people tend to spend a lower share of their income.

Question 15

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. 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 16

Explain how unemployment insurance acts as an automatic stabilizer.

Accepted Answer

As income falls, unemployment rises. Mor

Question 17

In the short run, an increase in the money supply causes interest rates to

Accepted Answer

A) increase, and aggregate demand to shift right. 
B) increase, and aggregate demand to shift left. 
C) decrease, and aggregate demand to shift right. 
D) decrease, and aggregate demand to shift left. 
A) increase, and aggregate demand to shift right. 
B) increase, and aggregate demand to shift left. 
C) decrease, and aggregate demand to shift right. 
D) decrease, and aggregate demand to shift left.

Question 18

Figure 34-2. 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 34-2. Assume the money market is always in equilibrium, and suppose r1 = 0.08; r2 = 0.12; Y1 = 13,000; Y2 = 10,000; P1 = 1.0; and P2 = 1.2. Which of the following statements is correct? When P = P2,

Accepted Answer

A) investment is lower than it is when P = P1. 
B) nominal output is higher than it is when P = P1. 
C) the expected rate of inflation is higher than it is when P = P1. 
D) the velocity of money is higher than it is when P = P1. 
A) investment is lower than it is when P = P1. 
B) nominal output is higher than it is when P = P1. 
C) the expected rate of inflation is higher than it is when P = P1. 
D) the velocity of money is higher than it is when P = P1.

Question 19

Other things equal, the higher the price level, the higher is the real wealth of households.

Accepted Answer

A) True 
 B)False

Question 20

Changes in the interest rate

Accepted Answer

A) shift aggregate demand whether they are caused by changes in the price level or by changes in fiscal or monetary policy. 
B) shift aggregate demand if they are caused by changes in the price level, but not if they are caused by changes in fiscal or monetary policy. 
C) shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level. 
D) do not shift aggregate demand. 
A) shift aggregate demand whether they are caused by changes in the price level or by changes in fiscal or monetary policy. 
B) shift aggregate demand if they are caused by changes in the price level, but not if they are caused by changes in fiscal or monetary policy. 
C) shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level. 
D) do not shift aggregate demand.

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

When the government reduces taxes, which of the following decreases?

The Employment Act of 1946

The most important automatic stabilizer is

The wealth effect stems from the idea that a higher price level

If the interest rate decreases

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

Suppose that consumers become pessimistic about the future health of the economy. What will happen to aggregate demand and to output? What might the president and Congress have to do to keep output stable?

According to liquidity preference theory, an increase in the price level shifts the

Which of the following is not a reason the aggregate-demand curve slopes downward? As the price level increases,

According to the Theory of Liquidity Preference, a fall in the _____ reduces the amount of money that people wish to hold. As a result, falling interest rates stimulates investment spending and aggregate _____.

Which of the following events would shift money demand to the right?

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

A tax cut targeted at ____ people may have a bigger effect because ​

Explain how unemployment insurance acts as an automatic stabilizer.

In the short run, an increase in the money supply causes interest rates to

Other things equal, the higher the price level, the higher is the real wealth of households.

Changes in the 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

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

According to the Theory of Liquidity Preference, a fall in the _ reduces the amount of money that people wish to hold. As a result, falling interest rates stimulates investment spending and aggregate _.

A tax cut targeted at ____ people may have a bigger effect because