Question 1

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 2

Monetary policy

Accepted Answer

A) must be described in terms of interest-rate targets. 
B) must be described in terms of money-supply targets. 
C) can be described either in terms of the money supply or in terms of the interest rate. 
D) cannot be accurately described in terms of the interest rate or in terms of the money supply. 
A) must be described in terms of interest-rate targets. 
B) must be described in terms of money-supply targets. 
C) can be described either in terms of the money supply or in terms of the interest rate. 
D) cannot be accurately described in terms of the interest rate or in terms of the money supply.

Question 3

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $80 billion to the left. The government wants to change spending to offset this decrease in demand. The MPC is 0.75. Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in real GDP?

Accepted Answer

A) Raise both taxes and expenditures by $80 billion dollars. 
B) Raise both taxes and expenditures by $10 billion dollars. 
C) Reduce both taxes and expenditures by $80 billion dollars. 
D) Reduce both taxes and expenditures by $10 billion dollars. 
A) Raise both taxes and expenditures by $80 billion dollars. 
B) Raise both taxes and expenditures by $10 billion dollars. 
C) Reduce both taxes and expenditures by $80 billion dollars. 
D) Reduce both taxes and expenditures by $10 billion dollars.

Question 4

According to liquidity preference theory, a decrease 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 5

What is the difference between monetary policy and fiscal policy?

Accepted Answer

The Federal Reserve Bank conducts U.S. m

Question 6

If the Federal Reserve decreases the money supply, then initially there is a

Accepted Answer

A) shortage in the money market, so people will want to sell bonds. 
B) shortage in the money market, so people will want to buy bonds. 
C) surplus in the money market, so people will want to sell bonds. 
D) surplus in the money market, so people will want to buy bonds. 
A) shortage in the money market, so people will want to sell bonds. 
B) shortage in the money market, so people will want to buy bonds. 
C) surplus in the money market, so people will want to sell bonds. 
D) surplus in the money market, so people will want to buy bonds.

Question 7

Figure 34-14  
-Refer to Figure 34-14. Households' desired money holdings are given by MD1. If the current rate of interest is r3, then there is excess _____. Households will _____ interest-earning assets, which causes the interest rate to _____.

Accepted Answer

Question 8

In the short run, open-market purchases

Accepted Answer

A) increase investment and real GDP, and decrease nominal interest rates. 
B) increase real GDP and nominal interest rates, and decrease investment. 
C) increase investment and nominal interest rates, and decrease real GDP. 
D) decrease investment, nominal interest rates, and real GDP. 
A) increase investment and real GDP, and decrease nominal interest rates. 
B) increase real GDP and nominal interest rates, and decrease investment. 
C) increase investment and nominal interest rates, and decrease real GDP. 
D) decrease investment, nominal interest rates, and real GDP.

Question 9

Which of the following reduces the interest rate?

Accepted Answer

A) an increase in government expenditures and an increase in the money supply 
B) an increase in government expenditures and a decrease in the money supply 
C) a decrease in government expenditures and an increase in the money supply 
D) a decrease in government expenditures and a decrease in the money supply 
A) an increase in government expenditures and an increase in the money supply 
B) an increase in government expenditures and a decrease in the money supply 
C) a decrease in government expenditures and an increase in the money supply 
D) a decrease in government expenditures and a decrease in the money supply

Question 10

If households view a tax cut as temporary, then the tax cut

Accepted Answer

A) has no effect on aggregate demand. 
B) has more of an effect on aggregate demand than if households view it as permanent. 
C) has the same effect as when households view the cut as permanent. 
D) has less of an effect on aggregate demand than if households view it as permanent. 
A) has no effect on aggregate demand. 
B) has more of an effect on aggregate demand than if households view it as permanent. 
C) has the same effect as when households view the cut as permanent. 
D) has less of an effect on aggregate demand than if households view it as permanent.

Question 11

If the interest rate is below the Fed's target, the Fed should

Accepted Answer

A) buy bonds to increase bank reserves. 
B) buy bonds to decrease bank reserves. 
C) sell bonds to increase bank reserves. 
D) sell bonds to decrease bank reserves. 
A) buy bonds to increase bank reserves. 
B) buy bonds to decrease bank reserves. 
C) sell bonds to increase bank reserves. 
D) sell bonds to decrease bank reserves.

Question 12

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

Accepted Answer

A) assumption that increases in government purchases have no effect on consumer spending. 
B) assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred. 
C) empirical evidence that points to a value of about 3/4 for the MPC. 
D) fact that the multiplier effect is represented by an infinite geometric series. 
A) assumption that increases in government purchases have no effect on consumer spending. 
B) assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred. 
C) empirical evidence that points to a value of about 3/4 for the MPC. 
D) fact that the multiplier effect is represented by an infinite geometric series.

Question 13

During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.

Accepted Answer

A) True 
 B)False

Question 14

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. If the graphs apply to an economy such as the U.S. economy, then the slope of the AD curve is primarily attributable to the

Accepted Answer

A) wealth effect. 
B) interest-rate effect. 
C) exchange-rate effect. 
D) Fisher effect. 
A) wealth effect. 
B) interest-rate effect. 
C) exchange-rate effect. 
D) Fisher effect.

Question 15

Figure 34-5. On the figure, MS represents money supply and MD represents money demand.  
-Refer to Figure 34-5. 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 16

The positive feedback from aggregate demand to investment is called

Accepted Answer

A) the investment multiplier. 
B) the crowding-out effect. 
C) the investment accelerator. 
D) the crowding-in multiplier. 
A) the investment multiplier. 
B) the crowding-out effect. 
C) the investment accelerator. 
D) the crowding-in multiplier.

Question 17

The additional shifts in aggregate demand that result when there is an increase in government spending is known as the _____.

Accepted Answer

The answer of The additional shifts in aggregate demand that...

Question 18

Critics of stabilization policy argue that monetary and fiscal policies affect the economy with _____.

Accepted Answer

The answer of Critics of stabilization policy argue that monetary...

Question 19

If the investment accelerator from an increase in government purchases is larger than the crowding-out effect, then

Accepted Answer

A) the multiplier is probably zero. 
B) the multiplier is probably equal to one. 
C) the multiplier is probably greater than one. 
D) the multiplier is probably less than one. 
A) the multiplier is probably zero. 
B) the multiplier is probably equal to one. 
C) the multiplier is probably greater than one. 
D) the multiplier is probably less than one.

Question 20

According to a 2009 article in The Economist, the multiplier effect and crowding-out effect would exactly offset each other when the economy is

Accepted Answer

A) operating at full capacity. 
B) in recession. 
C) experiencing zero inflation. 
D) experiencing high rates of inflation. 
A) operating at full capacity. 
B) in recession. 
C) experiencing zero inflation. 
D) experiencing high rates of inflation.

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

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

Monetary policy

According to liquidity preference theory, a decrease in the price level shifts the

What is the difference between monetary policy and fiscal policy?

If the Federal Reserve decreases the money supply, then initially there is a

Figure 34-14 -Refer to Figure 34-14. Households' desired money holdings are given by MD1. If the current rate of interest is r3, then there is excess _____. Households will _____ interest-earning assets, which causes the interest rate to _____.

In the short run, open-market purchases

Which of the following reduces the interest rate?

If households view a tax cut as temporary, then the tax cut

If the interest rate is below the Fed's target, the Fed should

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.

Figure 34-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-5. What is measured along the vertical axis of the graph?

The positive feedback from aggregate demand to investment is called

The additional shifts in aggregate demand that result when there is an increase in government spending is known as the _____.

Critics of stabilization policy argue that monetary and fiscal policies affect the economy with _____.

If the investment accelerator from an increase in government purchases is larger than the crowding-out effect, then

According to a 2009 article in The Economist, the multiplier effect and crowding-out effect would exactly offset each other when the economy is

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 34-14 -Refer to Figure 34-14. Households' desired money holdings are given by MD₁. If the current rate of interest is r₃, then there is excess ___. Households will _ interest-earning assets, which causes the interest rate to ___.