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

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?

Which of the following shifts aggregate demand to the left?

If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $115 billion increase in government expenditures would shift the aggregate demand curve right by

During recessions, unemployment insurance payments tend to rise.

When the interest rate decrease, the opportunity cost of holding money

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is

Figure 34-10 ​ -Refer to Figure 34-10. The economy is currently at point A. To stabilize output, the president and Congress can reduce _____ and/or increase _____.

Suppose households attempt to increase money holdings. To stabilize output and employment, the Federal Reserve will _____.

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Suppose an increase in interest rates causes rising unemployment and falling output. To counter this, the Federal Reserve would

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

If the multiplier is 3, then the MPC is

If the MPC is 3/5 then the multiplier is

The multiplier effect states that there are additional shifts in aggregate demand from expansionary fiscal policy, because it

Other things the same, an increase in taxes shifts aggregate demand to the left. In the short run this makes output fall which makes the interest rate rise.

In the short run, open-market purchases

Scenario 34-1. Take the following information as given for a small economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. -Refer to Scenario 34-1. The marginal propensity to consume for this economy is

A European recession that reduces U.S. net exports by $50 billion may ultimately lead to a $_____ billion reduction in aggregate demand if the MPC is 0.75.

When the Federal Reserve conducts an open-market purchase, the money supply _____ and aggregate demand _____.

While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1.25 percent, " a more precise account of the Fed's action would be as follows: