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

Figure 34-7 (a) The Money Market (b) The Aggregate Demand Curve -Refer to Figure 34-7. Suppose the multiplier is 5 and the government increases its purchases by $15 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. Also, suppose the horizontal distance between the curves AD₁ and AD₃ is $55 billion. The extent of crowding out, for any particular level of the price level, is

Figure 34-4 ​ ​ -Refer to Figure 34-4. Which of the following events could explain a shift of the money-demand curve from MD₁ to MD₂?

It is likely that a constitutional amendment that required the government always to run a balanced budget would

A decrease in taxes will shift aggregate demand to the _____, cause consumption to _____, and cause output to _____. Due to the crowding-out effect, investment will _____.

The wealth effect along an aggregate-demand curve stems from the idea that a higher price level

When the Fed announces a target for the federal funds rate, it essentially accommodates the day-to-day fluctuations in money demand by adjusting the money supply accordingly.

If the Federal Reserve's goal is to stabilize aggregate demand, then it will _____ the money supply in response to a stock market boom. This causes interest rates to _____.

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Which of the following correctly explains the crowding-out effect?

An increase in the price level shifts the money demand curve to the left, causing interest rates to increase.

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

The process of the investment accelerator involves

If the Fed conducts open-market sales, the money supply

Figure 34-2 (a) The Money Market (b) The Aggregate Demand Curve -Refer to Figure 34-2. If the money-supply curve MS on the left-hand graph were to shift to the left, this would

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

If the Federal Reserve decided to raise interest rates, it could

The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates

A significant lag for monetary policy is the time it takes to for a change in the money supply to change the economy. A significant lag for fiscal policy is the time it takes to pass legislation authorizing it.

If the stock market booms, then

Use the money market to explain the interest-rate effect and its relation to the slope of the aggregate demand curve.