Question 1

If an increase in interest rates reduces investment spending by $25m:

Accepted Answer

A) real GDP will decrease by $25 million 
B) GDP will decrease by $25 million 
C) GDP will decrease by more than $25 million 
D) GDP will decrease by less than $25 million x 
A) real GDP will decrease by $25 million 
B) GDP will decrease by $25 million 
C) GDP will decrease by more than $25 million 
D) GDP will decrease by less than $25 million x C

Question 2

When the government increases its purchases, the increase in aggregate demand could be more than or less than the increase in government purchases, depending on whether the multiplier effect or the crowding-out effect is larger.

Accepted Answer

A) True 
 B)False  True

Question 3

A reduction in direct taxes will result in:

Accepted Answer

A) an increase in output and a little inflation if the economy is near full employment 
B) a decrease in inflation and a small increase in output if the economy is near full employment 
C) a leftward shift in the AD curve 
D) no shift in the AD curve of these 
A) an increase in output and a little inflation if the economy is near full employment 
B) a decrease in inflation and a small increase in output if the economy is near full employment 
C) a leftward shift in the AD curve 
D) no shift in the AD curve of these B

Question 4

When the government reduces taxes, households' take-home pay:

Accepted Answer

A) increases, households' saving increases and households' consumption increases 
B) decreases, households' saving decreases and households' consumption decreases 
C) increases, households' saving is unaffected and households' consumption increases 
D) increases, households' saving increases and households' consumption is unaffected 
A) increases, households' saving increases and households' consumption increases 
B) decreases, households' saving decreases and households' consumption decreases 
C) increases, households' saving is unaffected and households' consumption increases 
D) increases, households' saving increases and households' consumption is unaffected

Question 5

Supply-side economists focus on:

Accepted Answer

A) how fiscal policy affects aggregate demand 
B) how tax-policy affects the incentives to work 
C) how fiscal policy affects aggregate supply 
D) both A and B 
E) both B and C 
A) how fiscal policy affects aggregate demand 
B) how tax-policy affects the incentives to work 
C) how fiscal policy affects aggregate supply 
D) both A and B 
E) both B and C

Question 6

Assuming that the crowding-out effect is $100 billion and the multiplier effect of an increase in government purchases is $120 billion, then the total effect on aggregate demand will be:

Accepted Answer

A) an $80 billion increase 
B) an $80 billion decrease 
C) a $20 billion increase 
D) a $20 billion decrease 
A) an $80 billion increase 
B) an $80 billion decrease 
C) a $20 billion increase 
D) a $20 billion decrease

Question 7

According to the Ricardian equivalence theory, what would happen if the government were to cut taxes without changing its spending?

Accepted Answer

A) Public and national saving would fall 
B) Public and national saving would rise 
C) Public and national saving would not change 
D) Private saving would rise, public saving would fall, and national saving would be unaffected 
A) Public and national saving would fall 
B) Public and national saving would rise 
C) Public and national saving would not change 
D) Private saving would rise, public saving would fall, and national saving would be unaffected

Question 8

Which of the following policies would Keynes have supported when the economy is experiencing unemployment?

Accepted Answer

A) An open-market purchase 
B) A reduction in tax rates 
C) An increase in government purchases 
D) All of the above 
A) An open-market purchase 
B) A reduction in tax rates 
C) An increase in government purchases 
D) All of the above

Question 9

Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.9.What is the total effect of this increase in government purchases?

Accepted Answer

A) $90 billion 
B) $111 billion 
C) $900 billion 
D) $1000 billion 
A) $90 billion 
B) $111 billion 
C) $900 billion 
D) $1000 billion

Question 10

When the economy goes into a recession, the amount of taxes collected by the government falls automatically.Why?

Accepted Answer

Tax revenue declines when the economy go

Question 11

The global financial crisis has shown that the Australian government can influence the behaviour of the economy only with fiscal policy.

Accepted Answer

A) True 
 B)False

Question 12

The notion that when the government increases its purchases of aeroplanes, the owners and employees of the aeroplane manufacturing companies will also purchase more as their incomes rise, and hence total purchases will increase by more than the initial change in government purchases, is known as the:

Accepted Answer

A) crowding-out effect 
B) Keynesian effect 
C) multiplier effect 
D) acceleration effect 
A) crowding-out effect 
B) Keynesian effect 
C) multiplier effect 
D) acceleration effect

Question 13

What are the key determinants of the interest rate in the short run? What are the key determinants of the interest rate in the long run?

Accepted Answer

In the short run, we can think of the in

Question 14

An increase in government purchases of $100 billion will shift the aggregate-demand curve to the:

Accepted Answer

A) left by more than $100 billion 
B) left by more or less than $100 billion 
C) right by more than $100 billion 
D) right by more or less than $100 billion 
A) left by more than $100 billion 
B) left by more or less than $100 billion 
C) right by more than $100 billion 
D) right by more or less than $100 billion

Question 15

An increase in Australia's marginal propensity to import will:

Accepted Answer

A) have no effect on GDP, because GDP only includes spending in Australia 
B) cause an increase in GDP, because Australians have risen their spending 
C) cause a decrease in GDP, because some existing spending will demand production overseas instead of in Australia 
D) always be bad for the economy 
A) have no effect on GDP, because GDP only includes spending in Australia 
B) cause an increase in GDP, because Australians have risen their spending 
C) cause a decrease in GDP, because some existing spending will demand production overseas instead of in Australia 
D) always be bad for the economy

Question 16

For a given fixed price level, an increase in the money supply will lead to:

Accepted Answer

A) an increase in the interest rate, which in turn decreases the quantity of goods and services demanded 
B) an increase in the interest rate, which in turn increases the quantity of goods and services demanded 
C) a fall in the interest rate, which in turn increases the quantity of goods and services demanded 
D) a fall in the interest rate, which in turn decreases the quantity of goods and services demanded 
A) an increase in the interest rate, which in turn decreases the quantity of goods and services demanded 
B) an increase in the interest rate, which in turn increases the quantity of goods and services demanded 
C) a fall in the interest rate, which in turn increases the quantity of goods and services demanded 
D) a fall in the interest rate, which in turn decreases the quantity of goods and services demanded

Question 17

An increase in money supply shifts the money supply curve to the _____, _____the equilibrium interest rate in the money market.

Accepted Answer

A) right; reducing 
B) right; raising 
C) left; reducing 
D) left; raising 
A) right; reducing 
B) right; raising 
C) left; reducing 
D) left; raising

Question 18

According to the theory of liquidity preference, the money demand curve is downward sloping, reflecting _____.

Accepted Answer

A) the opportunity cost holding money 
B) the cost of buying goods and services 
C) the effect of unforeseen inflation 
D) the risk of holding money 
A) the opportunity cost holding money 
B) the cost of buying goods and services 
C) the effect of unforeseen inflation 
D) the risk of holding money

Question 19

Changes in government spending affect saving and growth in the long run, and aggregate demand and employment in the short run.

Accepted Answer

A) True 
 B)False

Question 20

Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance is called:

Accepted Answer

A) the theory of sticky wages 
B) the theory of sticky prices 
C) the classical dichotomy theory 
D) the theory of liquidity preference 
A) the theory of sticky wages 
B) the theory of sticky prices 
C) the classical dichotomy theory 
D) the theory of liquidity preference

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

If an increase in interest rates reduces investment spending by $25m:

When the government increases its purchases, the increase in aggregate demand could be more than or less than the increase in government purchases, depending on whether the multiplier effect or the crowding-out effect is larger.

A reduction in direct taxes will result in:

When the government reduces taxes, households' take-home pay:

Supply-side economists focus on:

Assuming that the crowding-out effect is $100 billion and the multiplier effect of an increase in government purchases is $120 billion, then the total effect on aggregate demand will be:

According to the Ricardian equivalence theory, what would happen if the government were to cut taxes without changing its spending?

Which of the following policies would Keynes have supported when the economy is experiencing unemployment?

Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.9.What is the total effect of this increase in government purchases?

When the economy goes into a recession, the amount of taxes collected by the government falls automatically.Why?

The global financial crisis has shown that the Australian government can influence the behaviour of the economy only with fiscal policy.

What are the key determinants of the interest rate in the short run? What are the key determinants of the interest rate in the long run?

An increase in government purchases of $100 billion will shift the aggregate-demand curve to the:

An increase in Australia's marginal propensity to import will:

For a given fixed price level, an increase in the money supply will lead to:

An increase in money supply shifts the money supply curve to the _____, _____the equilibrium interest rate in the money market.

According to the theory of liquidity preference, the money demand curve is downward sloping, reflecting _____.

Changes in government spending affect saving and growth in the long run, and aggregate demand and employment in the short run.

Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance is called:

Ten Lessons From 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

Application: 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

Business Strategy and Oligopoly

Competition Policy

The Markets for the Factors of Production

Earnings, Unions and Discrimination

Income Inequity and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment and the Financial System

The Natural Rate of Unemployment

The Monetary System

Inflation: Its Causes and Costs

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Trade-Off Between Inflation and Unemployment

Global Financial Crisis of 2008 and Beyond

Five Debates Over Macroeconomic Policy

Filters

An increase in money supply shifts the money supply curve to the _, _the equilibrium interest rate in the money market.