Question 1

According to liquidity preference theory, the money-supply curve would shift rightward

Accepted Answer

A) if the money demand curve shifted right. 
B) if the Federal Reserve chose to increase the money supply. 
C) if the interest rate increased. 
D) All of the above are correct. 
A) if the money demand curve shifted right. 
B) if the Federal Reserve chose to increase the money supply. 
C) if the interest rate increased. 
D) All of the above are correct.

Question 2

If a $1,000 increase in income leads to a $750 increase in consumption expenditures, then the marginal propensity to consume is

Accepted Answer

A) 0.75 and the multiplier is 1 1/3. 
B) 0.75 and the multiplier is 4. 
C) 0.25 and the multiplier is 1 1/3. 
D) 0.25 and the multiplier is 4. 
A) 0.75 and the multiplier is 1 1/3. 
B) 0.75 and the multiplier is 4. 
C) 0.25 and the multiplier is 1 1/3. 
D) 0.25 and the multiplier is 4.

Question 3

According to liquidity preference theory, the opportunity cost of holding money is

Accepted Answer

A) the interest rate on bonds. 
B) the inflation rate. 
C) the cost of converting bonds to a medium of exchange. 
D) the difference between the inflation rate and the interest rate on bonds. 
A) the interest rate on bonds. 
B) the inflation rate. 
C) the cost of converting bonds to a medium of exchange. 
D) the difference between the inflation rate and the interest rate on bonds.

Question 4

Figure 21-2. 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 21-2. 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?

Accepted Answer

A) When r = r2, nominal output is higher than it is when r = r1. 
B) When r = r2, real output is higher than it is when r = r1. 
C) When r = r2, the expected rate of inflation is higher than it is when r = r1. 
D) If the velocity of money is 4 when r = r2, then the quantity of money is $3,000. 
A) When r = r2, nominal output is higher than it is when r = r1. 
B) When r = r2, real output is higher than it is when r = r1. 
C) When r = r2, the expected rate of inflation is higher than it is when r = r1. 
D) If the velocity of money is 4 when r = r2, then the quantity of money is $3,000.

Question 5

An increase in government spending

Accepted Answer

A) increases the interest rate and so investment spending increases. 
B) increases the interest rate and so investment spending decreases. 
C) decreases the interest rate and so increases investment spending increases. 
D) decreases the interest rate and so investment spending decreases. 
A) increases the interest rate and so investment spending increases. 
B) increases the interest rate and so investment spending decreases. 
C) decreases the interest rate and so increases investment spending increases. 
D) decreases the interest rate and so investment spending decreases.

Question 6

Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?

Accepted Answer

A) both the multiplier effect and the crowding-out effect 
B) the multiplier effect, but not the crowding-out effect 
C) the crowding-out effect, but not the multiplier effect 
D) neither the crowding out effect nor the multiplier effect 
A) both the multiplier effect and the crowding-out effect 
B) the multiplier effect, but not the crowding-out effect 
C) the crowding-out effect, but not the multiplier effect 
D) neither the crowding out effect nor the multiplier effect

Question 7

According to liquidity preference theory, a decrease in the price level causes the interest rate to

Accepted Answer

A) increase, which increases the quantity of goods and services demanded. 
B) increase, which decreases the quantity of goods and services demanded. 
C) decrease, which increases the quantity of goods and services demanded. 
D) decrease, which decreases the quantity of goods and services demanded. 
A) increase, which increases the quantity of goods and services demanded. 
B) increase, which decreases the quantity of goods and services demanded. 
C) decrease, which increases the quantity of goods and services demanded. 
D) decrease, which decreases the quantity of goods and services demanded.

Question 8

The interest-rate effect

Accepted Answer

A) depends on the idea that increases in interest rates increase the quantity of money demanded. 
B) depends on the idea that increases in interest rates increase the quantity of money supplied. 
C) is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve. 
D) is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand curve. 
A) depends on the idea that increases in interest rates increase the quantity of money demanded. 
B) depends on the idea that increases in interest rates increase the quantity of money supplied. 
C) is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve. 
D) is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.

Question 9

To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could

Accepted Answer

A) increase the money supply by buying bonds. 
B) Increase the money supply by selling bonds 
C) decrease the money supply by buying bonds. 
D) increase the money supply by selling bonds. 
A) increase the money supply by buying bonds. 
B) Increase the money supply by selling bonds 
C) decrease the money supply by buying bonds. 
D) increase the money supply by selling bonds.

Question 10

In the long run, fiscal policy influences

Accepted Answer

A) saving, investment, and growth; in the short run, fiscal policy primarily influences technology and the production function. 
B) saving, investment, and growth; in the short run, fiscal policy primarily influences the aggregate demand for goods and services. 
C) technology and the production function; in the short run, fiscal policy primarily influences saving, investment, and growth. 
D) the aggregate demand for goods and services; in the short run, fiscal policy primarily influences technology and the production function. 
A) saving, investment, and growth; in the short run, fiscal policy primarily influences technology and the production function. 
B) saving, investment, and growth; in the short run, fiscal policy primarily influences the aggregate demand for goods and services. 
C) technology and the production function; in the short run, fiscal policy primarily influences saving, investment, and growth. 
D) the aggregate demand for goods and services; in the short run, fiscal policy primarily influences technology and the production function.

Question 11

An increase in government purchases is likely to

Accepted Answer

A) decrease interest rates. 
B) result in a net decrease in aggregate demand. 
C) crowd out investment spending by business firms. 
D) decrease money demand. 
A) decrease interest rates. 
B) result in a net decrease in aggregate demand. 
C) crowd out investment spending by business firms. 
D) decrease money demand.

Question 12

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

Accepted Answer

A) the crowding-out effect 
B) the multiplier effect 
C) the exchange-rate effect 
D) the interest-rate effect 
A) the crowding-out effect 
B) the multiplier effect 
C) the exchange-rate effect 
D) the interest-rate effect

Question 13

Assume the multiplier is 5 and that the crowding-out effect is $20 billion. An increase in government purchases of $10 billion will shift the aggregate-demand curve to the

Accepted Answer

A) right by $150 billion. 
B) right by $70 billion. 
C) right by $30 billion. 
D) None of the above is correct. 
A) right by $150 billion. 
B) right by $70 billion. 
C) right by $30 billion. 
D) None of the above is correct.

Question 14

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then

Accepted Answer

A) 1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 1.96. 
B) 1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3. 
C) 1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3. 
D) 1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 2.5. 
A) 1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 1.96. 
B) 1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3. 
C) 1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3. 
D) 1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 2.5.

Question 15

Figure 21-5. On the figure, MS represents money supply and MD represents money demand.  
-Refer to Figure 21-5. 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

Suppose there are both multiplier and crowding out effects but without any accelerator effects. An increase in government expenditures would definitely

Accepted Answer

A) shift aggregate demand right by a larger amount than the increase in government expenditures. 
B) shift aggregate demand right by the same amount as an the increase in government expenditures. 
C) shift aggregate demand right by a smaller amount than the increase in government expenditures. 
D) Any of the above outcomes are possible. 
A) shift aggregate demand right by a larger amount than the increase in government expenditures. 
B) shift aggregate demand right by the same amount as an the increase in government expenditures. 
C) shift aggregate demand right by a smaller amount than the increase in government expenditures. 
D) Any of the above outcomes are possible.

Question 17

Figure 21-2. 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 21-2. Which of the following quantities is held constant as we move from one point to another on either graph?

Accepted Answer

A) the nominal interest rate 
B) the quantity of money demanded 
C) investment 
D) the expected rate of inflation 
A) the nominal interest rate 
B) the quantity of money demanded 
C) investment 
D) the expected rate of inflation

Question 18

If there is excess money supply, people will

Accepted Answer

A) deposit more into interest-bearing accounts, and the interest rate will fall. 
B) deposit more into interest-bearing accounts, and the interest rate will rise. 
C) withdraw money from interest-bearing accounts, and the interest rate will fall. 
D) withdraw money from interest-bearing accounts, and the interest rate will rise. 
A) deposit more into interest-bearing accounts, and the interest rate will fall. 
B) deposit more into interest-bearing accounts, and the interest rate will rise. 
C) withdraw money from interest-bearing accounts, and the interest rate will fall. 
D) withdraw money from interest-bearing accounts, and the interest rate will rise.

Question 19

If, at some interest rate, the quantity of money supplied is greater than the quantity of money demanded, people will desire to

Accepted Answer

A) sell interest-bearing assets, causing the interest rate to decrease. 
B) sell interest-bearing assets, causing the interest rate to increase. 
C) buy interest-bearing assets, causing the interest rate to decrease. 
D) buy interest-bearing assets, causing the interest rate to increase. 
A) sell interest-bearing assets, causing the interest rate to decrease. 
B) sell interest-bearing assets, causing the interest rate to increase. 
C) buy interest-bearing assets, causing the interest rate to decrease. 
D) buy interest-bearing assets, causing the interest rate to increase.

Question 20

An essential piece of the liquidity preference theory is the demand for money.

Accepted Answer

A) True 
 B)False

Exam 21: The Influence of Monetary and Fiscal Policy on Aggregate Demand

According to liquidity preference theory, the money-supply curve would shift rightward

If a $1,000 increase in income leads to a $750 increase in consumption expenditures, then the marginal propensity to consume is

According to liquidity preference theory, the opportunity cost of holding money is

An increase in government spending

Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?

According to liquidity preference theory, a decrease in the price level causes the interest rate to

The interest-rate effect

To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could

In the long run, fiscal policy influences

An increase in government purchases is likely to

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

Assume the multiplier is 5 and that the crowding-out effect is $20 billion. An increase in government purchases of $10 billion will shift the aggregate-demand curve to the

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. What is measured along the vertical axis of the graph?

Suppose there are both multiplier and crowding out effects but without any accelerator effects. An increase in government expenditures would definitely

If there is excess money supply, people will

If, at some interest rate, the quantity of money supplied is greater than the quantity of money demanded, people will desire to

An essential piece of the liquidity preference theory is the demand for money.

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

Application: The Costs of Taxation

Application: International Trade

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomic Models

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

Filters