Question 1

Other things the same, automatic stabilizers tend to

Accepted Answer

A) raise expenditures during expansions and recessions. 
B) lower expenditures during expansions and recessions. 
C) raise expenditures during recessions and lower expenditures during expansions. 
D) raise expenditures during expansions and lower expenditures during recessions. 
A) raise expenditures during expansions and recessions. 
B) lower expenditures during expansions and recessions. 
C) raise expenditures during recessions and lower expenditures during expansions. 
D) raise expenditures during expansions and lower expenditures during recessions.

Question 2

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

Accepted Answer

A) decrease taxes 
B) increase government expenditures 
C) increase the money supply 
D) None of the above is correct. 
A) decrease taxes 
B) increase government expenditures 
C) increase the money supply 
D) None of the above is correct.

Question 3

An increase in government spending initially and primarily shifts

Accepted Answer

A) aggregate demand to the right. 
B) aggregate demand to the left. 
C) aggregate supply to the right. 
D) neither aggregate demand nor aggregate supply in either direction. 
A) aggregate demand to the right. 
B) aggregate demand to the left. 
C) aggregate supply to the right. 
D) neither aggregate demand nor aggregate supply in either direction.

Question 4

A policy that results in slow and steady growth of the money supply is an example of

Accepted Answer

A) an "easy" monetary policy. 
B) a "passive" monetary policy. 
C) a "practical" monetary policy. 
D) an "active" monetary policy. 
A) an "easy" monetary policy. 
B) a "passive" monetary policy. 
C) a "practical" monetary policy. 
D) an "active" monetary policy.

Question 5

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following shifts aggregate demand to the right?

Accepted Answer

A) The price level rises. 
B) The price level falls. 
C) The Fed purchases government bonds on the open market. 
D) None of the above is correct. 
A) The price level rises. 
B) The price level falls. 
C) The Fed purchases government bonds on the open market. 
D) None of the above is correct.

Question 7

Which of the following effects results from the change in the interest rate created by an increase in government spending?

Accepted Answer

A) the investment accelerator and crowding out 
B) the investment accelerator but not crowding out 
C) crowding out but not the investment accelerator 
D) neither crowding out nor the investment accelerator 
A) the investment accelerator and crowding out 
B) the investment accelerator but not crowding out 
C) crowding out but not the investment accelerator 
D) neither crowding out nor the investment accelerator

Question 8

The multiplier effect

Accepted Answer

A) and the crowding-out effect both amplify the effects of an increase in government expenditures. 
B) and the crowding-out effect both diminish the effects of an increase in government expenditures. 
C) diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects. 
D) amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects. 
A) and the crowding-out effect both amplify the effects of an increase in government expenditures. 
B) and the crowding-out effect both diminish the effects of an increase in government expenditures. 
C) diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects. 
D) amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.

Question 9

Figure 21-6. 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 21-6. Suppose the multiplier is 5 and the government increases its purchases by $10 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 $20 billion. The extent of crowding out, for any particular level of the price level, is

Accepted Answer

A) the horizontal distance between the curves MD1 and MD2. 
B) $40 billion. 
C) $30 billion. 
D) $20 billion. 
A) the horizontal distance between the curves MD1 and MD2. 
B) $40 billion. 
C) $30 billion. 
D) $20 billion.

Question 10

Other things equal, in the short run a higher price level leads households to

Accepted Answer

A) increase consumption and firms to buy more capital goods. 
B) increase consumption and firms to buy fewer capital goods. 
C) decrease consumption and firms to buy more capital goods. 
D) decrease consumption and firms to buy fewer capital goods. 
A) increase consumption and firms to buy more capital goods. 
B) increase consumption and firms to buy fewer capital goods. 
C) decrease consumption and firms to buy more capital goods. 
D) decrease consumption and firms to buy fewer capital goods.

Question 11

Tax cuts

Accepted Answer

A) and increases in government expenditures shift aggregate demand right. 
B) and increases in government expenditures shift aggregate demand left. 
C) shift aggregate demand right while increases in government expenditures shift aggregate demand left. 
D) shift aggregate demand left while increases in government expenditures shift aggregate demand right. 
A) and increases in government expenditures shift aggregate demand right. 
B) and increases in government expenditures shift aggregate demand left. 
C) shift aggregate demand right while increases in government expenditures shift aggregate demand left. 
D) shift aggregate demand left while increases in government expenditures shift aggregate demand right.

Question 12

Which of the effects listed below increases the quantity of goods and services demanded when the price level falls and decreases the quantity of goods and services demanded when the price level rises?

Accepted Answer

A) the wealth effect 
B) the interest-rate effect 
C) the exchange-rate effect 
D) All of the above are correct. 
A) the wealth effect 
B) the interest-rate effect 
C) the exchange-rate effect 
D) All of the above are correct.

Question 13

The theory of liquidity preference illustrates the principle that

Accepted Answer

A) monetary policy can be described either in terms of the money supply or in terms of the interest rate. 
B) monetary policy can be described either in terms of the exchange rate or the interest rate. 
C) monetary policy must be described in terms of the money supply. 
D) monetary policy must be described in terms of the interest rate. 
A) monetary policy can be described either in terms of the money supply or in terms of the interest rate. 
B) monetary policy can be described either in terms of the exchange rate or the interest rate. 
C) monetary policy must be described in terms of the money supply. 
D) monetary policy must be described in terms of the interest rate.

Question 14

Suppose that the MPC is 0.60; there is no investment accelerator; and there are no crowding-out effects. If government expenditures increase by $25 billion, then aggregate demand

Accepted Answer

A) shifts rightward by $62.5 billion. 
B) shifts rightward by $50.0 billion. 
C) shifts rightward by $32.5 billion. 
D) None of the above is correct. 
A) shifts rightward by $62.5 billion. 
B) shifts rightward by $50.0 billion. 
C) shifts rightward by $32.5 billion. 
D) None of the above is correct.

Question 15

If net exports fall $40 billion and the MPC is 8/11 and there is a multiplier effect, but no crowding out and no investment accelerator, then

Accepted Answer

A) aggregate demand falls by 3 x $40 billion. 
B) aggregate demand falls by 11/3 x $40 billion. 
C) aggregate demand falls by 11/8 x $40 billion. 
D) None of the above is correct. 
A) aggregate demand falls by 3 x $40 billion. 
B) aggregate demand falls by 11/3 x $40 billion. 
C) aggregate demand falls by 11/8 x $40 billion. 
D) None of the above is correct.

Question 16

Some economists, called supply-siders, argue that changes in the money supply exert a strong influence on aggregate supply.

Accepted Answer

A) True 
 B)False

Question 17

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 18

For a country such as the U.S., the wealth effect exerts a very important influence on the slope of the aggregate-demand curve, since U.S. wealth is large relative to wealth in most other countries.

Accepted Answer

A) True 
 B)False

Question 19

When there is an increase in government expenditures, which of the following raises investment spending?

Accepted Answer

A) the investment accelerator and crowding out 
B) the investment accelerator but not crowding out 
C) crowding out but not the investment accelerator 
D) neither the investment accelerator or crowding out 
A) the investment accelerator and crowding out 
B) the investment accelerator but not crowding out 
C) crowding out but not the investment accelerator 
D) neither the investment accelerator or crowding out

Question 20

The Fed is concerned about stock market booms because the booms

Accepted Answer

A) increase consumption spending. 
B) increase investment spending. 
C) increase both consumption and investment spending. 
D) None of the above is correct. 
A) increase consumption spending. 
B) increase investment spending. 
C) increase both consumption and investment spending. 
D) None of the above is correct.

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

Other things the same, automatic stabilizers tend to

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

An increase in government spending initially and primarily shifts

A policy that results in slow and steady growth of the money supply is an example of

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

Which of the following shifts aggregate demand to the right?

Which of the following effects results from the change in the interest rate created by an increase in government spending?

The multiplier effect

Other things equal, in the short run a higher price level leads households to

Tax cuts

Which of the effects listed below increases the quantity of goods and services demanded when the price level falls and decreases the quantity of goods and services demanded when the price level rises?

The theory of liquidity preference illustrates the principle that

Suppose that the MPC is 0.60; there is no investment accelerator; and there are no crowding-out effects. If government expenditures increase by $25 billion, then aggregate demand

If net exports fall $40 billion and the MPC is 8/11 and there is a multiplier effect, but no crowding out and no investment accelerator, then

Some economists, called supply-siders, argue that changes in the money supply exert a strong influence on aggregate supply.

For a country such as the U.S., the wealth effect exerts a very important influence on the slope of the aggregate-demand curve, since U.S. wealth is large relative to wealth in most other countries.

When there is an increase in government expenditures, which of the following raises investment spending?

The Fed is concerned about stock market booms because the booms

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

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