Question 1

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

Accepted Answer

A) a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero. 
B) a central bank continues to have the option of committing itself to future monetary contraction, even after its interest rate target hits its lower bound of zero. 
C) a central bank can greatly reduce the likelihood of a liquidity trap by setting the target rate of inflation at zero. 
D) while the concept of a liquidity trap is theoretically possible, nothing resembling a liquidity trap ever has been observed in the real world. 
A) a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero. 
B) a central bank continues to have the option of committing itself to future monetary contraction, even after its interest rate target hits its lower bound of zero. 
C) a central bank can greatly reduce the likelihood of a liquidity trap by setting the target rate of inflation at zero. 
D) while the concept of a liquidity trap is theoretically possible, nothing resembling a liquidity trap ever has been observed in the real world.

Question 2

If the inflation rate is zero, then the nominal and real interest rate are the same.

Accepted Answer

A) True 
 B)False

Question 3

The term crowding-out effect refers to

Accepted Answer

A) the reduction in aggregate supply that results when a monetary expansion causes the interest rate to decrease. 
B) the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease. 
C) the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase. 
D) the reduction in aggregate demand that results when a decrease in government spending or an increase in taxes causes the interest rate to increase. 
A) the reduction in aggregate supply that results when a monetary expansion causes the interest rate to decrease. 
B) the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease. 
C) the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase. 
D) the reduction in aggregate demand that results when a decrease in government spending or an increase in taxes causes the interest rate to increase.

Question 4

In 1961, President John F. Kennedy, acting upon advice from his economists, proposed tax cuts. The advice he received

Accepted Answer

A) was opposed to the teaching of Keynes, who had taught that tax cuts were counterproductive. 
B) was opposed to the teaching of Keynes, who had taught that all attempts to stabilize the economy were futile. 
C) came from economists who had studied Keynes's ideas when those ideas were only a few years old. 
D) came from economists who were unaware of Keynes's ideas because those ideas had not yet been widely disseminated at that time. 
A) was opposed to the teaching of Keynes, who had taught that tax cuts were counterproductive. 
B) was opposed to the teaching of Keynes, who had taught that all attempts to stabilize the economy were futile. 
C) came from economists who had studied Keynes's ideas when those ideas were only a few years old. 
D) came from economists who were unaware of Keynes's ideas because those ideas had not yet been widely disseminated at that time.

Question 5

Assume the MPC is 0.625. Assuming only the multiplier effect matters, a decrease in government purchases of $10 billion will shift the aggregate demand curve to the

Accepted Answer

A) left by about $13.3 billion. 
B) left by about $26.7 billion. 
C) right by about $36.7 billion. 
D) None of the above is correct. 
A) left by about $13.3 billion. 
B) left by about $26.7 billion. 
C) right by about $36.7 billion. 
D) None of the above is correct.

Question 6

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

Accepted Answer

A) price level $\uparrow \Rightarrow$demand for money $\darr\Rightarrow$equilibrium interest rate $\uparrow \Rightarrow$quantity of goods and services demanded $\darr$ 
B) price level $\uparrow \Rightarrow$demand for money $\uparrow \Rightarrow$ equilibrium interest rate $\darr\Rightarrow$quantity of goods and services demanded $\darr$ 
C) price level $\darr\Rightarrow$demand for money $\darr\Rightarrow$equilibrium interest rate $\darr\Rightarrow$quantity of goods and services demanded $\uparrow$ 
D) price level $\darr\Rightarrow$equilibrium interest rate $\darr\Rightarrow$demand for money $\uparrow \Rightarrow$quantity of goods and services demanded $\uparrow$ 
A) price level $\uparrow \Rightarrow$demand for money $\darr\Rightarrow$equilibrium interest rate $\uparrow \Rightarrow$quantity of goods and services demanded $\darr$ 
B) price level $\uparrow \Rightarrow$demand for money $\uparrow \Rightarrow$ equilibrium interest rate $\darr\Rightarrow$quantity of goods and services demanded $\darr$ 
C) price level $\darr\Rightarrow$demand for money $\darr\Rightarrow$equilibrium interest rate $\darr\Rightarrow$quantity of goods and services demanded $\uparrow$ 
D) price level $\darr\Rightarrow$equilibrium interest rate $\darr\Rightarrow$demand for money $\uparrow \Rightarrow$quantity of goods and services demanded $\uparrow$

Question 7

Which of the following are effects of an increase in government spending financed by a tax increase?

Accepted Answer

A) the tax increase reduces consumption; the change in the interest rate reduces residential construction 
B) The tax increase reduces consumption; the change in the interest rate raises residential construction. 
C) the tax increase raises consumption; the change in the interest rate reduces residential construction 
D) The tax increase raises consumption; the change in the interest rate reduces residential construction. 
A) the tax increase reduces consumption; the change in the interest rate reduces residential construction 
B) The tax increase reduces consumption; the change in the interest rate raises residential construction. 
C) the tax increase raises consumption; the change in the interest rate reduces residential construction 
D) The tax increase raises consumption; the change in the interest rate reduces residential construction.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Which of the following illustrates how the investment accelerator works?

Accepted Answer

A) An increase in government expenditures increases aggregate spending so that SnoozeBargain Co. decides to modernize its motels. 
B) An increase in government expenditures increases the interest rate so that SnoozeBargain Co. decides to modernize its motels. 
C) An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by SnoozeBargain Co. rises. 
D) An increase in government expenditures decreases the interest rate so that SnoozeBargain Co. decides to modernize its motels. 
A) An increase in government expenditures increases aggregate spending so that SnoozeBargain Co. decides to modernize its motels. 
B) An increase in government expenditures increases the interest rate so that SnoozeBargain Co. decides to modernize its motels. 
C) An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by SnoozeBargain Co. rises. 
D) An increase in government expenditures decreases the interest rate so that SnoozeBargain Co. decides to modernize its motels.

Question 10

In recent years, the Federal Reserve has conducted policy by setting a target for the

Accepted Answer

A) size of the money supply. 
B) growth rate of the money supply. 
C) federal funds rate. 
D) discount rate. 
A) size of the money supply. 
B) growth rate of the money supply. 
C) federal funds rate. 
D) discount rate.

Question 11

Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could

Accepted Answer

A) increase the money supply. This increase would also move the price level closer to its value before the rise in stock prices. 
B) increase the money supply. However, this increase would move the price level farther from its value before the rise in stock prices. 
C) decrease the money supply. This decrease would also move the price level closer to its value before the rise in stock prices. 
D) decrease the money supply. However, this decrease would move the price level farther from its value before the rise in stock prices. 
A) increase the money supply. This increase would also move the price level closer to its value before the rise in stock prices. 
B) increase the money supply. However, this increase would move the price level farther from its value before the rise in stock prices. 
C) decrease the money supply. This decrease would also move the price level closer to its value before the rise in stock prices. 
D) decrease the money supply. However, this decrease would move the price level farther from its value before the rise in stock prices.

Question 12

If the multiplier is 2.5, then the MPC is

Accepted Answer

A) 0.2. 
B) 0.6. 
C) 0.75. 
D) 1.00. 
A) 0.2. 
B) 0.6. 
C) 0.75. 
D) 1.00.

Question 13

Figure 21-4. On the figure, MS represents money supply and MD represents money demand.  
-Refer to Figure 21-4. Suppose the money-demand curve is currently MD2. If the current interest rate is r2, then

Accepted Answer

A) in response, the money-demand curve will shift downward from its current position to establish equilibrium in the money market. 
B) people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. 
C) bond issuers and banks will respond by lowering the interest rates they offer. 
D) there is a surplus of money. 
A) in response, the money-demand curve will shift downward from its current position to establish equilibrium in the money market. 
B) people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. 
C) bond issuers and banks will respond by lowering the interest rates they offer. 
D) there is a surplus of money.

Question 14

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

Accepted Answer

A) a decrease in the money supply 
B) a reduction in tax rates 
C) a decrease in government purchases 
D) None of the above is correct. 
A) a decrease in the money supply 
B) a reduction in tax rates 
C) a decrease in government purchases 
D) None of the above is correct.

Question 15

According to John Maynard Keynes,

Accepted Answer

A) the demand for money in a country is determined entirely by that nation's central bank. 
B) the supply of money in a country is determined by the overall wealth of the citizens of that country. 
C) the interest rate adjusts to balance the supply of, and demand for, money. 
D) the interest rate adjusts to balance the supply of, and demand for, goods and services. 
A) the demand for money in a country is determined entirely by that nation's central bank. 
B) the supply of money in a country is determined by the overall wealth of the citizens of that country. 
C) the interest rate adjusts to balance the supply of, and demand for, money. 
D) the interest rate adjusts to balance the supply of, and demand for, goods and services.

Question 16

Keynes used the term "animal spirits" to refer to

Accepted Answer

A) policy makers harming the economy in the pursuit of self interest. 
B) arbitrary changes in attitudes of household and firms. 
C) mean-spirited economists who believed in the classical dichotomy. 
D) firms' relentless efforts to maximize profits. 
A) policy makers harming the economy in the pursuit of self interest. 
B) arbitrary changes in attitudes of household and firms. 
C) mean-spirited economists who believed in the classical dichotomy. 
D) firms' relentless efforts to maximize profits.

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. If the money-supply curve MS on the left-hand graph were to shift to the right, this would

Accepted Answer

A) represent an action taken by the Federal Reserve. 
B) shift the AD curve to the left. 
C) create, until the interest rate adjusted, an excess demand for money at the interest rate that equilibrated the money market before the shift. 
D) All of the above are correct. 
A) represent an action taken by the Federal Reserve. 
B) shift the AD curve to the left. 
C) create, until the interest rate adjusted, an excess demand for money at the interest rate that equilibrated the money market before the shift. 
D) All of the above are correct.

Question 18

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. If the graphs apply to an economy such as the U.S. economy, then the slope of the AD curve is primarily attributable to the

Accepted Answer

A) wealth effect. 
B) interest-rate effect. 
C) exchange-rate effect. 
D) Fisher effect. 
A) wealth effect. 
B) interest-rate effect. 
C) exchange-rate effect. 
D) Fisher effect.

Question 19

If, at some interest rate, the quantity of money demanded is greater than the quantity of money supplied, 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

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are

Accepted Answer

A) smaller in closed economies than in open economies. 
B) larger in closed economies than in open economies. 
C) smaller in capitalist economies than in socialist economies. 
D) larger in capitalist economies than in socialist economies. 
A) smaller in closed economies than in open economies. 
B) larger in closed economies than in open economies. 
C) smaller in capitalist economies than in socialist economies. 
D) larger in capitalist economies than in socialist economies.

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

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

If the inflation rate is zero, then the nominal and real interest rate are the same.

The term crowding-out effect refers to

In 1961, President John F. Kennedy, acting upon advice from his economists, proposed tax cuts. The advice he received

Assume the MPC is 0.625. Assuming only the multiplier effect matters, a decrease in government purchases of $10 billion will shift the aggregate demand curve to the

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

Which of the following are effects of an increase in government spending financed by a tax increase?

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

Which of the following illustrates how the investment accelerator works?

In recent years, the Federal Reserve has conducted policy by setting a target for the

Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could

If the multiplier is 2.5, then the MPC is

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the money-demand curve is currently MD2. If the current interest rate is r2, then

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

According to John Maynard Keynes,

Keynes used the term "animal spirits" to refer to

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

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are

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

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the money-demand curve is currently MD₂. If the current interest rate is r₂, then