Question 1

In recent years, the Fed has chosen to target interest rates rather than the money supply because

Accepted Answer

A) Congress passed a law requiring them to do so. 
B) the President requested them to do so. 
C) the money supply is hard to measure with sufficient precision. 
D) changes in the interest rate change aggregate demand, but changes in the money supply do not. 
A) Congress passed a law requiring them to do so. 
B) the President requested them to do so. 
C) the money supply is hard to measure with sufficient precision. 
D) changes in the interest rate change aggregate demand, but changes in the money supply do not.

Question 2

On the graph that depicts the theory of liquidity preference,

Accepted Answer

A) the demand-for-money curve is vertical. 
B) the supply-of-money curve is vertical. 
C) the interest rate is measured along the horizontal axis. 
D) the price level is measured along the vertical axis. 
A) the demand-for-money curve is vertical. 
B) the supply-of-money curve is vertical. 
C) the interest rate is measured along the horizontal axis. 
D) the price level is measured along the vertical axis.

Question 3

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

Accepted Answer

A) increased interest rates, and the economy avoided a recession. 
B) increased interest rates, but the economy was unable to avoid a recession. 
C) decreased interest rates, and the economy avoided a recession. 
D) decreased interest rates, but the economy was unable to avoid a recession. 
A) increased interest rates, and the economy avoided a recession. 
B) increased interest rates, but the economy was unable to avoid a recession. 
C) decreased interest rates, and the economy avoided a recession. 
D) decreased interest rates, but the economy was unable to avoid a recession.

Question 4

If the interest rate is above the Fed's target, the Fed should

Accepted Answer

A) buy bonds to increase the money supply. 
B) buy bonds to decrease the money supply. 
C) sell bonds to increase the money supply. 
D) sell bonds to decrease the money supply. 
A) buy bonds to increase the money supply. 
B) buy bonds to decrease the money supply. 
C) sell bonds to increase the money supply. 
D) sell bonds to decrease the money supply.

Question 5

Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference?

Accepted Answer

A) only the nominal interest rate 
B) both the nominal interest rate and the real interest rate 
C) only the interest rate on long-term bonds 
D) only the interest rate on short-term government bonds 
A) only the nominal interest rate 
B) both the nominal interest rate and the real interest rate 
C) only the interest rate on long-term bonds 
D) only the interest rate on short-term government bonds

Question 6

Some economists argue that

Accepted Answer

A) monetary policy should actively be used to stabilize the economy. 
B) fiscal policy should actively be used to stabilize the economy. 
C) fiscal policy can be used to shift the AD curve. 
D) All of the above are correct. 
A) monetary policy should actively be used to stabilize the economy. 
B) fiscal policy should actively be used to stabilize the economy. 
C) fiscal policy can be used to shift the AD curve. 
D) All of the above are correct.

Question 7

According to the theory of liquidity preference,

Accepted Answer

A) if the interest rate is below the equilibrium level, then the quantity of money people want to hold is less than the quantity of money the Fed has created. 
B) if the interest rate is above the equilibrium level, then the quantity of money people want to hold is greater than the quantity of money the Fed has created. 
C) the demand for money is represented by a downward-sloping line on a supply-and-demand graph. 
D) All of the above are correct. 
A) if the interest rate is below the equilibrium level, then the quantity of money people want to hold is less than the quantity of money the Fed has created. 
B) if the interest rate is above the equilibrium level, then the quantity of money people want to hold is greater than the quantity of money the Fed has created. 
C) the demand for money is represented by a downward-sloping line on a supply-and-demand graph. 
D) All of the above are correct.

Question 8

Which among the following assets is the most liquid?

Accepted Answer

A) capital goods 
B) stocks and bonds with a low risk 
C) real estate 
D) funds in a checking account 
A) capital goods 
B) stocks and bonds with a low risk 
C) real estate 
D) funds in a checking account

Question 9

A decrease in the interest rate could have been caused by the money-demand curve shifting

Accepted Answer

A) leftward because the price level fell. 
B) leftward because the price level rose 
C) rightward because the price level fell. 
D) rightward because the price level rose. 
A) leftward because the price level fell. 
B) leftward because the price level rose 
C) rightward because the price level fell. 
D) rightward because the price level rose.

Question 10

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. Under the assumptions of the model,

Accepted Answer

A) the real interest rate is higher at Y2 than it is at Y1. 
B) the quantity of money is the same at Y1 as it is at Y2. 
C) the price level is higher at r2 than it is at r1. 
D) All of the above are correct. 
A) the real interest rate is higher at Y2 than it is at Y1. 
B) the quantity of money is the same at Y1 as it is at Y2. 
C) the price level is higher at r2 than it is at r1. 
D) All of the above are correct.

Question 11

Suppose aggregate demand shifts to the left and policymakers want to stabilize output. What can they do?

Accepted Answer

A) repeal an investment tax credit or increase the money supply 
B) repeal an investment tax credit or decrease the money supply 
C) institute an investment tax credit or increase the money supply 
D) institute an investment tax credit or decrease the money supply 
A) repeal an investment tax credit or increase the money supply 
B) repeal an investment tax credit or decrease the money supply 
C) institute an investment tax credit or increase the money supply 
D) institute an investment tax credit or decrease the money supply

Question 12

In which of the following cases would the quantity of money demanded be smallest?

Accepted Answer

A) r = 0.06, P = 1.2 
B) r = 0.05, P = 1.0 
C) r = 0.04, P = 1.2 
D) r = 0.06, P = 1.0 
A) r = 0.06, P = 1.2 
B) r = 0.05, P = 1.0 
C) r = 0.04, P = 1.2 
D) r = 0.06, P = 1.0

Question 13

Figure 21-3.  
-Refer to Figure 21-3. What quantity is represented by the vertical line on the left-hand graph?

Accepted Answer

A) the supply of money 
B) the demand for money 
C) the rate of inflation 
D) the quantity of bonds that was most recently sold or purchased by the Federal Reserve 
A) the supply of money 
B) the demand for money 
C) the rate of inflation 
D) the quantity of bonds that was most recently sold or purchased by the Federal Reserve

Question 14

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

Accepted Answer

A) the wealth effect 
B) the interest-rate effect 
C) the exchange-rate effect 
D) the real-wage effect 
A) the wealth effect 
B) the interest-rate effect 
C) the exchange-rate effect 
D) the real-wage effect

Question 15

The multiplier effect is exemplified by the multiplied impact on

Accepted Answer

A) the money supply of a given increase in government purchases. 
B) tax revenues of a given increase in government purchases. 
C) investment of a given increase in interest rates. 
D) aggregate demand of a given increase in government purchases. 
A) the money supply of a given increase in government purchases. 
B) tax revenues of a given increase in government purchases. 
C) investment of a given increase in interest rates. 
D) aggregate demand of a given increase in government purchases.

Question 16

The interest rate would fall and the quantity of money demanded would

Accepted Answer

A) increase if there were a surplus in the money market. 
B) increase if there were a shortage in the money market. 
C) decrease if there were a surplus in the money market. 
D) decrease if there were a shortage in the money market. 
A) increase if there were a surplus in the money market. 
B) increase if there were a shortage in the money market. 
C) decrease if there were a surplus in the money market. 
D) decrease if there were a shortage in the money market.

Question 17

Other things the same, as the price level rises,

Accepted Answer

A) the interest rate rises causing aggregate demand to shift. 
B) the interest rate rises causing a movement along a given aggregate-demand curve. 
C) the interest rate falls causing aggregate demand to shift. 
D) the interest rate falls causing a movement along a given aggregate-demand curve. 
A) the interest rate rises causing aggregate demand to shift. 
B) the interest rate rises causing a movement along a given aggregate-demand curve. 
C) the interest rate falls causing aggregate demand to shift. 
D) the interest rate falls causing a movement along a given aggregate-demand curve.

Question 18

In the short run, an increase in the money supply causes interest rates to

Accepted Answer

A) increase, and aggregate demand to shift right. 
B) increase, and aggregate demand to shift left. 
C) decrease, and aggregate demand to shift right. 
D) decrease, and aggregate demand to shift left. 
A) increase, and aggregate demand to shift right. 
B) increase, and aggregate demand to shift left. 
C) decrease, and aggregate demand to shift right. 
D) decrease, and aggregate demand to shift left.

Question 19

Suppose that the Federal reserve is concerned about the effects of rising stock prices on the economy. What could it do?

Accepted Answer

A) buy bonds to raise the interest rate 
B) Buy bonds to lower the interest rate 
C) sell bonds to raise the interest rate. 
D) Sell bonds to raise the interest rate 
A) buy bonds to raise the interest rate 
B) Buy bonds to lower the interest rate 
C) sell bonds to raise the interest rate. 
D) Sell bonds to raise the interest rate

Question 20

Which of the following events shifts aggregate demand rightward?

Accepted Answer

A) an increase in government expenditures or a decrease in the price level 
B) a decrease in government expenditures or an increase in the price level 
C) an increase in government expenditures, but not a change in the price level 
D) a decrease in the price level, but not an increase in government expenditures 
A) an increase in government expenditures or a decrease in the price level 
B) a decrease in government expenditures or an increase in the price level 
C) an increase in government expenditures, but not a change in the price level 
D) a decrease in the price level, but not an increase in government expenditures

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

In recent years, the Fed has chosen to target interest rates rather than the money supply because

On the graph that depicts the theory of liquidity preference,

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

If the interest rate is above the Fed's target, the Fed should

Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference?

Some economists argue that

According to the theory of liquidity preference,

Which among the following assets is the most liquid?

A decrease in the interest rate could have been caused by the money-demand curve shifting

Suppose aggregate demand shifts to the left and policymakers want to stabilize output. What can they do?

In which of the following cases would the quantity of money demanded be smallest?

Figure 21-3. -Refer to Figure 21-3. What quantity is represented by the vertical line on the left-hand graph?

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

The multiplier effect is exemplified by the multiplied impact on

The interest rate would fall and the quantity of money demanded would

Other things the same, as the price level rises,

In the short run, an increase in the money supply causes interest rates to

Suppose that the Federal reserve is concerned about the effects of rising stock prices on the economy. What could it do?

Which of the following events shifts aggregate demand rightward?

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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