Question 1

Other things the same, which of the following responses would we expect from an increase in U.S. interest rates?

Accepted Answer

A) Your aunt puts more money in her savings account. 
B) Foreign citizens decide to buy fewer U.S. bonds. 
C) You decide to purchase a new oven for your cookie factory. 
D) All of the above are correct. 
A) Your aunt puts more money in her savings account. 
B) Foreign citizens decide to buy fewer U.S. bonds. 
C) You decide to purchase a new oven for your cookie factory. 
D) All of the above are correct.

Question 2

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

Accepted Answer

A) MPC = 1/2, and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures. 
B) MPC = 2/3, and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures 
C) MPC = 3/4, and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures 
D) All of the above are correct. 
A) MPC = 1/2, and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures. 
B) MPC = 2/3, and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures 
C) MPC = 3/4, and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures 
D) All of the above are correct.

Question 3

If there is excess demand for money, then people will

Accepted Answer

A) deposit more money into interest-bearing accounts, and the interest rate will fall. 
B) deposit more money 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 money into interest-bearing accounts, and the interest rate will fall. 
B) deposit more money 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 4

Figure 21-1  
-Refer to Figure 21-1. There is an excess demand for money at an interest rate of

Accepted Answer

A) 2 percent. 
B) 3 percent. 
C) 4 percent. 
D) None of the above is correct. 
A) 2 percent. 
B) 3 percent. 
C) 4 percent. 
D) None of the above is correct.

Question 5

Unemployment insurance and welfare programs work as automatic stabilizers.

Accepted Answer

A) True 
 B)False

Question 6

If the stock market crashes, then

Accepted Answer

A) aggregate demand increases, which the Fed could offset by increasing the money supply. 
B) aggregate demand increases, which the Fed could offset by decreasing the money supply. 
C) aggregate demand decreases, which the Fed could offset by increasing the money supply. 
D) aggregate demand decreases, which the Fed could offset by decreasing the money supply. 
A) aggregate demand increases, which the Fed could offset by increasing the money supply. 
B) aggregate demand increases, which the Fed could offset by decreasing the money supply. 
C) aggregate demand decreases, which the Fed could offset by increasing the money supply. 
D) aggregate demand decreases, which the Fed could offset by decreasing the money supply.

Question 7

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Accepted Answer

A) True 
 B)False

Question 8

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

Accepted Answer

A) zero. 
B) likely smaller than if the cut had been permanent. 
C) likely about the same as if the cut had been permanent. 
D) likely larger than if the cut had been permanent. 
A) zero. 
B) likely smaller than if the cut had been permanent. 
C) likely about the same as if the cut had been permanent. 
D) likely larger than if the cut had been permanent.

Question 9

People will want to hold more money if the price level

Accepted Answer

A) or if the interest rate increases. 
B) or if the interest rate decreases. 
C) increases or if the interest rate decreases. 
D) decreases or if the interest rate increases. 
A) or if the interest rate increases. 
B) or if the interest rate decreases. 
C) increases or if the interest rate decreases. 
D) decreases or if the interest rate increases.

Question 10

If the government cuts the tax rate, workers get to keep

Accepted Answer

A) less of each additional dollar they earn, so work effort increases, and aggregate supply shifts right. 
B) less of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left. 
C) more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right. 
D) more of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left. 
A) less of each additional dollar they earn, so work effort increases, and aggregate supply shifts right. 
B) less of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left. 
C) more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right. 
D) more of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.

Question 11

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always half as strong as the multiplier effect, and if the MPC equals 0.8, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

Accepted Answer

A) by $5 billion 
B) by $10 billion 
C) by $20 billion 
D) by $50 billion 
A) by $5 billion 
B) by $10 billion 
C) by $20 billion 
D) by $50 billion

Question 12

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

Accepted Answer

A) True 
 B)False

Question 13

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 3 and the government increases its purchases by $25 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. Finally, assume the horizontal distance between the curves AD1 and AD3 is $30 billion. The extent of crowding out, for any particular level of the price level, is

Accepted Answer

A) $25 billion. 
B) $30 billion. 
C) $45 billion. 
D) $60 billion. 
A) $25 billion. 
B) $30 billion. 
C) $45 billion. 
D) $60 billion.

Question 14

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Accepted Answer

A) True 
 B)False

Question 15

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

Accepted Answer

A) assumption that increases in government purchases have no effect on consumer spending. 
B) assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred. 
C) empirical evidence that points to a value of aboutfor the MPC. 
D) fact that the multiplier effect is represented by an infinite geometric series. 
A) assumption that increases in government purchases have no effect on consumer spending. 
B) assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred. 
C) empirical evidence that points to a value of aboutfor the MPC. 
D) fact that the multiplier effect is represented by an infinite geometric series.

Question 16

When the interest rate is above the equilibrium level,

Accepted Answer

A) the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. 
B) people respond by buying interest-bearing bonds or by depositing money in interest-bearing bank accounts. 
C) bond issuers and banks respond by lowering the interest rates they offer. 
D) All of the above are correct. 
A) the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. 
B) people respond by buying interest-bearing bonds or by depositing money in interest-bearing bank accounts. 
C) bond issuers and banks respond by lowering the interest rates they offer. 
D) All of the above are correct.

Question 17

If expected inflation is constant and the nominal interest rate increases by 3.5 percentage points, then the real interest rate

Accepted Answer

A) increases by 3.5 percentage points. 
B) increases, but by less than 3.5 percentage points. 
C) decreases, but by less than 3.5 percentage points. 
D) decreases by 3.5 percentage points. 
A) increases by 3.5 percentage points. 
B) increases, but by less than 3.5 percentage points. 
C) decreases, but by less than 3.5 percentage points. 
D) decreases by 3.5 percentage points.

Question 18

For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve?

Accepted Answer

A) An increase in the price level decreases the interest rate. 
B) An increase in the price level increases the interest rate. 
C) An increase in the money supply decreases the interest rate. 
D) An increase in the money supply increases the interest rate. 
A) An increase in the price level decreases the interest rate. 
B) An increase in the price level increases the interest rate. 
C) An increase in the money supply decreases the interest rate. 
D) An increase in the money supply increases the interest rate.

Question 19

According to liquidity preference theory, the money-supply curve is

Accepted Answer

A) upward sloping. 
B) downward sloping. 
C) vertical. 
D) horizontal. 
A) upward sloping. 
B) downward sloping. 
C) vertical. 
D) horizontal.

Question 20

The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates

Accepted Answer

A) the accelerator effect. 
B) the multiplier effect. 
C) the chain effect. 
D) the bandwagon effect. 
A) the accelerator effect. 
B) the multiplier effect. 
C) the chain effect. 
D) the bandwagon effect.

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

Other things the same, which of the following responses would we expect from an increase in U.S. interest rates?

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

If there is excess demand for money, then people will

Figure 21-1 -Refer to Figure 21-1. There is an excess demand for money at an interest rate of

Unemployment insurance and welfare programs work as automatic stabilizers.

If the stock market crashes, then

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

People will want to hold more money if the price level

If the government cuts the tax rate, workers get to keep

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

When the interest rate is above the equilibrium level,

If expected inflation is constant and the nominal interest rate increases by 3.5 percentage points, then the real interest rate

For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve?

According to liquidity preference theory, the money-supply curve is

The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates

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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