Question 1

Which of the following shifts aggregate demand to the right?

Accepted Answer

A) The price level rises. 
B) The price level falls. 
C) The money supply falls. 
D) None of the above is correct. 
A) The price level rises. 
B) The price level falls. 
C) The money supply falls. 
D) None of the above is correct.

Question 2

For the following questions, use the diagram below:
Figure 21-7.  
-Refer to Figure 21-7. Which of the following is correct?

Accepted Answer

A) A wave of optimism could move the economy from point a to pointB 
B) If aggregate demand moves from AD1 to AD2, the economy will stay at point b in both the short run and long run. 
C) It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2. 
D) All of the above are correct. 
A) A wave of optimism could move the economy from point a to pointB 
B) If aggregate demand moves from AD1 to AD2, the economy will stay at point b in both the short run and long run. 
C) It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2. 
D) All of the above are correct.

Question 3

Fiscal policy refers to the idea that aggregate demand is affected by changes in

Accepted Answer

A) the money supply. 
B) government spending and taxes. 
C) trade policy. 
D) All of the above are correct. 
A) the money supply. 
B) government spending and taxes. 
C) trade policy. 
D) All of the above are correct.

Question 4

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Accepted Answer

A) True 
 B)False

Question 5

Other things equal, the higher the price level, the higher is the real wealth of households.

Accepted Answer

A) True 
 B)False

Question 6

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) bank reserves. 
B) the monetary growth rate. 
C) the exchange rate. 
D) the federal funds rate. 
A) bank reserves. 
B) the monetary growth rate. 
C) the exchange rate. 
D) the federal funds rate.

Question 8

A fiscal stimulus was initiated by President Obama in response to the economic downturn of 2008-2009. At that time, the president's economists estimated the multiplier to be

Accepted Answer

A) 3.2 for government purchases and 2.0 for tax cuts. 
B) 2.4 for government purchases and 1.4 for tax cuts. 
C) 1.6 for government purchases and 1.0 for tax cuts. 
D) 1.6 for government purchases and 0.4 for tax cuts. 
A) 3.2 for government purchases and 2.0 for tax cuts. 
B) 2.4 for government purchases and 1.4 for tax cuts. 
C) 1.6 for government purchases and 1.0 for tax cuts. 
D) 1.6 for government purchases and 0.4 for tax cuts.

Question 9

Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-demand curve?

Accepted Answer

A) As the money supply increases, the interest rate falls, so spending rises. 
B) As the money supply increases, the interest rate rises, so spending falls. 
C) As the price level increases, the interest rate falls, so spending rises. 
D) As the price level increases, the interest rate rises, so spending falls. 
A) As the money supply increases, the interest rate falls, so spending rises. 
B) As the money supply increases, the interest rate rises, so spending falls. 
C) As the price level increases, the interest rate falls, so spending rises. 
D) As the price level increases, the interest rate rises, so spending falls.

Question 10

According to a 2009 article in The Economist, the multiplier effect and crowding-out effect would exactly offset each other when the economy is

Accepted Answer

A) operating at full capacity. 
B) in recession. 
C) experiencing zero inflation. 
D) experiencing high rates of inflation. 
A) operating at full capacity. 
B) in recession. 
C) experiencing zero inflation. 
D) experiencing high rates of inflation.

Question 11

When the government reduces taxes, which of the following decreases?

Accepted Answer

A) consumption 
B) take-home pay 
C) household saving 
D) None of the above is correct. 
A) consumption 
B) take-home pay 
C) household saving 
D) None of the above is correct.

Question 12

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is

Accepted Answer

A) relatively important in the United States because expenditures on consumer durables is very responsive to changes in wealth. 
B) relatively important in the United States because consumption spending is a large part of GDP. 
C) relatively unimportant in the United States because money holdings are a small part of consumer wealth. 
D) relatively unimportant because it takes a large change in wealth to cause a significant change in interest rates. 
A) relatively important in the United States because expenditures on consumer durables is very responsive to changes in wealth. 
B) relatively important in the United States because consumption spending is a large part of GDP. 
C) relatively unimportant in the United States because money holdings are a small part of consumer wealth. 
D) relatively unimportant because it takes a large change in wealth to cause a significant change in interest rates.

Question 13

A tax cut shifts the aggregate demand curve the farthest if

Accepted Answer

A) the MPC is large and if the tax cut is permanent. 
B) the MPC is large and if the tax cut is temporary. 
C) the MPC is small and if the tax cut is permanent. 
D) the MPC is small and if the tax cut is temporary. 
A) the MPC is large and if the tax cut is permanent. 
B) the MPC is large and if the tax cut is temporary. 
C) the MPC is small and if the tax cut is permanent. 
D) the MPC is small and if the tax cut is temporary.

Question 14

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

Accepted Answer

A) the MPC is small and changes in the interest rate have a small effect on investment 
B) the MPC is small and changes in the interest rate have a large effect on investment 
C) the MPC is large and changes in the interest rate have a small effect on investment 
D) the MPC is large and changes in the interest rate have a large effect on investment 
A) the MPC is small and changes in the interest rate have a small effect on investment 
B) the MPC is small and changes in the interest rate have a large effect on investment 
C) the MPC is large and changes in the interest rate have a small effect on investment 
D) the MPC is large and changes in the interest rate have a large effect on investment

Question 15

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

Accepted Answer

A) True 
 B)False

Question 16

The multiplier for changes in government spending is calculated as

Accepted Answer

A) 1/MPC. 
B) 1/(1 - MP
C) . 
C) MPC/(1 - MP
C) . 
D) (1 - MP
C) /MPC. 
A) 1/MPC. 
B) 1/(1 - MP
C) . 
C) MPC/(1 - MP
C) . 
D) (1 - MP
C) /MPC.

Question 17

Both monetary policy and fiscal policy affect aggregate demand.

Accepted Answer

A) True 
 B)False

Question 18

If it were not for the automatic stabilizers in the U.S. economy,

Accepted Answer

A) the Federal Reserve would have less reason than it has now to monitor stock prices. 
B) it would be more desirable than it is now for the Federal Reserve to target an interest rate. 
C) a strict balanced-budget rule would be more desirable than it is now. 
D) output and employment would probably be more volatile than they are now. 
A) the Federal Reserve would have less reason than it has now to monitor stock prices. 
B) it would be more desirable than it is now for the Federal Reserve to target an interest rate. 
C) a strict balanced-budget rule would be more desirable than it is now. 
D) output and employment would probably be more volatile than they are now.

Question 19

Government expenditures on capital goods such as roads could increase aggregate supply. Such effects on aggregate supply are likely to matter more in the short run than in the long run.

Accepted Answer

A) True 
 B)False

Question 20

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

Accepted Answer

A) liquidity preference. 
B) liquidity trap. 
C) open-market trap. 
D) interest-rate contraction. 
A) liquidity preference. 
B) liquidity trap. 
C) open-market trap. 
D) interest-rate contraction.

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

Which of the following shifts aggregate demand to the right?

For the following questions, use the diagram below: Figure 21-7. -Refer to Figure 21-7. Which of the following is correct?

Fiscal policy refers to the idea that aggregate demand is affected by changes in

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Other things equal, the higher the price level, the higher is the real wealth of households.

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

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

A fiscal stimulus was initiated by President Obama in response to the economic downturn of 2008-2009. At that time, the president's economists estimated the multiplier to be

Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-demand curve?

According to a 2009 article in The Economist, the multiplier effect and crowding-out effect would exactly offset each other when the economy is

When the government reduces taxes, which of the following decreases?

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is

A tax cut shifts the aggregate demand curve the farthest if

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

The multiplier for changes in government spending is calculated as

Both monetary policy and fiscal policy affect aggregate demand.

If it were not for the automatic stabilizers in the U.S. economy,

Government expenditures on capital goods such as roads could increase aggregate supply. Such effects on aggregate supply are likely to matter more in the short run than in the long run.

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

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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