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

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures shifts aggregate demand

The interest rate that the Federal Reserve pays banks on the reserves they hold is called the

Monetary policy

The exchange-rate effect is based, in part, on the idea that

Supply-side economists believe that a reduction in the tax rate

The Employment Act of 1946

Which of the following is not an automatic stabilizer?

An increase in the money supply decreases the interest rate in the short run.

Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400. -Refer to Scenario 21-2. The multiplier for this economy is

A tax increase has

During recessions, automatic stabilizers tend to make the government's budget

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₁. Let Y₁ represent the corresponding quantity of goods and services demanded, and let P₁ represent the corresponding price level. Starting from this situation, if the Federal Reserve increases the money supply and if the price level remains at P₁, then

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $40 billion to the left. The government wants to change its spending to offset this decrease in demand. The MPC is 0.60. Suppose the effect on aggregate demand from a change in taxes is 3/5 the size of the change from government expenditures. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in real GDP?

Other things the same, an increase in taxes shifts aggregate demand to the left. In the short run this makes output fall which makes the interest rate rise.

Which of the following events would shift money demand to the right?

If the MPC = 0.85, then the government purchases multiplier is about

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

People hold money primarily because it

If the interest rate is below the Fed's target, the Fed would

According to liquidity preference theory, an increase in the price level shifts the