Question 1

The logic of the multiplier effect applies

Accepted Answer

A) only to changes in government spending. 
B) to any change in spending on any component of GDP. 
C) only to changes in the money supply. 
D) only when the crowding-out effect is sufficiently strong. 
A) only to changes in government spending. 
B) to any change in spending on any component of GDP. 
C) only to changes in the money supply. 
D) only when the crowding-out effect is sufficiently strong.

Question 2

If the stock market booms, then

Accepted Answer

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

Question 3

Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more,

Accepted Answer

A) the smaller the MPC and the stronger the influence of income on money demand. 
B) the smaller the MPC and the weaker the influence of income on money demand. 
C) the larger the MPC and the stronger the influence of income on money demand. 
D) the larger the MPC and the weaker the influence of income on money demand. 
A) the smaller the MPC and the stronger the influence of income on money demand. 
B) the smaller the MPC and the weaker the influence of income on money demand. 
C) the larger the MPC and the stronger the influence of income on money demand. 
D) the larger the MPC and the weaker the influence of income on money demand.

Question 4

When the interest rate increases, the opportunity cost of holding money

Accepted Answer

A) increases, so the quantity of money demanded increases. 
B) increases, so the quantity of money demanded decreases. 
C) decreases, so the quantity of money demanded increases. 
D) decreases, so the quantity of money demanded decreases. 
A) increases, so the quantity of money demanded increases. 
B) increases, so the quantity of money demanded decreases. 
C) decreases, so the quantity of money demanded increases. 
D) decreases, so the quantity of money demanded decreases.

Question 5

Which of the following statements is correct for the long run?

Accepted Answer

A) Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for money; the price level adjusts to balance the supply and demand for loanable funds. 
B) Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money. 
C) Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level is relatively slow to adjust. 
D) Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money. 
A) Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for money; the price level adjusts to balance the supply and demand for loanable funds. 
B) Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money. 
C) Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level is relatively slow to adjust. 
D) Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.

Question 6

The primary argument against active monetary and fiscal policy is that

Accepted Answer

A) attempts to stabilize the economy do not constitute a proper role for government in a democratic society. 
B) these policies affect the economy with a long lag. 
C) these policies affect the economy too quickly and with too much impact. 
D) history demonstrates that interest rates respond unpredictably to active policies, leading to unpredictable effects on income. 
A) attempts to stabilize the economy do not constitute a proper role for government in a democratic society. 
B) these policies affect the economy with a long lag. 
C) these policies affect the economy too quickly and with too much impact. 
D) history demonstrates that interest rates respond unpredictably to active policies, leading to unpredictable effects on income.

Question 7

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

Accepted Answer

A) r = 0.03, P = 1.2 
B) r = 0.03, P = 1.3 
C) r = 0.04, P = 1.2 
D) r = 0.05, P = 0.9 
A) r = 0.03, P = 1.2 
B) r = 0.03, P = 1.3 
C) r = 0.04, P = 1.2 
D) r = 0.05, P = 0.9

Question 8

Critics of stabilization policy argue that

Accepted Answer

A) there is a lag between the time policy is passed and the time policy has an impact on the economy. 
B) the impact of policy may last longer than the problem it was designed to offset. 
C) policy can be a source of, instead of a cure for, economic fluctuations. 
D) All of the above are correct. 
A) there is a lag between the time policy is passed and the time policy has an impact on the economy. 
B) the impact of policy may last longer than the problem it was designed to offset. 
C) policy can be a source of, instead of a cure for, economic fluctuations. 
D) All of the above are correct.

Question 9

People are likely to want to hold more money if the interest rate

Accepted Answer

A) increases, making the opportunity cost of holding money rise. 
B) increases, making the opportunity cost of holding money fall. 
C) decreases, making the opportunity cost of holding money rise. 
D) decreases, making the opportunity cost of holding money fall. 
A) increases, making the opportunity cost of holding money rise. 
B) increases, making the opportunity cost of holding money fall. 
C) decreases, making the opportunity cost of holding money rise. 
D) decreases, making the opportunity cost of holding money fall.

Question 10

Figure 21-4. On the figure, MS represents money supply and MD represents money demand.  
-Refer to Figure 21-4. Which of the following events could explain a decrease in the equilibrium interest rate from r3 to r1?

Accepted Answer

A) a decrease in the price level 
B) a decrease in the number of firms building new factories and buying new equipment 
C) an increase in the price level 
D) an increase in the number of firms building new factories and buying new equipment 
A) a decrease in the price level 
B) a decrease in the number of firms building new factories and buying new equipment 
C) an increase in the price level 
D) an increase in the number of firms building new factories and buying new equipment

Question 11

The Kennedy tax cut of 1964 included an investment tax credit that was designed to

Accepted Answer

A) increase aggregate demand in the short run and aggregate supply in the long run. 
B) increase aggregate supply in the short run and aggregate demand in the long run. 
C) only increase aggregate supply in the long run. 
D) only increase aggregate demand in the short run. 
A) increase aggregate demand in the short run and aggregate supply in the long run. 
B) increase aggregate supply in the short run and aggregate demand in the long run. 
C) only increase aggregate supply in the long run. 
D) only increase aggregate demand in the short run.

Question 12

Assume the MPC is 0.75. Assume there is a multiplier effect and that the total crowding-out effect is $6 billion. An increase in government purchases of $10 billion will shift aggregate demand to the

Accepted Answer

A) left by $24 billion. 
B) left by $36 billion. 
C) right by $34 billion. 
D) right by $36 billion. 
A) left by $24 billion. 
B) left by $36 billion. 
C) right by $34 billion. 
D) right by $36 billion.

Question 13

If the multiplier is 6 and if there is no crowding-out effect, then a $60 billion increase in government expenditures causes aggregate demand to

Accepted Answer

A) increase by $250 billion. 
B) increase by $333 billion. 
C) increase by $360 billion. 
D) None of the above are correct. 
A) increase by $250 billion. 
B) increase by $333 billion. 
C) increase by $360 billion. 
D) None of the above are correct.

Question 14

To decrease the interest rate the Federal Reserve could

Accepted Answer

A) buy bonds. The fall in the interest rate would increase investment spending. 
B) buy bonds. The fall in the interest rate would decrease investment spending. 
C) sell bonds. The fall in the interest rate would increase investment spending 
D) sell bonds. The fall in the interest rate would decrease investment spending. 
A) buy bonds. The fall in the interest rate would increase investment spending. 
B) buy bonds. The fall in the interest rate would decrease investment spending. 
C) sell bonds. The fall in the interest rate would increase investment spending 
D) sell bonds. The fall in the interest rate would decrease investment spending.

Question 15

If expected inflation is constant, then when the nominal interest rate falls, the real interest rate

Accepted Answer

A) falls by more than the change in the nominal interest rate. 
B) falls by the change in the nominal interest rate. 
C) rises by the change in the nominal interest rate. 
D) rises by more than the change in the nominal interest rate. 
A) falls by more than the change in the nominal interest rate. 
B) falls by the change in the nominal interest rate. 
C) rises by the change in the nominal interest rate. 
D) rises by more than the change in the nominal interest rate.

Question 16

According to the theory of liquidity preference, the interest rate adjusts to balance the supply of, and demand for, loanable funds.

Accepted Answer

A) True 
 B)False

Question 17

Suppose there were a large increase in net exports. If the Fed wanted to stabilize output, it could

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 18

Monetary policy affects the economy with a long lag, in part because

Accepted Answer

A) proposals to change monetary policy must go through both the House and Senate before being sent to the president. 
B) monetary policy works through changes in interest rates, and the Fed does not have the ability to change interest rates quickly. 
C) changes in interest rates primarily influence consumption spending, and households make consumption plans far in advance. 
D) changes in interest rates primarily influence investment spending, and firms make investment plans far in advance. 
A) proposals to change monetary policy must go through both the House and Senate before being sent to the president. 
B) monetary policy works through changes in interest rates, and the Fed does not have the ability to change interest rates quickly. 
C) changes in interest rates primarily influence consumption spending, and households make consumption plans far in advance. 
D) changes in interest rates primarily influence investment spending, and firms make investment plans far in advance.

Question 19

If the Federal Reserve increases the money supply, then initially there is a

Accepted Answer

A) shortage in the money market, so people will want to sell bonds. 
B) shortage in the money market, so people will want to buy bonds. 
C) surplus in the money market, so people will want to sell bonds. 
D) surplus in the money market, so people will want to buy bonds. 
A) shortage in the money market, so people will want to sell bonds. 
B) shortage in the money market, so people will want to buy bonds. 
C) surplus in the money market, so people will want to sell bonds. 
D) surplus in the money market, so people will want to buy bonds.

Question 20

Automatic stabilizers

Accepted Answer

A) increase the problems that lags cause in using fiscal policy as a stabilization tool. 
B) are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession. 
C) are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession. 
D) All of the above are correct. 
A) increase the problems that lags cause in using fiscal policy as a stabilization tool. 
B) are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession. 
C) are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession. 
D) All of the above are correct.

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

The logic of the multiplier effect applies

If the stock market booms, then

Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more,

When the interest rate increases, the opportunity cost of holding money

Which of the following statements is correct for the long run?

The primary argument against active monetary and fiscal policy is that

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

Critics of stabilization policy argue that

People are likely to want to hold more money if the interest rate

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Which of the following events could explain a decrease in the equilibrium interest rate from r3 to r1?

The Kennedy tax cut of 1964 included an investment tax credit that was designed to

Assume the MPC is 0.75. Assume there is a multiplier effect and that the total crowding-out effect is $6 billion. An increase in government purchases of $10 billion will shift aggregate demand to the

If the multiplier is 6 and if there is no crowding-out effect, then a $60 billion increase in government expenditures causes aggregate demand to

To decrease the interest rate the Federal Reserve could

If expected inflation is constant, then when the nominal interest rate falls, the real interest rate

According to the theory of liquidity preference, the interest rate adjusts to balance the supply of, and demand for, loanable funds.

Suppose there were a large increase in net exports. If the Fed wanted to stabilize output, it could

Monetary policy affects the economy with a long lag, in part because

If the Federal Reserve increases the money supply, then initially there is a

Automatic stabilizers

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. Which of the following events could explain a decrease in the equilibrium interest rate from r₃ to r₁?