Question 1

One of President Obama's first policy initiatives was a stimulus bill that included large increases in government spending.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output?

Accepted Answer

A) increase taxes 
B) increase the money supply 
C) increase government expenditures 
D) All of the above are correct. 
A) increase taxes 
B) increase the money supply 
C) increase government expenditures 
D) All of the above are correct.

Question 3

In a certain economy, when income is $200, consumer spending is $145. The value of the multiplier for this economy is 6.25. It follows that, when income is $230, consumer spending is

Accepted Answer

A) $166.75. For this economy, an initial impulse of $10 in consumer spending translates into a $62.50 increase in aggregate demand. 
B) $166.75. For this economy, an initial impulse of $10 in consumer spending translates into a $66.75 increase in aggregate demand. 
C) $170.20. For this economy, an initial impulse of $10 in consumer spending translates into a $62.50 increase in aggregate demand. 
D) $170.20. For this economy, an initial impulse of $10 in consumer spending translates into a $70.20 increase in aggregate demand. 
A) $166.75. For this economy, an initial impulse of $10 in consumer spending translates into a $62.50 increase in aggregate demand. 
B) $166.75. For this economy, an initial impulse of $10 in consumer spending translates into a $66.75 increase in aggregate demand. 
C) $170.20. For this economy, an initial impulse of $10 in consumer spending translates into a $62.50 increase in aggregate demand. 
D) $170.20. For this economy, an initial impulse of $10 in consumer spending translates into a $70.20 increase in aggregate demand.

Question 4

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 r3. Which of the following events would cause the equilibrium interest rate to decrease?

Accepted Answer

A) The Federal Reserve increases the money supply. 
B) Money demand decreases. 
C) The price level decreases. 
D) All of the above are correct. 
A) The Federal Reserve increases the money supply. 
B) Money demand decreases. 
C) The price level decreases. 
D) All of the above are correct.

Question 5

The wealth effect stems from the idea that a higher price level

Accepted Answer

A) increases the real value of households' money holdings. 
B) decreases the real value of households' money holdings. 
C) increases the real value of the domestic currency in foreign-exchange markets. 
D) decreases the real value of the domestic currency in foreign-exchange markets. 
A) increases the real value of households' money holdings. 
B) decreases the real value of households' money holdings. 
C) increases the real value of the domestic currency in foreign-exchange markets. 
D) decreases the real value of the domestic currency in foreign-exchange markets.

Question 6

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. What does Y represent on the horizontal axis of the right-hand graph?

Accepted Answer

A) the quantity of money 
B) the rate of inflation 
C) real output 
D) nominal output 
A) the quantity of money 
B) the rate of inflation 
C) real output 
D) nominal output

Question 7

The most important automatic stabilizer is

Accepted Answer

A) open-market operations. 
B) the tax system. 
C) unemployment compensation. 
D) welfare benefits. 
A) open-market operations. 
B) the tax system. 
C) unemployment compensation. 
D) welfare benefits.

Question 8

It is likely that a constitutional amendment that required the government always to run a balanced budget would

Accepted Answer

A) contribute to a more stable level of output. 
B) mitigate the crowding-out effect. 
C) eliminate the economy's automatic stabilizers. 
D) All of the above are correct. 
A) contribute to a more stable level of output. 
B) mitigate the crowding-out effect. 
C) eliminate the economy's automatic stabilizers. 
D) All of the above are correct.

Question 9

In the long run, fiscal policy primarily affects

Accepted Answer

A) aggregate demand. In the short run, it affects primarily aggregate supply. 
B) aggregate supply. In the short run, it affects primarily saving, investment, and growth. 
C) saving, investment, and growth. In the short run, it affects primarily aggregate demand. 
D) saving, investment, and growth. In the short run, it affects primarily aggregate supply. 
A) aggregate demand. In the short run, it affects primarily aggregate supply. 
B) aggregate supply. In the short run, it affects primarily saving, investment, and growth. 
C) saving, investment, and growth. In the short run, it affects primarily aggregate demand. 
D) saving, investment, and growth. In the short run, it affects primarily aggregate supply.

Question 10

Figure 21-5. On the figure, MS represents money supply and MD represents money demand.  
-Refer to Figure 21-5. A shift of the money-demand curve from MD1 to MD2 could be a result of

Accepted Answer

A) a decrease in taxes. 
B) an increase in government spending. 
C) an increase in the price level. 
D) All of the above are correct. 
A) a decrease in taxes. 
B) an increase in government spending. 
C) an increase in the price level. 
D) All of the above are correct.

Question 11

The Kennedy tax cut of 1964 was

Accepted Answer

A) successful in stimulating the economy. 
B) designed to shift the aggregate demand curve to the right. 
C) designed to shift the aggregate supply curve to the right. 
D) All of the above are correct. 
A) successful in stimulating the economy. 
B) designed to shift the aggregate demand curve to the right. 
C) designed to shift the aggregate supply curve to the right. 
D) All of the above are correct.

Question 12

According to liquidity preference theory, investment spending would rise if the price level

Accepted Answer

A) fell, making the interest rate rise. 
B) fell, making the interest rate fall. 
C) rose, making the interest rate rise. 
D) rose, making the interest rate fall. 
A) fell, making the interest rate rise. 
B) fell, making the interest rate fall. 
C) rose, making the interest rate rise. 
D) rose, making the interest rate fall.

Question 13

The Fed can influence the money supply by

Accepted Answer

A) changing how much it lends to banks. 
B) changing the interest rate it pays banks on the reserves they are holding. 
C) using open-market operations. 
D) All of the above are correct. 
A) changing how much it lends to banks. 
B) changing the interest rate it pays banks on the reserves they are holding. 
C) using open-market operations. 
D) All of the above are correct.

Question 14

When government expenditures increase, the interest rate

Accepted Answer

A) increases, making the change in aggregate demand larger. 
B) increases, making the change in aggregate demand smaller 
C) decreases, making the change in aggregate demand larger. 
D) decreases, making the change in aggregate demand smaller. 
A) increases, making the change in aggregate demand larger. 
B) increases, making the change in aggregate demand smaller 
C) decreases, making the change in aggregate demand larger. 
D) decreases, making the change in aggregate demand smaller.

Question 15

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Accepted Answer

If the interest rate is above equilibriu

Question 16

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

Accepted Answer

A) buy bonds to raise interest rates. 
B) buy bonds to lower interest rates. 
C) sell bonds to raise interest rates. 
D) sell bonds to lower interest rates. 
A) buy bonds to raise interest rates. 
B) buy bonds to lower interest rates. 
C) sell bonds to raise interest rates. 
D) sell bonds to lower interest rates.

Question 17

Because the liquidity-preference framework focuses on the

Accepted Answer

A) short run, it assumes the price level adjusts to bring the money market to equilibrium. 
B) short run, it assumes the interest rate adjusts to bring the money market to equilibrium. 
C) long run, it assumes the price level adjusts to bring the money market to equilibrium. 
D) long run, it assumes the interest rate adjusts to bring the money market to equilibrium. 
A) short run, it assumes the price level adjusts to bring the money market to equilibrium. 
B) short run, it assumes the interest rate adjusts to bring the money market to equilibrium. 
C) long run, it assumes the price level adjusts to bring the money market to equilibrium. 
D) long run, it assumes the interest rate adjusts to bring the money market to equilibrium.

Question 18

An increase in government spending shifts aggregate demand

Accepted Answer

A) to the right. The larger the multiplier is, the farther it shifts. 
B) to the right. The larger the multiplier is, the less it shifts. 
C) to the left. The larger the multiplier is, the farther it shifts. 
D) to the left. The larger the multiplier is, the less it shifts. 
A) to the right. The larger the multiplier is, the farther it shifts. 
B) to the right. The larger the multiplier is, the less it shifts. 
C) to the left. The larger the multiplier is, the farther it shifts. 
D) to the left. The larger the multiplier is, the less it shifts.

Question 19

In the long run, changes in the money supply affect

Accepted Answer

A) prices. 
B) output. 
C) unemployment rates. 
D) All of the above. 
A) prices. 
B) output. 
C) unemployment rates. 
D) All of the above.

Question 20

According to liquidity preference theory, a decrease in the price level shifts the

Accepted Answer

A) money demand curve rightward, so the interest rate increases. 
B) money demand curve rightward, so the interest rate decreases. 
C) money demand curve leftward, so the interest rate decreases. 
D) money demand curve leftward, so the interest rate increases. 
A) money demand curve rightward, so the interest rate increases. 
B) money demand curve rightward, so the interest rate decreases. 
C) money demand curve leftward, so the interest rate decreases. 
D) money demand curve leftward, so the interest rate increases.

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

One of President Obama's first policy initiatives was a stimulus bill that included large increases in government spending.

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output?

In a certain economy, when income is $200, consumer spending is $145. The value of the multiplier for this economy is 6.25. It follows that, when income is $230, consumer spending is

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 r3. Which of the following events would cause the equilibrium interest rate to decrease?

The wealth effect stems from the idea that a higher price level

The most important automatic stabilizer is

It is likely that a constitutional amendment that required the government always to run a balanced budget would

In the long run, fiscal policy primarily affects

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. A shift of the money-demand curve from MD1 to MD2 could be a result of

The Kennedy tax cut of 1964 was

According to liquidity preference theory, investment spending would rise if the price level

The Fed can influence the money supply by

When government expenditures increase, the interest rate

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

Because the liquidity-preference framework focuses on the

An increase in government spending shifts aggregate demand

In the long run, changes in the money supply affect

According to liquidity preference theory, a decrease in the price level shifts the

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. Suppose the current equilibrium interest rate is r₃. Which of the following events would cause the equilibrium interest rate to decrease?

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. A shift of the money-demand curve from MD₁ to MD₂ could be a result of