Question 1

Which of the following statements is correct?

Accepted Answer

A)  Both liquidity preference theory and classical theory assume the interest rate adjusts to bring the money market into equilibrium. 
B)  Both liquidity preference theory and classical theory assume the price level adjusts to bring the money market into equilibrium. 
C)  Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium;classical theory assumes the price level adjusts to bring the money market into equilibrium. 
D)  Liquidity preference theory assumes the price level adjusts to bring the money market into equilibrium;classical theory assumes the interest rate adjusts to bring the money market into equilibrium. 
A)  Both liquidity preference theory and classical theory assume the interest rate adjusts to bring the money market into equilibrium. 
B)  Both liquidity preference theory and classical theory assume the price level adjusts to bring the money market into equilibrium. 
C)  Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium;classical theory assumes the price level adjusts to bring the money market into equilibrium. 
D)  Liquidity preference theory assumes the price level adjusts to bring the money market into equilibrium;classical theory assumes the interest rate adjusts to bring the money market into equilibrium. C

Question 2

Figure 34-2.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 34-2.A decrease in Y from Y1 to Y2 is explained as follows:

Accepted Answer

A)  The Federal Reserve increases the money supply,causing the money-demand curve to shift from MD1 to MD2;this shift of MD causes r to increase from r1 to r2;and this increase in r causes Y to decrease from Y1 to Y2. 
B)  An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2;this shift of MD causes r to increase from r1 to r2;and this increase in r causes Y to decrease from Y1 to Y2. 
C)  A decrease in P from P2 to P1 causes the money-demand curve to shift from MD1 to MD2;this shift of MD causes r to increase from r1 to r2;and this increase in r causes Y to decrease from Y1 to Y2. 
D)  An increase in the price level causes the money-demand curve to shift from MD2 to MD1;this shift of MD causes r to decrease from r2 to r1;and this decrease in r causes Y to decrease from Y1 to Y2. 
A)  The Federal Reserve increases the money supply,causing the money-demand curve to shift from MD1 to MD2;this shift of MD causes r to increase from r1 to r2;and this increase in r causes Y to decrease from Y1 to Y2. 
B)  An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2;this shift of MD causes r to increase from r1 to r2;and this increase in r causes Y to decrease from Y1 to Y2. 
C)  A decrease in P from P2 to P1 causes the money-demand curve to shift from MD1 to MD2;this shift of MD causes r to increase from r1 to r2;and this increase in r causes Y to decrease from Y1 to Y2. 
D)  An increase in the price level causes the money-demand curve to shift from MD2 to MD1;this shift of MD causes r to decrease from r2 to r1;and this decrease in r causes Y to decrease from Y1 to Y2. B

Question 3

Figure 34-3.  
-Refer to Figure 34-3.Which of the following sequences (numbered arrows)shows the logic of the interest-rate effect?

Accepted Answer

A)  1,2,3,4 
B)  1,4,3,2 
C)  3,4,2,1 
D)  3,2,1,4 
A)  1,2,3,4 
B)  1,4,3,2 
C)  3,4,2,1 
D)  3,2,1,4 D

Question 4

Monetary policy

Accepted Answer

A)  must be described in terms of interest-rate targets. 
B)  must be described in terms of money-supply targets. 
C)  can be described either in terms of the money supply or in terms of the interest rate. 
D)  cannot be accurately described in terms of the interest rate or in terms of the money supply. 
A)  must be described in terms of interest-rate targets. 
B)  must be described in terms of money-supply targets. 
C)  can be described either in terms of the money supply or in terms of the interest rate. 
D)  cannot be accurately described in terms of the interest rate or in terms of the money supply.

Question 5

While a television news reporter might state that "Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent," a more precise account of the Fed's action would be as follows:

Accepted Answer

A)  "Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent." 
B)  "Today the Fed lowered the discount rate by a quarter of a percentage point,and this action will force the federal funds rate to drop by the same amount." 
C)  "Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent." 
D)  "Today the Fed took a step toward contracting aggregate demand,and this was done by lowering the federal funds rate to 5.25 percent." 
A)  "Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent." 
B)  "Today the Fed lowered the discount rate by a quarter of a percentage point,and this action will force the federal funds rate to drop by the same amount." 
C)  "Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent." 
D)  "Today the Fed took a step toward contracting aggregate demand,and this was done by lowering the federal funds rate to 5.25 percent."

Question 6

When the interest rate decreases,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 7

According to liquidity preference theory,an increase 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.

Question 8

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

Accepted Answer

When the money supply increases,the inte

Question 9

Suppose an economy's marginal propensity to consume (MPC)is 0.6.Then

Accepted Answer

A)  1 + MPC + MPC 2 + MPC 3 = 1.844 and,if we continued adding up terms in this geometric series,we would get closer and closer to the multiplier value of 1.96. 
B)  1 + MPC + MPC 2 + MPC 3 = 1.844 and,if we continued adding up terms in this geometric series,we would get closer and closer to the multiplier value of 3. 
C)  1 + MPC + MPC 2 + MPC 3 = 2.176 and,if we continued adding up terms in this geometric series,we would get closer and closer to the multiplier value of 3. 
D)  1 + MPC + MPC 2 + MPC 3 = 2.176 and,if we continued adding up terms in this geometric series,we would get closer and closer to the multiplier value of 2.5. 
A)  1 + MPC + MPC 2 + MPC 3 = 1.844 and,if we continued adding up terms in this geometric series,we would get closer and closer to the multiplier value of 1.96. 
B)  1 + MPC + MPC 2 + MPC 3 = 1.844 and,if we continued adding up terms in this geometric series,we would get closer and closer to the multiplier value of 3. 
C)  1 + MPC + MPC 2 + MPC 3 = 2.176 and,if we continued adding up terms in this geometric series,we would get closer and closer to the multiplier value of 3. 
D)  1 + MPC + MPC 2 + MPC 3 = 2.176 and,if we continued adding up terms in this geometric series,we would get closer and closer to the multiplier value of 2.5.

Question 10

The short-run effects on the interest rate are

Accepted Answer

A)  shown equally well using either liquidity preference theory or classical theory. 
B)  best shown using classical theory. 
C)  best shown using liquidity preference theory. 
D)  not shown well by either liquidity preference theory or classical theory. 
A)  shown equally well using either liquidity preference theory or classical theory. 
B)  best shown using classical theory. 
C)  best shown using liquidity preference theory. 
D)  not shown well by either liquidity preference theory or classical theory.

Question 11

Stock prices often rise when the Fed raises interest rates.

Accepted Answer

A) True 
 B)False

Question 12

In the short run,an increase in the money supply causes interest rates to

Accepted Answer

A)  increase,and aggregate demand to shift right. 
B)  increase,and aggregate demand to shift left. 
C)  decrease,and aggregate demand to shift right. 
D)  decrease,and aggregate demand to shift left. 
A)  increase,and aggregate demand to shift right. 
B)  increase,and aggregate demand to shift left. 
C)  decrease,and aggregate demand to shift right. 
D)  decrease,and aggregate demand to shift left.

Question 13

Assume the money market is initially in equilibrium.If the price level decreases,then according to liquidity preference theory there is an excess

Accepted Answer

A)  supply of money until the interest rate increases. 
B)  supply of money until the interest rate decreases. 
C)  demand for money until the interest rate increases. 
D)  demand for money until the interest rate decreases. 
A)  supply of money until the interest rate increases. 
B)  supply of money until the interest rate decreases. 
C)  demand for money until the interest rate increases. 
D)  demand for money until the interest rate decreases.

Question 14

Which of the following policy actions shifts the aggregate-demand curve?

Accepted Answer

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

Question 15

Assume the MPC is 0.75.The multiplier is

Accepted Answer

A)  0.75. 
B)  1.25. 
C)  4.00. 
D)  6.25. 
A)  0.75. 
B)  1.25. 
C)  4.00. 
D)  6.25.

Question 16

A decrease in government spending

Accepted Answer

A)  increases the interest rate and so investment spending increases. 
B)  increases the interest rate and so decreases investment spending decreases. 
C)  decreases the interest rate and so investment spending increases. 
D)  decreases the interest rate and so investment spending decreases. 
A)  increases the interest rate and so investment spending increases. 
B)  increases the interest rate and so decreases investment spending decreases. 
C)  decreases the interest rate and so investment spending increases. 
D)  decreases the interest rate and so investment spending decreases.

Question 17

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 18

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.

Question 19

Figure 34-1  
-Refer to Figure 34-1.Which of the following is correct?

Accepted Answer

A)  If the interest rate is 4 percent,there is excess money demand,and the interest rate will fall. 
B)  If the interest rate is 3 percent,there is excess money supply,and the interest rate will rise. 
C)  Starting with an interest rate of 4 percent,the demand for goods and services will increase until the money market reaches a new equilibrium. 
D)  None of the above is correct. 
A)  If the interest rate is 4 percent,there is excess money demand,and the interest rate will fall. 
B)  If the interest rate is 3 percent,there is excess money supply,and the interest rate will rise. 
C)  Starting with an interest rate of 4 percent,the demand for goods and services will increase until the money market reaches a new equilibrium. 
D)  None of the above is correct.

Question 20

Which U.S.president,when asked why he had proposed a tax cut,responded by saying "To stimulate the economy.Don't you remember your Economics 101?"

Accepted Answer

A)  Dwight D.Eisenhower 
B)  John F.Kennedy 
C)  Ronald Reagan 
D)  Bill Clinton 
A)  Dwight D.Eisenhower 
B)  John F.Kennedy 
C)  Ronald Reagan 
D)  Bill Clinton

Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Which of the following statements is correct?

Figure 34-3. -Refer to Figure 34-3.Which of the following sequences (numbered arrows)shows the logic of the interest-rate effect?

Monetary policy

While a television news reporter might state that "Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent," a more precise account of the Fed's action would be as follows:

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

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

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

Suppose an economy's marginal propensity to consume (MPC)is 0.6.Then

The short-run effects on the interest rate are

Stock prices often rise when the Fed raises interest rates.

In the short run,an increase in the money supply causes interest rates to

Assume the money market is initially in equilibrium.If the price level decreases,then according to liquidity preference theory there is an excess

Which of the following policy actions shifts the aggregate-demand curve?

Assume the MPC is 0.75.The multiplier is

A decrease in government spending

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

Automatic stabilizers

Figure 34-1 -Refer to Figure 34-1.Which of the following is correct?

Which U.S.president,when asked why he had proposed a tax cut,responded by saying "To stimulate the economy.Don't you remember your Economics 101?"

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

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

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 Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Trade-Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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