Question 1

Keynes argued that

Accepted Answer

A)  irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment. 
B)  irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply. 
C)  changes in business and consumer expectations generally stabilize the economy. 
D)  All of the above are correct. 
A)  irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment. 
B)  irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply. 
C)  changes in business and consumer expectations generally stabilize the economy. 
D)  All of the above are correct.

Question 2

In the short run,open-market sales

Accepted Answer

A)  increase the price level and real GDP. 
B)  decrease the price level and real GDP. 
C)  increases the price level and decreases real GDP. 
D)  decreases the price level and increases real GDP. 
A)  increase the price level and real GDP. 
B)  decrease the price level and real GDP. 
C)  increases the price level and decreases real GDP. 
D)  decreases the price level and increases real GDP.

Question 3

An increase in the MPC

Accepted Answer

A)  increases the multiplier,so that changes in government expenditures have a larger effect on aggregate demand. 
B)  increases the multiplier,so that changes in government expenditures have a smaller effect on aggregate demand. 
C)  decreases the multiplier,so that changes in government expenditures have a larger effect on aggregate demand. 
D)  decreases the multiplier,so that changes in government expenditures have a smaller effect on aggregate demand. 
A)  increases the multiplier,so that changes in government expenditures have a larger effect on aggregate demand. 
B)  increases the multiplier,so that changes in government expenditures have a smaller effect on aggregate demand. 
C)  decreases the multiplier,so that changes in government expenditures have a larger effect on aggregate demand. 
D)  decreases the multiplier,so that changes in government expenditures have a smaller effect on aggregate demand.

Question 4

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 5

According to the theory of liquidity preference,if output increases

Accepted Answer

A)  people want to hold more money.This response is shown as a movement along the money demand curve. 
B)  people want to hold more money.This response is shown as a shift of the money demand curve. 
C)  people want to hold less money.This response is shown as a movement along the money demand curve. 
D)  people want to hold less money.This response is shown as a shift of the money demand curve. 
A)  people want to hold more money.This response is shown as a movement along the money demand curve. 
B)  people want to hold more money.This response is shown as a shift of the money demand curve. 
C)  people want to hold less money.This response is shown as a movement along the money demand curve. 
D)  people want to hold less money.This response is shown as a shift of the money demand curve.

Question 6

When the interest rate is above the equilibrium level,

Accepted Answer

A)  the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. 
B)  people respond by buying interest-bearing bonds or by depositing money in interest-bearing bank accounts. 
C)  bond issuers and banks respond by lowering the interest rates they offer. 
D)  All of the above are correct. 
A)  the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. 
B)  people respond by buying interest-bearing bonds or by depositing money in interest-bearing bank accounts. 
C)  bond issuers and banks respond by lowering the interest rates they offer. 
D)  All of the above are correct.

Question 7

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 8

If the multiplier is 2.5,then the MPC is

Accepted Answer

A)  0.2. 
B)  0.6. 
C)  0.75. 
D)  1.00. 
A)  0.2. 
B)  0.6. 
C)  0.75. 
D)  1.00.

Question 9

The government increases both its expenditures and taxes by $400 billion.There is no crowding out and no accelerator effect.Aggregate demand shifts by $400 billion.Which of the following is consistent with how far aggregate demand shifts?

Accepted Answer

A)  MPC = 1/2,and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures. 
B)  MPC = 2/3,and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures 
C)  MPC = 3/4,and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures 
D)  All of the above are correct. 
A)  MPC = 1/2,and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures. 
B)  MPC = 2/3,and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures 
C)  MPC = 3/4,and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures 
D)  All of the above are correct.

Question 10

Which of the following raises the interest rate?

Accepted Answer

A)  an increase in government expenditures and an increase in the money supply 
B)  an increase in government expenditures and a decrease in the money supply 
C)  a decrease in government expenditures and an increase in the money supply 
D)  a decrease in government expenditures and a decrease in the money supply 
A)  an increase in government expenditures and an increase in the money supply 
B)  an increase in government expenditures and a decrease in the money supply 
C)  a decrease in government expenditures and an increase in the money supply 
D)  a decrease in government expenditures and a decrease in the money supply

Question 11

If the MPC is 4/5,the multiplier is 5/4.

Accepted Answer

A) True 
 B)False

Question 12

A tax increase has

Accepted Answer

A)  a multiplier effect but not a crowding out effect 
B)  a crowding out effect but not a multiplier effect 
C)  both a crowding out and multiplier effect 
D)  neither a multiplier or crowding out effect 
A)  a multiplier effect but not a crowding out effect 
B)  a crowding out effect but not a multiplier effect 
C)  both a crowding out and multiplier effect 
D)  neither a multiplier or crowding out effect

Question 13

Which of the following actions might we logically expect to result from rising stock prices?

Accepted Answer

A)  Jim increases his consumption spending. 
B)  Firms sell fewer shares of new stock. 
C)  Firms spend less on investment. 
D)  None of the above is correct. 
A)  Jim increases his consumption spending. 
B)  Firms sell fewer shares of new stock. 
C)  Firms spend less on investment. 
D)  None of the above is correct.

Question 14

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 15

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Accepted Answer

A) True 
 B)False

Question 16

According to liquidity preference theory,the money-supply curve would shift if the Fed

Accepted Answer

A)  engaged in open-market transactions. 
B)  changed the discount rate. 
C)  changed the reserve requirement. 
D)  did any of the above. 
A)  engaged in open-market transactions. 
B)  changed the discount rate. 
C)  changed the reserve requirement. 
D)  did any of the above.

Question 17

During recessions,the government tends to run a budget deficit.

Accepted Answer

A) True 
 B)False

Question 18

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 19

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 20

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

Accepted Answer

A)  move toward deficit. 
B)  move toward surplus. 
C)  move toward balance. 
D)  not necessarily move the budget in any particular direction. 
A)  move toward deficit. 
B)  move toward surplus. 
C)  move toward balance. 
D)  not necessarily move the budget in any particular direction.

Exam 24: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Keynes argued that

In the short run,open-market sales

An increase in the MPC

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

According to the theory of liquidity preference,if output increases

When the interest rate is above the equilibrium level,

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

If the multiplier is 2.5,then the MPC is

The government increases both its expenditures and taxes by $400 billion.There is no crowding out and no accelerator effect.Aggregate demand shifts by $400 billion.Which of the following is consistent with how far aggregate demand shifts?

Which of the following raises the interest rate?

If the MPC is 4/5,the multiplier is 5/4.

A tax increase has

Which of the following actions might we logically expect to result from rising stock prices?

If the stock market booms,then

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

According to liquidity preference theory,the money-supply curve would shift if the Fed

During recessions,the government tends to run a budget deficit.

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

A tax cut shifts the aggregate demand curve the farthest if

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

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 Costs of Production

Firms in Competitive Markets

Monopoly

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

Aggregate Demand and Aggregate Supply

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