Question 1

On the graph that depicts the theory of liquidity preference,

Accepted Answer

A)  the demand-for-money curve is vertical. 
B)  the supply-of-money curve is vertical. 
C)  the interest rate is measured along the horizontal axis. 
D)  the price level is measured along the vertical axis. 
A)  the demand-for-money curve is vertical. 
B)  the supply-of-money curve is vertical. 
C)  the interest rate is measured along the horizontal axis. 
D)  the price level is measured along the vertical axis.

Question 2

According to the theory of liquidity preference,the money supply

Accepted Answer

A)  and money demand are positively related to the interest rate. 
B)  and money demand are negatively related to the interest rate. 
C)  is negatively related to the interest rate while money demand is positively related to the interest rate. 
D)  is independent of the interest rate,while money demand is negatively related to the interest rate. 
A)  and money demand are positively related to the interest rate. 
B)  and money demand are negatively related to the interest rate. 
C)  is negatively related to the interest rate while money demand is positively related to the interest rate. 
D)  is independent of the interest rate,while money demand is negatively related to the interest rate.

Question 3

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Accepted Answer

A) True 
 B)False

Question 4

Critics of stabilization policy argue that

Accepted Answer

A)  policy affects aggregate demand quickly,but the effects on aggregate demand are long-lived. 
B)  policy affects aggregate demand with a lag,and the effects on aggregate demand are long-lived. 
C)  policy affects aggregate demand with a lag,but the effects are short-lived. 
D)  policy does not affect aggregate demand. 
A)  policy affects aggregate demand quickly,but the effects on aggregate demand are long-lived. 
B)  policy affects aggregate demand with a lag,and the effects on aggregate demand are long-lived. 
C)  policy affects aggregate demand with a lag,but the effects are short-lived. 
D)  policy does not affect aggregate demand.

Question 5

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

Accepted Answer

A)  the crowding-out effect 
B)  the multiplier effect 
C)  the exchange-rate effect 
D)  the interest-rate effect 
A)  the crowding-out effect 
B)  the multiplier effect 
C)  the exchange-rate effect 
D)  the interest-rate effect

Question 6

Figure 24-4.On the figure,MS represents money supply and MD represents money demand.  
-Refer to Figure 24-4.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 7

The change in aggregate demand that results from fiscal expansion changing the interest rate is called the

Accepted Answer

A)  multiplier effect. 
B)  crowding-out effect. 
C)  accelerator effect. 
D)  Ricardian equivalence effect. 
A)  multiplier effect. 
B)  crowding-out effect. 
C)  accelerator effect. 
D)  Ricardian equivalence effect.

Question 8

If the inflation rate is zero,then

Accepted Answer

A)  both the nominal interest rate and the real interest rate can fall below zero. 
B)  the nominal interest rate can fall below zero,but the real interest rate cannot fall below zero. 
C)  the real interest rate can fall below zero,but the nominal interest rate cannot fall below zero. 
D)  neither the nominal interest rate nor the real interest rate can fall below zero. 
A)  both the nominal interest rate and the real interest rate can fall below zero. 
B)  the nominal interest rate can fall below zero,but the real interest rate cannot fall below zero. 
C)  the real interest rate can fall below zero,but the nominal interest rate cannot fall below zero. 
D)  neither the nominal interest rate nor the real interest rate can fall below zero.

Question 9

A reduction in U.S net exports would shift U.S.aggregate demand

Accepted Answer

A)  rightward.In an attempt to stabilize the economy,the government could raise taxes. 
B)  rightward.In an attempt to stabilize the economy,the government could cut taxes. 
C)  leftward.In an attempt to stabilize the economy,the government could raise taxes. 
D)  leftward.In an attempt to stabilize the economy,the government could cut taxes. 
A)  rightward.In an attempt to stabilize the economy,the government could raise taxes. 
B)  rightward.In an attempt to stabilize the economy,the government could cut taxes. 
C)  leftward.In an attempt to stabilize the economy,the government could raise taxes. 
D)  leftward.In an attempt to stabilize the economy,the government could cut taxes.

Question 10

Fiscal policy affects the economy

Accepted Answer

A)  only in the short run. 
B)  only in the long run. 
C)  in both the short and long run. 
D)  in neither the short nor the long run. 
A)  only in the short run. 
B)  only in the long run. 
C)  in both the short and long run. 
D)  in neither the short nor the long run.

Question 11

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 12

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 13

Which of the following claims concerning the importance of effects that explain the slope of the U.S.aggregate-demand curve is correct?

Accepted Answer

A)  The exchange-rate effect is relatively small because exports and imports are a small part of real GDP. 
B)  The interest-rate effect is relatively small because investment spending is not very responsive to interest rate changes. 
C)  The wealth effect is relatively large because money holdings are a significant portion of most households' wealth. 
D)  None of the above is correct. 
A)  The exchange-rate effect is relatively small because exports and imports are a small part of real GDP. 
B)  The interest-rate effect is relatively small because investment spending is not very responsive to interest rate changes. 
C)  The wealth effect is relatively large because money holdings are a significant portion of most households' wealth. 
D)  None of the above is correct.

Question 14

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 15

Figure 24-6.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 24-6.Suppose the multiplier is 3 and the government increases its purchases by $25 billion.Also,suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out.Finally,assume the horizontal distance between the curves AD1 and AD3 is $30 billion.The extent of crowding out,for any particular level of the price level,is

Accepted Answer

A)  $25 billion. 
B)  $30 billion. 
C)  $45 billion. 
D)  $60 billion. 
A)  $25 billion. 
B)  $30 billion. 
C)  $45 billion. 
D)  $60 billion.

Question 16

Which of the following shifts aggregate demand to the right?

Accepted Answer

A)  The price level rises. 
B)  The price level falls. 
C)  The money supply falls. 
D)  None of the above is correct. 
A)  The price level rises. 
B)  The price level falls. 
C)  The money supply falls. 
D)  None of the above is correct.

Question 17

In the long run,fiscal policy influences

Accepted Answer

A)  saving,investment,and growth; in the short run,fiscal policy primarily influences technology and the production function. 
B)  saving,investment,and growth; in the short run,fiscal policy primarily influences the aggregate demand for goods and services. 
C)  technology and the production function; in the short run,fiscal policy primarily influences saving,investment,and growth. 
D)  the aggregate demand for goods and services; in the short run,fiscal policy primarily influences technology and the production function. 
A)  saving,investment,and growth; in the short run,fiscal policy primarily influences technology and the production function. 
B)  saving,investment,and growth; in the short run,fiscal policy primarily influences the aggregate demand for goods and services. 
C)  technology and the production function; in the short run,fiscal policy primarily influences saving,investment,and growth. 
D)  the aggregate demand for goods and services; in the short run,fiscal policy primarily influences technology and the production function.

Question 18

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 19

Changes in the interest rate

Accepted Answer

A)  shift aggregate demand whether they are caused by changes in the price level or by changes in fiscal or monetary policy. 
B)  shift aggregate demand if they are caused by changes in the price level,but not if they are caused by changes in fiscal or monetary policy. 
C)  shift aggregate demand if they are caused by fiscal or monetary policy,but not if they are caused by changes in the price level. 
D)  do not shift aggregate demand. 
A)  shift aggregate demand whether they are caused by changes in the price level or by changes in fiscal or monetary policy. 
B)  shift aggregate demand if they are caused by changes in the price level,but not if they are caused by changes in fiscal or monetary policy. 
C)  shift aggregate demand if they are caused by fiscal or monetary policy,but not if they are caused by changes in the price level. 
D)  do not shift aggregate demand.

Question 20

Scenario 24-2.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 24-2.The multiplier for this economy is

Accepted Answer

A)  6.00. 
B)  6.25. 
C)  8.40 
D)  9.00. 
A)  6.00. 
B)  6.25. 
C)  8.40 
D)  9.00.

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

On the graph that depicts the theory of liquidity preference,

According to the theory of liquidity preference,the money supply

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Critics of stabilization policy argue that

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Which of the following events could explain a decrease in the equilibrium interest rate from r3 to r1?

The change in aggregate demand that results from fiscal expansion changing the interest rate is called the

If the inflation rate is zero,then

A reduction in U.S net exports would shift U.S.aggregate demand

Fiscal policy affects the economy

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

Monetary policy

Which of the following claims concerning the importance of effects that explain the slope of the U.S.aggregate-demand curve is correct?

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 shifts aggregate demand to the right?

In the long run,fiscal policy influences

Critics of stabilization policy argue that

Changes in the interest rate

Scenario 24-2.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 24-2.The multiplier for this economy is

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

Filters

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Which of the following events could explain a decrease in the equilibrium interest rate from r₃ to r₁?