Question 1

Using the liquidity-preference model,when the Federal Reserve increases the money supply,

Accepted Answer

A)  the equilibrium interest rate decreases. 
B)  the aggregate-demand curve shifts to the left. 
C)  the quantity of goods and services demanded is unchanged for a given price level. 
D)  the long-run aggregate-supply curve shifts to the right. 
A)  the equilibrium interest rate decreases. 
B)  the aggregate-demand curve shifts to the left. 
C)  the quantity of goods and services demanded is unchanged for a given price level. 
D)  the long-run aggregate-supply curve shifts to the right.

Question 2

Supply-side economists focus more than other economists on

Accepted Answer

A)  how fiscal policy affects consumption. 
B)  the multiplier affect of fiscal policy. 
C)  how fiscal policy affects aggregate supply. 
D)  the money supply. 
A)  how fiscal policy affects consumption. 
B)  the multiplier affect of fiscal policy. 
C)  how fiscal policy affects aggregate supply. 
D)  the money supply.

Question 3

The theory of liquidity preference is largely at odds with the basic ideas of supply and demand.

Accepted Answer

A) True 
 B)False

Question 4

Suppose foreigners find U.S.goods and services more desirable for some reason other than a change in the exchange rate.Which policies could be used to offset the resulting change in output?

Accepted Answer

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

Question 5

According to the theory of liquidity preference,

Accepted Answer

A)  if the interest rate is below the equilibrium level,then the quantity of money people want to hold is less than the quantity of money the Fed has created. 
B)  if the interest rate is above the equilibrium level,then the quantity of money people want to hold is greater than the quantity of money the Fed has created. 
C)  the demand for money is represented by a downward-sloping line on a supply-and-demand graph. 
D)  All of the above are correct. 
A)  if the interest rate is below the equilibrium level,then the quantity of money people want to hold is less than the quantity of money the Fed has created. 
B)  if the interest rate is above the equilibrium level,then the quantity of money people want to hold is greater than the quantity of money the Fed has created. 
C)  the demand for money is represented by a downward-sloping line on a supply-and-demand graph. 
D)  All of the above are correct.

Question 6

In order to simplify the equation for the multiplier to its familiar,relatively simple form,we make use of the

Accepted Answer

A)  assumption that increases in government purchases have no effect on consumer spending. 
B)  assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred. 
C)  empirical evidence that points to a value of aboutfor the MPC. 
D)  fact that the multiplier effect is represented by an infinite geometric series. 
A)  assumption that increases in government purchases have no effect on consumer spending. 
B)  assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred. 
C)  empirical evidence that points to a value of aboutfor the MPC. 
D)  fact that the multiplier effect is represented by an infinite geometric series.

Question 7

Figure 24-2.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 24-2.Assume the money market is always in equilibrium.Under the assumptions of the model,

Accepted Answer

A)  the real interest rate is higher at Y2 than it is at Y1. 
B)  the quantity of money is the same at Y1 as it is at Y2. 
C)  the price level is higher at r2 than it is at r1. 
D)  All of the above are correct. 
A)  the real interest rate is higher at Y2 than it is at Y1. 
B)  the quantity of money is the same at Y1 as it is at Y2. 
C)  the price level is higher at r2 than it is at r1. 
D)  All of the above are correct.

Question 8

Which particular interest rate(s)do we attempt to explain using the theory of liquidity preference?

Accepted Answer

A)  only the nominal interest rate 
B)  both the nominal interest rate and the real interest rate 
C)  only the interest rate on long-term bonds 
D)  only the interest rate on short-term government bonds 
A)  only the nominal interest rate 
B)  both the nominal interest rate and the real interest rate 
C)  only the interest rate on long-term bonds 
D)  only the interest rate on short-term government bonds

Question 9

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 10

Suppose the MPC is 0.9.There are no crowding out or investment accelerator effects.If the government increases its expenditures by $30 billion,then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion,then by how far does aggregate demand shift to the right?

Accepted Answer

A)  $283 billion and $254.7 billion 
B)  $283 billion and $283 billion 
C)  $300 billion and $270 billion 
D)  $300 billion and $300 billion 
A)  $283 billion and $254.7 billion 
B)  $283 billion and $283 billion 
C)  $300 billion and $270 billion 
D)  $300 billion and $300 billion

Question 11

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

Accepted Answer

A) True 
 B)False

Question 12

A significant lag for monetary policy is the time it takes to for a change in the money supply to change the economy.A significant lag for fiscal policy is the time it takes to pass legislation authorizing it.

Accepted Answer

A) True 
 B)False

Question 13

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

Accepted Answer

A)  shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate. 
B)  the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an interest rate. 
C)  changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate. 
D)  the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate. 
A)  shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate. 
B)  the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an interest rate. 
C)  changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate. 
D)  the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate.

Question 14

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 15

Which of the following illustrates how the investment accelerator works?

Accepted Answer

A)  An increase in government expenditures increases the interest rate so that the Burgerville chain of restaurants decides to build fewer new restaurants. 
B)  An increase in government expenditures increases aggregate spending so that Burgerville finds it profitable to build more new restaurants. 
C)  An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by Burgerville increases. 
D)  An increase in government expenditures decreases the interest rate so that Burgerville decides to build more new restaurants. 
A)  An increase in government expenditures increases the interest rate so that the Burgerville chain of restaurants decides to build fewer new restaurants. 
B)  An increase in government expenditures increases aggregate spending so that Burgerville finds it profitable to build more new restaurants. 
C)  An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by Burgerville increases. 
D)  An increase in government expenditures decreases the interest rate so that Burgerville decides to build more new restaurants.

Question 16

Suppose stock prices rise.To offset the resulting change in output the Federal Reserve could

Accepted Answer

A)  increase the money supply.This increase would also move the price level closer to its value before the rise in stock prices. 
B)  increase the money supply.However,this increase would move the price level farther from its value before the rise in stock prices. 
C)  decrease the money supply.This decrease would also move the price level closer to its value before the rise in stock prices. 
D)  decrease the money supply.However,this decrease would move the price level farther from its value before the rise in stock prices. 
A)  increase the money supply.This increase would also move the price level closer to its value before the rise in stock prices. 
B)  increase the money supply.However,this increase would move the price level farther from its value before the rise in stock prices. 
C)  decrease the money supply.This decrease would also move the price level closer to its value before the rise in stock prices. 
D)  decrease the money supply.However,this decrease would move the price level farther from its value before the rise in stock prices.

Question 17

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 18

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 19

As the interest rate falls,

Accepted Answer

A)  the quantity of money demanded falls,which would reduce a shortage. 
B)  the quantity of money demanded falls,which would reduce a surplus. 
C)  the quantity of money demanded rises,which would reduce a shortage. 
D)  the quantity of money demanded rises,which would reduce a surplus. 
A)  the quantity of money demanded falls,which would reduce a shortage. 
B)  the quantity of money demanded falls,which would reduce a surplus. 
C)  the quantity of money demanded rises,which would reduce a shortage. 
D)  the quantity of money demanded rises,which would reduce a surplus.

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

Using the liquidity-preference model,when the Federal Reserve increases the money supply,

Supply-side economists focus more than other economists on

The theory of liquidity preference is largely at odds with the basic ideas of supply and demand.

Suppose foreigners find U.S.goods and services more desirable for some reason other than a change in the exchange rate.Which policies could be used to offset the resulting change in output?

According to the theory of liquidity preference,

In order to simplify the equation for the multiplier to its familiar,relatively simple form,we make use of the

Which particular interest rate(s)do we attempt to explain using the theory of liquidity preference?

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

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

A significant lag for monetary policy is the time it takes to for a change in the money supply to change the economy.A significant lag for fiscal policy is the time it takes to pass legislation authorizing it.

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

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

Which of the following illustrates how the investment accelerator works?

Suppose stock prices rise.To offset the resulting change in output the Federal Reserve could

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

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

As the interest rate falls,

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

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