Question 1

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 2

If the Federal Reserve increases the money supply,then initially people want to

Accepted Answer

A)  sell bonds so the interest rate rises. 
B)  sell bonds so the interest rate falls. 
C)  buy bonds so the interest rate rises. 
D)  buy bonds so the interest rate falls. 
A)  sell bonds so the interest rate rises. 
B)  sell bonds so the interest rate falls. 
C)  buy bonds so the interest rate rises. 
D)  buy bonds so the interest rate falls.

Question 3

In the short run,a decrease 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 4

A 2009 article in The Economist noted that

Accepted Answer

A)  recent research has allowed economists to estimate the values of fiscal multipliers with a great deal of precision. 
B)  research on multipliers indicates that multipliers for permanent tax cuts tend to be smaller than multipliers for temporary tax cuts. 
C)  most of the evidence on multipliers for government spending is based on changes in military expenditures. 
D)  All of the above are correct. 
A)  recent research has allowed economists to estimate the values of fiscal multipliers with a great deal of precision. 
B)  research on multipliers indicates that multipliers for permanent tax cuts tend to be smaller than multipliers for temporary tax cuts. 
C)  most of the evidence on multipliers for government spending is based on changes in military expenditures. 
D)  All of the above are correct.

Question 5

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)  $151.25. 
B)  $166.75. 
C)  $170.20. 
D)  $175.00. 
A)  $151.25. 
B)  $166.75. 
C)  $170.20. 
D)  $175.00.

Question 6

If the interest rate increases

Accepted Answer

A)  or if the price level increases,then people will want to hold more money. 
B)  or if the price level increases,then people will want to hold less money. 
C)  or if the price level decreases,then people will want to hold more money. 
D)  or if the price level decreases,then people will want to hold less money. 
A)  or if the price level increases,then people will want to hold more money. 
B)  or if the price level increases,then people will want to hold less money. 
C)  or if the price level decreases,then people will want to hold more money. 
D)  or if the price level decreases,then people will want to hold less money.

Question 7

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 8

Consider the following sequence of events: price level  $\uparrow\implies$demand for money  $\uparrow\implies$equilibrium interest rate  $\uparrow\implies$
quantity of goods and services demanded  $\downarrow$
This sequence explains why the

Accepted Answer

A)  money-supply curve is vertical. 
B)  aggregate-demand curve shifts leftward in response to a monetary injection. 
C)  aggregate-demand curve shifts rightward in response to a monetary injection. 
D)  aggregate-demand curve slopes downward. 
A)  money-supply curve is vertical. 
B)  aggregate-demand curve shifts leftward in response to a monetary injection. 
C)  aggregate-demand curve shifts rightward in response to a monetary injection. 
D)  aggregate-demand curve slopes downward.

Question 9

Initially,the economy is in long-run equilibrium.The aggregate demand curve then shifts $80 billion to the left.The government wants to change spending to offset this decrease in demand.The MPC is 0.75.Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure.There is no crowding out and no accelerator effect.What should the government do if it wants to offset the decrease in real GDP?

Accepted Answer

A)  Raise both taxes and expenditures by $80 billion dollars. 
B)  Raise both taxes and expenditures by $10 billion dollars. 
C)  Reduce both taxes and expenditures by $80 billion dollars. 
D)  Reduce both taxes and expenditures by $10 billion dollars. 
A)  Raise both taxes and expenditures by $80 billion dollars. 
B)  Raise both taxes and expenditures by $10 billion dollars. 
C)  Reduce both taxes and expenditures by $80 billion dollars. 
D)  Reduce both taxes and expenditures by $10 billion dollars.

Question 10

According to the theory of liquidity preference,which variable adjusts to balance the supply and demand for money?

Accepted Answer

A)  interest rate 
B)  money supply 
C)  quantity of output 
D)  price level 
A)  interest rate 
B)  money supply 
C)  quantity of output 
D)  price level

Question 11

The theory of liquidity preference is most helpful in understanding

Accepted Answer

A)  the wealth effect. 
B)  the exchange-rate effect. 
C)  the interest-rate effect. 
D)  misperceptions theory. 
A)  the wealth effect. 
B)  the exchange-rate effect. 
C)  the interest-rate effect. 
D)  misperceptions theory.

Question 12

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

Accepted Answer

A)  interest rate and investment to rise. 
B)  interest rate and investment to fall. 
C)  interest rate to rise and investment to fall. 
D)  interest rate to fall and investment to rise. 
A)  interest rate and investment to rise. 
B)  interest rate and investment to fall. 
C)  interest rate to rise and investment to fall. 
D)  interest rate to fall and investment to rise.

Question 13

The interest rate would fall and the quantity of money demanded would

Accepted Answer

A)  increase if there were a surplus in the money market. 
B)  increase if there were a shortage in the money market. 
C)  decrease if there were a surplus in the money market. 
D)  decrease if there were a shortage in the money market. 
A)  increase if there were a surplus in the money market. 
B)  increase if there were a shortage in the money market. 
C)  decrease if there were a surplus in the money market. 
D)  decrease if there were a shortage in the money market.

Question 14

In 1961,President John F.Kennedy,acting upon advice from his economists,proposed tax cuts.The advice he received

Accepted Answer

A)  was opposed to the teaching of Keynes,who had taught that tax cuts were counterproductive. 
B)  was opposed to the teaching of Keynes,who had taught that all attempts to stabilize the economy were futile. 
C)  came from economists who had studied Keynes's ideas when those ideas were only a few years old. 
D)  came from economists who were unaware of Keynes's ideas because those ideas had not yet been widely disseminated at that time. 
A)  was opposed to the teaching of Keynes,who had taught that tax cuts were counterproductive. 
B)  was opposed to the teaching of Keynes,who had taught that all attempts to stabilize the economy were futile. 
C)  came from economists who had studied Keynes's ideas when those ideas were only a few years old. 
D)  came from economists who were unaware of Keynes's ideas because those ideas had not yet been widely disseminated at that time.

Question 15

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

Accepted Answer

A)  a decrease in the money supply 
B)  a reduction in tax rates 
C)  a decrease in government purchases 
D)  None of the above is correct. 
A)  a decrease in the money supply 
B)  a reduction in tax rates 
C)  a decrease in government purchases 
D)  None of the above is correct.

Question 16

When the Fed sells government bonds,the reserves of the banking system

Accepted Answer

A)  increase,so the money supply increases. 
B)  increase,so the money supply decreases. 
C)  decrease,so the money supply increases. 
D)  decrease,so the money supply decreases. 
A)  increase,so the money supply increases. 
B)  increase,so the money supply decreases. 
C)  decrease,so the money supply increases. 
D)  decrease,so the money supply decreases.

Question 17

Which of the following statements generates the greatest amount of disagreement among economists?

Accepted Answer

A)  Increases in the money supply shift aggregate demand to the right. 
B)  In the long run,increases in the money supply increase prices,but not output. 
C)  Recessions are associated with decreases in consumption,investment,and employment. 
D)  Government should use fiscal policy to try to stabilize the economy. 
A)  Increases in the money supply shift aggregate demand to the right. 
B)  In the long run,increases in the money supply increase prices,but not output. 
C)  Recessions are associated with decreases in consumption,investment,and employment. 
D)  Government should use fiscal policy to try to stabilize the economy.

Question 18

The lag problem associated with monetary policy is due mostly to

Accepted Answer

A)  the fact that business firms make investment plans far in advance. 
B)  the political system of checks and balances that slows down the process of determining monetary policy. 
C)  the time it takes for changes in government spending to affect the interest rate. 
D)  All of the above are correct. 
A)  the fact that business firms make investment plans far in advance. 
B)  the political system of checks and balances that slows down the process of determining monetary policy. 
C)  the time it takes for changes in government spending to affect the interest rate. 
D)  All of the above are correct.

Question 19

According to liquidity preference theory,if the quantity of money supplied is greater than the quantity demanded,then the interest rate will

Accepted Answer

A)  increase and the quantity of money demanded will decrease. 
B)  increase and the quantity of money demanded will increase. 
C)  decrease and the quantity of money demanded will decrease. 
D)  decrease and the quantity of money demanded will increase. 
A)  increase and the quantity of money demanded will decrease. 
B)  increase and the quantity of money demanded will increase. 
C)  decrease and the quantity of money demanded will decrease. 
D)  decrease and the quantity of money demanded will increase.

Question 20

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.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.

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

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

If the Federal Reserve increases the money supply,then initially people want to

In the short run,a decrease in the money supply causes interest rates to

A 2009 article in The Economist noted that

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

If the interest rate increases

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

Consider the following sequence of events: price level ↑ ⟹ \uparrow\implies↑⟹ demand for money ↑ ⟹ \uparrow\implies↑⟹ equilibrium interest rate ↑ ⟹ \uparrow\implies↑⟹ quantity of goods and services demanded ↓\downarrow↓ This sequence explains why the

According to the theory of liquidity preference,which variable adjusts to balance the supply and demand for money?

The theory of liquidity preference is most helpful in understanding

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

The interest rate would fall and the quantity of money demanded would

In 1961,President John F.Kennedy,acting upon advice from his economists,proposed tax cuts.The advice he received

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

When the Fed sells government bonds,the reserves of the banking system

Which of the following statements generates the greatest amount of disagreement among economists?

The lag problem associated with monetary policy is due mostly to

According to liquidity preference theory,if the quantity of money supplied is greater than the quantity demanded,then the interest rate will

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

Consider the following sequence of events: price level $\uparrow\implies$ demand for money $\uparrow\implies$ equilibrium interest rate $\uparrow\implies$ quantity of goods and services demanded $\downarrow$ This sequence explains why the