Question 1

When the interest rate is below the equilibrium level,

Accepted Answer

A)  the quantity of money that the Federal Reserve has supplied exceeds the quantity of money that people want to hold. 
B)  people respond by selling interest-bearing bonds or by withdrawing money from 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 the Federal Reserve has supplied exceeds the quantity of money that people want to hold. 
B)  people respond by selling interest-bearing bonds or by withdrawing money from 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 2

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.For this economy,an initial increase of $500 in government purchases translates into a

Accepted Answer

A)  $1,428.57 increase in aggregate demand in the absence of the crowding-out effect. 
B)  $3,125.00 increase in aggregate demand in the absence of the crowding-out effect. 
C)  $1,428.57 increase in aggregate demand when the crowding-out effect is taken into account. 
D)  $3,125.00 increase in aggregate demand when the crowding-out effect is taken into account. 
A)  $1,428.57 increase in aggregate demand in the absence of the crowding-out effect. 
B)  $3,125.00 increase in aggregate demand in the absence of the crowding-out effect. 
C)  $1,428.57 increase in aggregate demand when the crowding-out effect is taken into account. 
D)  $3,125.00 increase in aggregate demand when the crowding-out effect is taken into account.

Question 3

If the Fed conducts open-market sales,the money supply

Accepted Answer

A)  increases and aggregate demand shifts right. 
B)  increases and aggregate demand shifts left. 
C)  decreases and aggregate demand shifts right. 
D)  decreases and aggregate demand shifts left. 
A)  increases and aggregate demand shifts right. 
B)  increases and aggregate demand shifts left. 
C)  decreases and aggregate demand shifts right. 
D)  decreases and aggregate demand shifts left.

Question 4

The Kennedy tax cut of 1964 included an investment tax credit that was designed to

Accepted Answer

A)  increase aggregate demand in the short run and aggregate supply in the long run. 
B)  increase aggregate supply in the short run and aggregate demand in the long run. 
C)  only increase aggregate supply in the long run. 
D)  only increase aggregate demand in the short run. 
A)  increase aggregate demand in the short run and aggregate supply in the long run. 
B)  increase aggregate supply in the short run and aggregate demand in the long run. 
C)  only increase aggregate supply in the long run. 
D)  only increase aggregate demand in the short run.

Question 5

In the graph of the money market,the money supply curve is

Accepted Answer

A)  vertical.It shifts rightward if the Fed buys bonds. 
B)  vertical.It shifts rightward if the Fed sells bonds. 
C)  upward sloping.It shifts rightward if the Fed buys bonds. 
D)  upward sloping.It shifts rightward if the Fed sells bonds. 
A)  vertical.It shifts rightward if the Fed buys bonds. 
B)  vertical.It shifts rightward if the Fed sells bonds. 
C)  upward sloping.It shifts rightward if the Fed buys bonds. 
D)  upward sloping.It shifts rightward if the Fed sells bonds.

Question 6

Assume the money market is initially in equilibrium.If the price level increases,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 7

According to classical macroeconomic theory,

Accepted Answer

A)  output is determined by the supplies of capital and labor and the available production technology. 
B)  for any given level of output,the interest rate adjusts to balance the supply of,and demand for,loanable funds. 
C)  given output and the interest rate,the price level adjusts to balance the supply of,and demand for,money. 
D)  All of the above are correct. 
A)  output is determined by the supplies of capital and labor and the available production technology. 
B)  for any given level of output,the interest rate adjusts to balance the supply of,and demand for,loanable funds. 
C)  given output and the interest rate,the price level adjusts to balance the supply of,and demand for,money. 
D)  All of the above are correct.

Question 8

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Accepted Answer

If the interest rate is above equilibriu

Question 9

When the Fed increases the money supply,the interest rate decreases.This decrease in the interest rate increases consumption and investment demand,so the aggregate-demand curve shifts to the right.

Accepted Answer

A) True 
 B)False

Question 10

According to the theory of liquidity preference,an increase 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 11

An increase in government spending shifts aggregate demand

Accepted Answer

A)  to the right.The larger the multiplier is,the farther it shifts. 
B)  to the right.The larger the multiplier is,the less it shifts. 
C)  to the left.The larger the multiplier is,the farther it shifts. 
D)  to the left.The larger the multiplier is,the less it shifts. 
A)  to the right.The larger the multiplier is,the farther it shifts. 
B)  to the right.The larger the multiplier is,the less it shifts. 
C)  to the left.The larger the multiplier is,the farther it shifts. 
D)  to the left.The larger the multiplier is,the less it shifts.

Question 12

How does a reduction in the money supply by the Fed make owning stocks less attractive?

Accepted Answer

The reduction in the money supply raises

Question 13

Figure 24-4.On the figure,MS represents money supply and MD represents money demand.  
-Refer to Figure 24-4.Suppose the money-demand curve is currently MD1.If the current interest rate is r2,then

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 will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. 
C)  bond issuers and banks will respond by raising the interest rates they offer. 
D)  in response,the money-demand curve will shift upward from its current position to establish equilibrium in the money market. 
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 will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. 
C)  bond issuers and banks will respond by raising the interest rates they offer. 
D)  in response,the money-demand curve will shift upward from its current position to establish equilibrium in the money market.

Question 14

People are likely to want to hold more money if the interest rate

Accepted Answer

A)  increases,making the opportunity cost of holding money rise. 
B)  increases,making the opportunity cost of holding money fall. 
C)  decreases,making the opportunity cost of holding money rise. 
D)  decreases,making the opportunity cost of holding money fall. 
A)  increases,making the opportunity cost of holding money rise. 
B)  increases,making the opportunity cost of holding money fall. 
C)  decreases,making the opportunity cost of holding money rise. 
D)  decreases,making the opportunity cost of holding money fall.

Question 15

Monetary policy

Accepted Answer

A)  can be implemented quickly and most of its impact on aggregate demand occurs very soon after policy is implemented. 
B)  can be implemented quickly,but most of its impact on aggregate demand occurs months after policy is implemented. 
C)  cannot be implemented quickly,but once implemented most of its impact on aggregate demand occurs very soon afterward. 
D)  cannot be implemented quickly and most of its impact on aggregate demand occurs months after policy is implemented. 
A)  can be implemented quickly and most of its impact on aggregate demand occurs very soon after policy is implemented. 
B)  can be implemented quickly,but most of its impact on aggregate demand occurs months after policy is implemented. 
C)  cannot be implemented quickly,but once implemented most of its impact on aggregate demand occurs very soon afterward. 
D)  cannot be implemented quickly and most of its impact on aggregate demand occurs months after policy is implemented.

Question 16

Suppose investment spending falls.To offset the 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 decline in investment spending. 
B)  increase the money supply.However,this increase would move the price level farther from its value before the decline in investment spending. 
C)  decrease the money supply.This decrease would also move the price level closer to its value before the decline in investment spending. 
D)  decrease the money supply.However,this increase would move the price level farther from its value before the decline in investment spending. 
A)  increase the money supply.This increase would also move the price level closer to its value before the decline in investment spending. 
B)  increase the money supply.However,this increase would move the price level farther from its value before the decline in investment spending. 
C)  decrease the money supply.This decrease would also move the price level closer to its value before the decline in investment spending. 
D)  decrease the money supply.However,this increase would move the price level farther from its value before the decline in investment spending.

Question 17

What actions could be taken to stabilize output in response to a large decrease in U.S.net exports?

Accepted Answer

A)  increase government expenditures or increase the money supply 
B)  increase government expenditures or decrease the money supply 
C)  decrease government expenditures or increase the money supply 
D)  decrease government expenditures or decrease the money supply 
A)  increase government expenditures or increase the money supply 
B)  increase government expenditures or decrease the money supply 
C)  decrease government expenditures or increase the money supply 
D)  decrease government expenditures or decrease the money supply

Question 18

There are three factors that help explain the slope of the aggregate demand curve.Which two are less important? Why are they less important?

Accepted Answer

The wealth effect and the exchange-rate

Question 19

During recessions,unemployment insurance payments tend to rise.

Accepted Answer

A) True 
 B)False

Question 20

Changes in the interest rate bring the money market into equilibrium according to

Accepted Answer

A)  both liquidity preference theory and classical theory. 
B)  neither liquidity preference theory nor classical theory. 
C)  liquidity preference theory,but not classical theory. 
D)  classical theory,but not liquidity preference theory. 
A)  both liquidity preference theory and classical theory. 
B)  neither liquidity preference theory nor classical theory. 
C)  liquidity preference theory,but not classical theory. 
D)  classical theory,but not liquidity preference theory.

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

When the interest rate is below the equilibrium level,

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.For this economy,an initial increase of $500 in government purchases translates into a

If the Fed conducts open-market sales,the money supply

The Kennedy tax cut of 1964 included an investment tax credit that was designed to

In the graph of the money market,the money supply curve is

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

According to classical macroeconomic theory,

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

When the Fed increases the money supply,the interest rate decreases.This decrease in the interest rate increases consumption and investment demand,so the aggregate-demand curve shifts to the right.

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

An increase in government spending shifts aggregate demand

How does a reduction in the money supply by the Fed make owning stocks less attractive?

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Suppose the money-demand curve is currently MD1.If the current interest rate is r2,then

People are likely to want to hold more money if the interest rate

Monetary policy

Suppose investment spending falls.To offset the change in output the Federal Reserve could

What actions could be taken to stabilize output in response to a large decrease in U.S.net exports?

There are three factors that help explain the slope of the aggregate demand curve.Which two are less important? Why are they less important?

During recessions,unemployment insurance payments tend to rise.

Changes in the interest rate bring the money market into equilibrium according to

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.Suppose the money-demand curve is currently MD₁.If the current interest rate is r₂,then