Question 1

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 2

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

Accepted Answer

The nominal interest rate on currency is

Question 3

For a country such as the U.S., the wealth effect exerts a very important influence on the slope of the aggregate-demand curve, since U.S. wealth is large relative to wealth in most other countries.

Accepted Answer

A) True 
 B)False

Question 4

Suppose that the MPC is 0.60; there is no investment accelerator; and there are no crowding-out effects. If government expenditures increase by $25 billion, then aggregate demand

Accepted Answer

A)  shifts rightward by $62.5 billion. 
B)  shifts rightward by $50.0 billion. 
C)  shifts rightward by $32.5 billion. 
D)  None of the above is correct. 
A)  shifts rightward by $62.5 billion. 
B)  shifts rightward by $50.0 billion. 
C)  shifts rightward by $32.5 billion. 
D)  None of the above is correct.

Question 5

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 6

Suppose that the Federal reserve is concerned about the effects of rising stock prices on the economy. What could it do?

Accepted Answer

A)  buy bonds to raise the interest rat 
B)  buy bonds to lower the interest rate 
C)  sell bonds to raise the interest rate 
D)  sell bonds to raise the interest rate. 
A)  buy bonds to raise the interest rat 
B)  buy bonds to lower the interest rate 
C)  sell bonds to raise the interest rate 
D)  sell bonds to raise the interest rate.

Question 7

The theory of liquidity preference was developed by Irving Fisher.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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 10

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 11

The term crowding-out effect refers to

Accepted Answer

A)  the reduction in aggregate supply that results when a monetary expansion causes the interest rate to decrease. 
B)  the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease. 
C)  the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase. 
D)  the reduction in aggregate demand that results when a decrease in government spending or an increase in taxes causes the interest rate to increase. 
A)  the reduction in aggregate supply that results when a monetary expansion causes the interest rate to decrease. 
B)  the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease. 
C)  the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase. 
D)  the reduction in aggregate demand that results when a decrease in government spending or an increase in taxes causes the interest rate to increase.

Question 12

According to liquidity preference theory, the slope of the money demand curve is explained as follows:

Accepted Answer

A)  Interest rates rise as the Fed reduces the quantity of money demanded. 
B)  Interest rates fall as the Fed reduces the supply of money. 
C)  People will want to hold less money as the cost of holding it falls. 
D)  People will want to hold more money as the cost of holding it falls. 
A)  Interest rates rise as the Fed reduces the quantity of money demanded. 
B)  Interest rates fall as the Fed reduces the supply of money. 
C)  People will want to hold less money as the cost of holding it falls. 
D)  People will want to hold more money as the cost of holding it falls.

Question 13

If the interest rate is below the Fed's target, the Fed would

Accepted Answer

A)  buy bonds to increase the money supply. 
B)  buy bonds to decrease the money supply. 
C)  sell bonds to increase the money supply. 
D)  sell bonds to decrease the money supply. 
A)  buy bonds to increase the money supply. 
B)  buy bonds to decrease the money supply. 
C)  sell bonds to increase the money supply. 
D)  sell bonds to decrease the money supply.

Question 14

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 15

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.

Question 16

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 17

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Accepted Answer

A) True 
 B)False

Question 18

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 19

Figure 16-6. 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 16-6. Suppose the graphs are drawn to show the effects of an increase in government purchases. If it were not for the increase in r from r1 to r2, then

Accepted Answer

A)  there would be no crowding out. 
B)  the full multiplier effect of the increase in government purchases would be realized. 
C)  the AD curves that actually apply, before and after the change in government purchases, would be separated horizontally by the distance equal to the multiplier times the change in government purchases. 
D)  All of the above are correct. 
A)  there would be no crowding out. 
B)  the full multiplier effect of the increase in government purchases would be realized. 
C)  the AD curves that actually apply, before and after the change in government purchases, would be separated horizontally by the distance equal to the multiplier times the change in government purchases. 
D)  All of the above are correct.

Question 20

People will want to hold less money if the price level

Accepted Answer

A)  increases or if the interest rate increases. 
B)  decreases or if the interest rate decreases. 
C)  increases or if the interest rate decreases. 
D)  decreases or if the interest rate increases. 
A)  increases or if the interest rate increases. 
B)  decreases or if the interest rate decreases. 
C)  increases or if the interest rate decreases. 
D)  decreases or if the interest rate increases.

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

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

For a country such as the U.S., the wealth effect exerts a very important influence on the slope of the aggregate-demand curve, since U.S. wealth is large relative to wealth in most other countries.

Suppose that the MPC is 0.60; there is no investment accelerator; and there are no crowding-out effects. If government expenditures increase by $25 billion, then aggregate demand

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

Suppose that the Federal reserve is concerned about the effects of rising stock prices on the economy. What could it do?

The theory of liquidity preference was developed by Irving Fisher.

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

A tax cut shifts the aggregate demand curve the farthest if

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.

The term crowding-out effect refers to

According to liquidity preference theory, the slope of the money demand curve is explained as follows:

If the interest rate is below the Fed's target, the Fed would

According to classical macroeconomic theory,

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

According to the theory of liquidity preference, if output increases

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

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

People will want to hold less money if the price level

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

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

Open-Economy Macroeconomic Models

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

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Exam 16: The Influence of Monetary and Fiscal Policy on Aggregate Demand

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

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

For a country such as the U.S., the wealth effect exerts a very important influence on the slope of the aggregate-demand curve, since U.S. wealth is large relative to wealth in most other countries.

Suppose that the MPC is 0.60; there is no investment accelerator; and there are no crowding-out effects. If government expenditures increase by $25 billion, then aggregate demand

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

Suppose that the Federal reserve is concerned about the effects of rising stock prices on the economy. What could it do?

The theory of liquidity preference was developed by Irving Fisher.

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

A tax cut shifts the aggregate demand curve the farthest if

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.

The term crowding-out effect refers to

According to liquidity preference theory, the slope of the money demand curve is explained as follows:

If the interest rate is below the Fed's target, the Fed would

According to classical macroeconomic theory,

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

According to the theory of liquidity preference, if output increases

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

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

People will want to hold less money if the price level

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

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

Open-Economy Macroeconomic Models

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

Filters