Question 1

When the interest rate decreases, the opportunity cost of holding money

Accepted Answer

A)  increases, so the quantity of money demanded increases. 
B)  increases, so the quantity of money demanded decreases. 
C)  decreases, so the quantity of money demanded increases. 
D)  decreases, so the quantity of money demanded decreases. 
A)  increases, so the quantity of money demanded increases. 
B)  increases, so the quantity of money demanded decreases. 
C)  decreases, so the quantity of money demanded increases. 
D)  decreases, so the quantity of money demanded decreases.

Question 2

Which of the following events would shift money demand to the right?

Accepted Answer

A)  an increase in the interest rate or an increase in the price level 
B)  an increase in the interest rate, but not an increase in the price level 
C)  an increase in the price level, but not an increase in the interest rate 
D)  neither an increase in the interest rate nor an increase in the price level 
A)  an increase in the interest rate or an increase in the price level 
B)  an increase in the interest rate, but not an increase in the price level 
C)  an increase in the price level, but not an increase in the interest rate 
D)  neither an increase in the interest rate nor an increase in the price level

Question 3

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 4

An increase in government spending

Accepted Answer

A)  increases the interest rate and so investment spending increases. 
B)  increases the interest rate and so investment spending decreases. 
C)  decreases the interest rate and so increases investment spending increases. 
D)  decreases the interest rate and so investment spending decreases. 
A)  increases the interest rate and so investment spending increases. 
B)  increases the interest rate and so investment spending decreases. 
C)  decreases the interest rate and so increases investment spending increases. 
D)  decreases the interest rate and so investment spending decreases.

Question 5

Open-market purchases

Accepted Answer

A)  increase investment and real GDP. 
B)  decrease investment and increase real GDP. 
C)  increase investment and decrease real GDP. 
D)  decrease investment and real GDP. 
A)  increase investment and real GDP. 
B)  decrease investment and increase real GDP. 
C)  increase investment and decrease real GDP. 
D)  decrease investment and real GDP.

Question 6

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

Accepted Answer

A) True 
 B)False

Question 7

A tax increase has

Accepted Answer

A)  a multiplier effect but not a crowding out effect 
B)  a crowding out effect but not a multiplier effect 
C)  both a crowding out and multiplier effect 
D)  neither a multiplier or crowding out effect 
A)  a multiplier effect but not a crowding out effect 
B)  a crowding out effect but not a multiplier effect 
C)  both a crowding out and multiplier effect 
D)  neither a multiplier or crowding out effect

Question 8

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 9

"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)  rightward shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate. 
B)  the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate. 
C)  changes in monetary policy aimed at expanding aggregate demand can be described either as increasing the money supply or as increasing the interest rate. 
D)  our analysis of monetary policy is not fundamentally altered if the Federal Reserve decides to target an interest rate. 
A)  rightward shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate. 
B)  the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate. 
C)  changes in monetary policy aimed at expanding aggregate demand can be described either as increasing the money supply or as increasing the interest rate. 
D)  our analysis of monetary policy is not fundamentally altered if the Federal Reserve decides to target an interest rate.

Question 10

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 11

During recessions, the government tends to run a budget deficit.

Accepted Answer

A) True 
 B)False

Question 12

Most economists believe that a cut in tax rates

Accepted Answer

A)  would generally increase government tax revenue. 
B)  would have no effect on aggregate demand. 
C)  has a relatively small effect on the aggregate-supply curve. 
D)  All of the above are correct. 
A)  would generally increase government tax revenue. 
B)  would have no effect on aggregate demand. 
C)  has a relatively small effect on the aggregate-supply curve. 
D)  All of the above are correct.

Question 13

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 14

Other things the same, a decrease in the U.S. interest rate

Accepted Answer

A)  induces firms to invest more. 
B)  shifts money demand to the left. 
C)  makes the U.S. dollar appreciate. 
D)  increases the opportunity cost of holding dollars. 
A)  induces firms to invest more. 
B)  shifts money demand to the left. 
C)  makes the U.S. dollar appreciate. 
D)  increases the opportunity cost of holding dollars.

Question 15

Assume the MPC is 0.75. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

Accepted Answer

A)  left by $200 billion. 
B)  left by $400 billion. 
C)  right by $800 billion. 
D)  None of the above is correct. 
A)  left by $200 billion. 
B)  left by $400 billion. 
C)  right by $800 billion. 
D)  None of the above is correct.

Question 16

In the short run, an increase 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 17

According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

Accepted Answer

A)  rises and the aggregate quantity of goods demanded rises. 
B)  rises and the aggregate quantity of goods demanded falls. 
C)  falls and the aggregate quantity of goods demanded rises. 
D)  falls and the aggregate quantity of goods demanded falls. 
A)  rises and the aggregate quantity of goods demanded rises. 
B)  rises and the aggregate quantity of goods demanded falls. 
C)  falls and the aggregate quantity of goods demanded rises. 
D)  falls and the aggregate quantity of goods demanded falls.

Question 18

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

Accepted Answer

A)  price level $\uparrow$$\Rightarrow$demand for money $\downarrow$$\Rightarrow$equilibrium interest rate $\uparrow$$\Rightarrow$quantity of goods and services demanded $\downarrow$ 
B)  price level $\uparrow$$\Rightarrow$demand for money $\uparrow$$\Rightarrow$equilibrium interest rate $\downarrow$$\Rightarrow$quantity of goods and services demanded $\downarrow$ 
C)  price level $\downarrow$$\Rightarrow$demand for money $\downarrow$$\Rightarrow$equilibrium interest rate $\downarrow$$\Rightarrow$quantity of goods and services demanded $\uparrow$ 
D)  price level $\downarrow$$\Rightarrow$equilibrium interest rate $\downarrow$$\Rightarrow$demand for money $\uparrow$$\Rightarrow$quantity of goods and services demanded $\uparrow$ 
A)  price level $\uparrow$$\Rightarrow$demand for money $\downarrow$$\Rightarrow$equilibrium interest rate $\uparrow$$\Rightarrow$quantity of goods and services demanded $\downarrow$ 
B)  price level $\uparrow$$\Rightarrow$demand for money $\uparrow$$\Rightarrow$equilibrium interest rate $\downarrow$$\Rightarrow$quantity of goods and services demanded $\downarrow$ 
C)  price level $\downarrow$$\Rightarrow$demand for money $\downarrow$$\Rightarrow$equilibrium interest rate $\downarrow$$\Rightarrow$quantity of goods and services demanded $\uparrow$ 
D)  price level $\downarrow$$\Rightarrow$equilibrium interest rate $\downarrow$$\Rightarrow$demand for money $\uparrow$$\Rightarrow$quantity of goods and services demanded $\uparrow$

Question 19

While a television news reporter might state that "Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent," a more precise account of the Fed's action would be as follows:

Accepted Answer

A)  "Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent." 
B)  "Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount." 
C)  "Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent." 
D)  "Today the Fed took a step toward contracting aggregate demand, and this was done by lowering the federal funds rate to 5.25 percent." 
A)  "Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent." 
B)  "Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount." 
C)  "Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent." 
D)  "Today the Fed took a step toward contracting aggregate demand, and this was done by lowering the federal funds rate to 5.25 percent."

Question 20

According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in

Accepted Answer

A)  the price level. 
B)  the interest rate. 
C)  the exchange rate. 
D)  real wealth. 
A)  the price level. 
B)  the interest rate. 
C)  the exchange rate. 
D)  real wealth.

When the interest rate decreases, the opportunity cost of holding money

Which of the following events would shift money demand to the right?

According to the theory of liquidity preference, the money supply

An increase in government spending

Open-market purchases

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

A tax increase has

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

"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

When the interest rate is below the equilibrium level,

During recessions, the government tends to run a budget deficit.

Most economists believe that a cut in tax rates

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

Other things the same, a decrease in the U.S. interest rate

Assume the MPC is 0.75. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

In the short run, an increase in the money supply causes interest rates to

According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

While a television news reporter might state that "Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent," a more precise account of the Fed's action would be as follows:

According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in

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

When the interest rate decreases, the opportunity cost of holding money

Which of the following events would shift money demand to the right?

According to the theory of liquidity preference, the money supply

An increase in government spending

Open-market purchases

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

A tax increase has

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

"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

When the interest rate is below the equilibrium level,

During recessions, the government tends to run a budget deficit.

Most economists believe that a cut in tax rates

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

Other things the same, a decrease in the U.S. interest rate

Assume the MPC is 0.75. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

In the short run, an increase in the money supply causes interest rates to

According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

While a television news reporter might state that "Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent," a more precise account of the Fed's action would be as follows:

According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in

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