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

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

When government expenditures increase, the interest rate

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

Opponents of active stabilization policy

If the marginal propensity to consume is 5/6, and there is no investment accelerator or crowding out, a $20 billion increase in government expenditures would shift the aggregate demand curve right by

When the government reduces taxes, which of the following decreases?

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are

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 multiplier is 3 and the government increases its purchases by $25 billion. Also, suppose the AD curve would shift from AD₁ to AD₂ if there were no crowding out; the AD curve actually shifts from AD₁ to AD₃ with crowding out. Finally, assume the horizontal distance between the curves AD₁ and AD₃ is $30 billion. The extent of crowding out, for any particular level of the price level, is

The interest rate falls if

Figure 16-3. -Refer to Figure 16-3. What quantity is represented by the vertical line on the left-hand graph?

Paul Samuelson, a famous economist, said that

An increase in government purchases is likely to

An essential piece of the liquidity preference theory is the demand for money.

According to John Maynard Keynes,

Liquidity preference theory is most relevant to the

For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

According to liquidity preference theory, if there were a shortage of money, then

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?

An increase in the MPC

According to liquidity preference theory, the money-supply curve would shift if the Fed