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

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

The interest-rate effect

If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

To offset increased pessimism by households, the government may _____ government spending and/or _____ taxes.

Critics of stabilization policy argue that

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

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $50 billion to the left. The government wants to change its spending to offset this decrease in demand. The MPC is 0.80. Suppose the effect on aggregate demand from a change in taxes is 4/5 the size of the change from government expenditures. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in aggregate demand?

If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, it could

When the Federal Reserve decreases the Federal Funds target rate, the lower rate is achieved through

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

Figure 34-7 -Refer to Figure 34-7. Which of the following is correct?

A 2009 article in The Economist noted that

When government expenditures increase, the interest rate

An decrease in taxes shifts aggregate demand

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

If the multiplier is 5.25, then the MPC is

Keynes used the term "animal spirits" to refer to

If Congress increases taxes to balance the federal budget, then to prevent unemployment and a recession the Fed will