Question 1

If the Federal Reserve increases the money supply, then initially there is a

Accepted Answer

A)  shortage in the money market, so people will want to sell bonds. 
B)  shortage in the money market, so people will want to buy bonds. 
C)  surplus in the money market, so people will want to sell bonds. 
D)  surplus in the money market, so people will want to buy bonds. 
A)  shortage in the money market, so people will want to sell bonds. 
B)  shortage in the money market, so people will want to buy bonds. 
C)  surplus in the money market, so people will want to sell bonds. 
D)  surplus in the money market, so people will want to buy bonds.

Question 2

Suppose stock prices rise. To offset the resulting 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 rise in stock prices. 
B)  increase the money supply. However, this increase would move the price level farther from its value before the rise in stock prices. 
C)  decrease the money supply. This decrease would also move the price level closer to its value before the rise in stock prices. 
D)  decrease the money supply. However, this decrease would move the price level farther from its value before the rise in stock prices. 
A)  increase the money supply. This increase would also move the price level closer to its value before the rise in stock prices. 
B)  increase the money supply. However, this increase would move the price level farther from its value before the rise in stock prices. 
C)  decrease the money supply. This decrease would also move the price level closer to its value before the rise in stock prices. 
D)  decrease the money supply. However, this decrease would move the price level farther from its value before the rise in stock prices.

Question 3

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

Accepted Answer

A)  the wealth effect 
B)  the interest-rate effect 
C)  the exchange-rate effect 
D)  the real-wage effect 
A)  the wealth effect 
B)  the interest-rate effect 
C)  the exchange-rate effect 
D)  the real-wage effect

Question 4

There is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct?

Accepted Answer

A)  By themselves, both the change in output and the change in the interest rate increase desired investment. 
B)  By themselves, both the change in output and the change in the interest rate decrease desired investment. 
C)  By itself, the change in output increases desired investment spending and by itself the change in the interest rate decreases desired investment spending. 
D)  By itself, the change in output decreases desired investment spending and by itself the change in the interest rate increases desired investment spending. 
A)  By themselves, both the change in output and the change in the interest rate increase desired investment. 
B)  By themselves, both the change in output and the change in the interest rate decrease desired investment. 
C)  By itself, the change in output increases desired investment spending and by itself the change in the interest rate decreases desired investment spending. 
D)  By itself, the change in output decreases desired investment spending and by itself the change in the interest rate increases desired investment spending.

Question 5

Suppose the Federal Reserve lowers the target on the interest rate in the Federal Funds market. The Federal Reserve will _____ the money supply and aggregate demand will _____.

Accepted Answer

The answer of Suppose the Federal Reserve lowers the target...

Question 6

Figure 34-6. 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 34-6. 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 $40 billion. The extent of crowding out, for any particular level of the price level, is

Accepted Answer

A)  $15 billion. 
B)  $40 billion. 
C)  $35 billion. 
D)  $95 billion. 
A)  $15 billion. 
B)  $40 billion. 
C)  $35 billion. 
D)  $95 billion.

Question 7

Shifts in the aggregate-demand curve can cause fluctuations in

Accepted Answer

A)  neither the level of output nor the level of prices. 
B)  the level of output, but not in the level of prices. 
C)  the level of prices, but not in the level of output. 
D)  the level of output and in the level of prices. 
A)  neither the level of output nor the level of prices. 
B)  the level of output, but not in the level of prices. 
C)  the level of prices, but not in the level of output. 
D)  the level of output and in the level of prices.

Question 8

If the investment accelerator from an increase in government purchases is larger than the crowding-out effect, then

Accepted Answer

A)  the multiplier is probably zero. 
B)  the multiplier is probably equal to one. 
C)  the multiplier is probably greater than one. 
D)  the multiplier is probably less than one. 
A)  the multiplier is probably zero. 
B)  the multiplier is probably equal to one. 
C)  the multiplier is probably greater than one. 
D)  the multiplier is probably less than one.

Question 9

Which of the following statements is correct for the short run?

Accepted Answer

A)  Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for money; the price level adjusts to balance the supply and demand for loanable funds. 
B)  Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money. 
C)  Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for money; the price level is relatively slow to adjust. 
D)  Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money. 
A)  Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for money; the price level adjusts to balance the supply and demand for loanable funds. 
B)  Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money. 
C)  Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for money; the price level is relatively slow to adjust. 
D)  Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.

Question 10

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is

Accepted Answer

A)  relatively important in the United States because expenditures on consumer durables is very responsive to changes in wealth. 
B)  relatively important in the United States because consumption spending is a large part of GDP. 
C)  relatively unimportant in the United States because money holdings are a small part of consumer wealth. 
D)  relatively unimportant because it takes a large change in wealth to cause a significant change in interest rates. 
A)  relatively important in the United States because expenditures on consumer durables is very responsive to changes in wealth. 
B)  relatively important in the United States because consumption spending is a large part of GDP. 
C)  relatively unimportant in the United States because money holdings are a small part of consumer wealth. 
D)  relatively unimportant because it takes a large change in wealth to cause a significant change in interest rates.

Question 11

Assume the MPC is 0.72. The multiplier is

Accepted Answer

A)  4.53. 
B)  1.39. 
C)  2.57. 
D)  3.57. 
A)  4.53. 
B)  1.39. 
C)  2.57. 
D)  3.57.

Question 12

Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?

Accepted Answer

A)  both the multiplier effect and the crowding-out effect 
B)  the multiplier effect, but not the crowding-out effect 
C)  the crowding-out effect, but not the multiplier effect 
D)  neither the crowding out effect nor the multiplier effect 
A)  both the multiplier effect and the crowding-out effect 
B)  the multiplier effect, but not the crowding-out effect 
C)  the crowding-out effect, but not the multiplier effect 
D)  neither the crowding out effect nor the multiplier effect

Question 13

Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures?

Accepted Answer

A)  an increase in government expenditures 
B)  an increase in net exports 
C)  an increase in investment spending 
D)  All of the above are correct. 
A)  an increase in government expenditures 
B)  an increase in net exports 
C)  an increase in investment spending 
D)  All of the above are correct.

Question 14

Suppose that the MPC is 0.7, there is no investment accelerator, and there are no crowding-out effects. If government expenditures increase by $30 billion, then aggregate demand

Accepted Answer

A)  shifts rightward by $100 billion. 
B)  shifts rightward by $51 billion. 
C)  shifts rightward by $170 billion. 
D)  shifts rightward by $72.8 billion. 
A)  shifts rightward by $100 billion. 
B)  shifts rightward by $51 billion. 
C)  shifts rightward by $170 billion. 
D)  shifts rightward by $72.8 billion.

Question 15

If expected inflation is constant and the nominal interest rate decreases by 2 percentage points, then the real interest rate

Accepted Answer

A)  increases by 2 percentage points. 
B)  increases, but by less than 2 percentage points. 
C)  decreases, but by less than 2 percentage points. 
D)  decreases by 2 percentage points. 
A)  increases by 2 percentage points. 
B)  increases, but by less than 2 percentage points. 
C)  decreases, but by less than 2 percentage points. 
D)  decreases by 2 percentage points.

Question 16

The potential positive feedback that government spending may have on investment is known as the _____. The potential negative effect that government spending may have on investment is known as the _____ effect.

Accepted Answer

investment

Question 17

The opportunity cost of holding money

Accepted Answer

A)  decreases when the interest rate decreases, so people desire to hold more of it. 
B)  decreases when the interest rate decreases, so people desire to hold less of it. 
C)  increases when the interest rate decreases, so people desire to hold more of it. 
D)  increases when the interest rate decreases, so people desire to hold less of it. 
A)  decreases when the interest rate decreases, so people desire to hold more of it. 
B)  decreases when the interest rate decreases, so people desire to hold less of it. 
C)  increases when the interest rate decreases, so people desire to hold more of it. 
D)  increases when the interest rate decreases, so people desire to hold less of it.

Question 18

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one- third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

Accepted Answer

A)  by $90 billion 
B)  by $60 billion 
C)  by $20 billion 
D)  by $30 billion 
A)  by $90 billion 
B)  by $60 billion 
C)  by $20 billion 
D)  by $30 billion

Question 19

If the MPC = 4/5, then the government purchases multiplier is

Accepted Answer

A)  5/4. 
B)  4/5. 
C)  5. 
D)  20. 
A)  5/4. 
B)  4/5. 
C)  5. 
D)  20.

Question 20

If the inflation rate is zero, then

Accepted Answer

A)  both the nominal interest rate and the real interest rate can fall below zero. 
B)  the nominal interest rate can fall below zero, but the real interest rate cannot fall below zero. 
C)  the real interest rate can fall below zero, but the nominal interest rate cannot fall below zero. 
D)  neither the nominal interest rate nor the real interest rate can fall below zero. 
A)  both the nominal interest rate and the real interest rate can fall below zero. 
B)  the nominal interest rate can fall below zero, but the real interest rate cannot fall below zero. 
C)  the real interest rate can fall below zero, but the nominal interest rate cannot fall below zero. 
D)  neither the nominal interest rate nor the real interest rate can fall below zero.

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

If the Federal Reserve increases the money supply, then initially there is a

Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

There is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct?

Suppose the Federal Reserve lowers the target on the interest rate in the Federal Funds market. The Federal Reserve will _____ the money supply and aggregate demand will _____.

Shifts in the aggregate-demand curve can cause fluctuations in

If the investment accelerator from an increase in government purchases is larger than the crowding-out effect, then

Which of the following statements is correct for the short run?

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is

Assume the MPC is 0.72. The multiplier is

Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?

Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures?

Suppose that the MPC is 0.7, there is no investment accelerator, and there are no crowding-out effects. If government expenditures increase by $30 billion, then aggregate demand

If expected inflation is constant and the nominal interest rate decreases by 2 percentage points, then the real interest rate

The potential positive feedback that government spending may have on investment is known as the _____. The potential negative effect that government spending may have on investment is known as the _____ effect.

The opportunity cost of holding money

If the MPC = 4/5, then the government purchases multiplier is

If the inflation rate is zero, then

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

Suppose the Federal Reserve lowers the target on the interest rate in the Federal Funds market. The Federal Reserve will _ the money supply and aggregate demand will _.

The potential positive feedback that government spending may have on investment is known as the _. The potential negative effect that government spending may have on investment is known as the _ effect.