Question 1

When the Fed lowers the growth rate of the money supply, it must take into account

Accepted Answer

A)  only the short-run effect on production. 
B)  only the short-run effects on inflation and production. 
C)  only the long-run effect on inflation. 
D)  the long-run effect on inflation as well as the short-run effect on production. 
A)  only the short-run effect on production. 
B)  only the short-run effects on inflation and production. 
C)  only the long-run effect on inflation. 
D)  the long-run effect on inflation as well as the short-run effect on production.

Question 2

Both monetary policy and fiscal policy affect aggregate demand.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A)  consumption 
B)  take-home pay 
C)  household saving 
D)  None of the above is correct. 
A)  consumption 
B)  take-home pay 
C)  household saving 
D)  None of the above is correct.

Question 4

Scenario 34-2. The following facts apply to a small, imaginary economy.
• Consumption spending is $6,720 when income is $8,000.
• Consumption spending is $7,040 when income is $8,500.
-Refer to Scenario 34-2. For this economy, an initial increase of $500 in government purchases translates into a

Accepted Answer

A)  $1,388.89 increase in aggregate demand in the absence of the crowding-out effect. 
B)  $3,125.00 increase in aggregate demand in the absence of the crowding-out effect. 
C)  $1,135 increase in aggregate demand when the crowding-out effect is taken into account. 
D)  $3,125.00 increase in aggregate demand when the crowding-out effect is taken into account. 
A)  $1,388.89 increase in aggregate demand in the absence of the crowding-out effect. 
B)  $3,125.00 increase in aggregate demand in the absence of the crowding-out effect. 
C)  $1,135 increase in aggregate demand when the crowding-out effect is taken into account. 
D)  $3,125.00 increase in aggregate demand when the crowding-out effect is taken into account.

Question 5

Which of the following policy actions shifts the aggregate-demand curve?

Accepted Answer

A)  an increase in the money supply 
B)  an increase in taxes 
C)  an increase in government spending 
D)  All of the above are correct. 
A)  an increase in the money supply 
B)  an increase in taxes 
C)  an increase in government spending 
D)  All of the above are correct.

Question 6

Assume the MPC is 0.65. Assuming only the multiplier effect matters, a decrease in government purchases of $20 billion will shift the aggregate demand curve to the

Accepted Answer

A)  left by about $30.77 billion. 
B)  left by about $57.1 billion. 
C)  right by about $57.1 billion. 
D)  right by about $30.77 billion. 
A)  left by about $30.77 billion. 
B)  left by about $57.1 billion. 
C)  right by about $57.1 billion. 
D)  right by about $30.77 billion.

Question 7

Use the money market to explain the interest-rate effect and its relation to the slope of the aggregate demand curve.

Accepted Answer

When the price level falls, people need

Question 8

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

Accepted Answer

A)  increased the money supply and increased interest rates. 
B)  increased the money supply and decreased interest rates. 
C)  decreased the money supply and increased interest rates. 
D)  decreased the money supply and decreased interest rates. 
A)  increased the money supply and increased interest rates. 
B)  increased the money supply and decreased interest rates. 
C)  decreased the money supply and increased interest rates. 
D)  decreased the money supply and decreased interest rates.

Question 9

Figure 34-7  
-Refer to Figure 34-7. If the economy is at point b, a policy to restore full employment would be

Accepted Answer

A)  an increase in the money supply. 
B)  a decrease in government purchases. 
C)  an increase in taxes. 
D)  All of the above are correct. 
A)  an increase in the money supply. 
B)  a decrease in government purchases. 
C)  an increase in taxes. 
D)  All of the above are correct.

Question 10

On the graph that depicts the theory of liquidity preference,

Accepted Answer

A)  the demand-for-money curve is vertical. 
B)  the supply-of-money curve is vertical. 
C)  the interest rate is measured along the horizontal axis. 
D)  the price level is measured along the vertical axis. 
A)  the demand-for-money curve is vertical. 
B)  the supply-of-money curve is vertical. 
C)  the interest rate is measured along the horizontal axis. 
D)  the price level is measured along the vertical axis.

Question 11

In the long run, fiscal policy primarily affects

Accepted Answer

A)  aggregate demand. In the short run, it affects primarily aggregate supply. 
B)  aggregate supply. In the short run, it affects primarily saving, investment, and growth. 
C)  saving, investment, and growth. In the short run, it affects primarily aggregate demand. 
D)  saving, investment, and growth. In the short run, it affects primarily aggregate supply. 
A)  aggregate demand. In the short run, it affects primarily aggregate supply. 
B)  aggregate supply. In the short run, it affects primarily saving, investment, and growth. 
C)  saving, investment, and growth. In the short run, it affects primarily aggregate demand. 
D)  saving, investment, and growth. In the short run, it affects primarily aggregate supply.

Question 12

Liquidity refers to

Accepted Answer

A)  the relation between the price and interest rate of an asset. 
B)  the risk of an asset relative to its selling price. 
C)  the ease with which an asset is converted into a medium of exchange. 
D)  the sensitivity of investment spending to changes in the interest rate. 
A)  the relation between the price and interest rate of an asset. 
B)  the risk of an asset relative to its selling price. 
C)  the ease with which an asset is converted into a medium of exchange. 
D)  the sensitivity of investment spending to changes in the interest rate.

Question 13

Which of the following Fed actions would both decrease the money supply?

Accepted Answer

A)  buy bonds and raise the reserve requirement 
B)  buy bonds and lower the reserve requirement 
C)  sell bonds and raise the reserve requirement 
D)  sell bonds and lower the reserve requirement 
A)  buy bonds and raise the reserve requirement 
B)  buy bonds and lower the reserve requirement 
C)  sell bonds and raise the reserve requirement 
D)  sell bonds and lower the reserve requirement

Question 14

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?

Accepted Answer

A)  Raise both taxes and expenditures by $80 billion dollars. 
B)  Raise both taxes and expenditures by $10 billion dollars. 
C)  Reduce both taxes and expenditures by $80 billion dollars. 
D)  Reduce both taxes and expenditures by $10 billion dollars. 
A)  Raise both taxes and expenditures by $80 billion dollars. 
B)  Raise both taxes and expenditures by $10 billion dollars. 
C)  Reduce both taxes and expenditures by $80 billion dollars. 
D)  Reduce both taxes and expenditures by $10 billion dollars.

Question 15

According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, then the interest rate will

Accepted Answer

A)  increase and the quantity of money demanded will decrease. 
B)  increase and the quantity of money demanded will increase. 
C)  decrease and the quantity of money demanded will decrease. 
D)  decrease and the quantity of money demanded will increase. 
A)  increase and the quantity of money demanded will decrease. 
B)  increase and the quantity of money demanded will increase. 
C)  decrease and the quantity of money demanded will decrease. 
D)  decrease and the quantity of money demanded will increase.

Question 16

Figure 34-1  
-Refer to Figure 34-1. There is an excess demand for money at an interest rate of

Accepted Answer

A)  2 percent. 
B)  3 percent. 
C)  4 percent. 
D)  None of the above is correct. 
A)  2 percent. 
B)  3 percent. 
C)  4 percent. 
D)  None of the above is correct.

Question 17

Most economists believe that fiscal policy

Accepted Answer

A)  only affects aggregate demand and not aggregate supply. 
B)  primarily affects aggregate demand. 
C)  primarily effects aggregate supply. 
D)  only affects aggregate supply and not aggregate demand. 
A)  only affects aggregate demand and not aggregate supply. 
B)  primarily affects aggregate demand. 
C)  primarily effects aggregate supply. 
D)  only affects aggregate supply and not aggregate demand.

Question 18

When households decide to hold more money,

Accepted Answer

A)  interest rates fall and investment decreases. 
B)  interest rates fall and investment increases. 
C)  interest rates rise and investment increases. 
D)  interest rates rise and investment decreases. 
A)  interest rates fall and investment decreases. 
B)  interest rates fall and investment increases. 
C)  interest rates rise and investment increases. 
D)  interest rates rise and investment decreases.

Question 19

According to classical macroeconomic theory,

Accepted Answer

A)  the price level is sticky in the short run and it plays only a minor role in the short-run adjustment process. 
B)  for any given level of output, the interest rate adjusts to balance the supply of, and demand for, money. 
C)  output is determined by the supplies of capital and labor and the available production technology. 
D)  All of the above are correct. 
A)  the price level is sticky in the short run and it plays only a minor role in the short-run adjustment process. 
B)  for any given level of output, the interest rate adjusts to balance the supply of, and demand for, money. 
C)  output is determined by the supplies of capital and labor and the available production technology. 
D)  All of the above are correct.

Question 20

When there is an increase in government expenditures, which of the following raises investment spending?

Accepted Answer

A)  the investment accelerator and crowding out 
B)  the investment accelerator but not crowding out 
C)  crowding out but not the investment accelerator 
D)  neither the investment accelerator or crowding out 
A)  the investment accelerator and crowding out 
B)  the investment accelerator but not crowding out 
C)  crowding out but not the investment accelerator 
D)  neither the investment accelerator or crowding out

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

When the Fed lowers the growth rate of the money supply, it must take into account

Both monetary policy and fiscal policy affect aggregate demand.

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

Which of the following policy actions shifts the aggregate-demand curve?

Assume the MPC is 0.65. Assuming only the multiplier effect matters, a decrease in government purchases of $20 billion will shift the aggregate demand curve to the

Use the money market to explain the interest-rate effect and its relation to the slope of the aggregate demand curve.

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

Figure 34-7 -Refer to Figure 34-7. If the economy is at point b, a policy to restore full employment would be

On the graph that depicts the theory of liquidity preference,

In the long run, fiscal policy primarily affects

Liquidity refers to

Which of the following Fed actions would both decrease the money supply?

According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, then the interest rate will

Figure 34-1 -Refer to Figure 34-1. There is an excess demand for money at an interest rate of

Most economists believe that fiscal policy

When households decide to hold more money,

According to classical macroeconomic theory,

When there is an increase in government expenditures, which of the following raises investment spending?

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

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