Question 1

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 2

Assume the following. • The MPC has a value of 0.8.
• The relationship between the interest rate, r, and investment, I, is given by the equation,
I = 20,000 - br,
Where b is a positive constant.
• Government purchases, G, are increased by $1,000.
In which of the following cases would there be no crowding out?

Accepted Answer

A)  b = 0 
B)  b = 0.2 
C)  b = 0.8 
D)  b = 1 
A)  b = 0 
B)  b = 0.2 
C)  b = 0.8 
D)  b = 1

Question 3

Permanent tax cuts shift the AD curve

Accepted Answer

A)  farther to the right than do temporary tax cuts. 
B)  not as far to the right as do temporary tax cuts. 
C)  farther to the left than do temporary tax cuts. 
D)  not as far to the left as do temporary tax cuts. 
A)  farther to the right than do temporary tax cuts. 
B)  not as far to the right as do temporary tax cuts. 
C)  farther to the left than do temporary tax cuts. 
D)  not as far to the left as do temporary tax cuts.

Question 4

Both monetary policy and fiscal policy affect aggregate demand.

Accepted Answer

A) True 
 B)False

Question 5

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 6

The logic of the multiplier effect applies

Accepted Answer

A)  only to changes in government spending. 
B)  to any change in spending on any component of GDP. 
C)  only to changes in the money supply. 
D)  only when the crowding-out effect is sufficiently strong. 
A)  only to changes in government spending. 
B)  to any change in spending on any component of GDP. 
C)  only to changes in the money supply. 
D)  only when the crowding-out effect is sufficiently strong.

Question 7

A severe problem that many economists have with the active use of monetary policy and fiscal policy to stabilize the economy is that, while those policies obviously work well in practice, they are not well understood on a theoretical level.

Accepted Answer

A) True 
 B)False

Question 8

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Accepted Answer

A) True 
 B)False

Question 9

According to classical macroeconomic theory,

Accepted Answer

A)  output is determined by the supplies of capital and labor and the available production technology. 
B)  for any given level of output, the interest rate adjusts to balance the supply of, and demand for, loanable funds. 
C)  given output and the interest rate, the price level adjusts to balance the supply of, and demand for, money. 
D)  All of the above are correct. 
A)  output is determined by the supplies of capital and labor and the available production technology. 
B)  for any given level of output, the interest rate adjusts to balance the supply of, and demand for, loanable funds. 
C)  given output and the interest rate, the price level adjusts to balance the supply of, and demand for, money. 
D)  All of the above are correct.

Question 10

In the short run, open-market sales

Accepted Answer

A)  increase the price level and real GDP. 
B)  decrease the price level and real GDP. 
C)  increases the price level and decreases real GDP. 
D)  decreases the price level and increases real GDP. 
A)  increase the price level and real GDP. 
B)  decrease the price level and real GDP. 
C)  increases the price level and decreases real GDP. 
D)  decreases the price level and increases real GDP.

Question 11

Other things the same, which of the following responses would we expect from an increase in U.S. interest rates?

Accepted Answer

A)  Your aunt puts more money in her savings account. 
B)  Foreign citizens decide to buy fewer U.S. bonds. 
C)  You decide to purchase a new oven for your cookie factory. 
D)  All of the above are correct. 
A)  Your aunt puts more money in her savings account. 
B)  Foreign citizens decide to buy fewer U.S. bonds. 
C)  You decide to purchase a new oven for your cookie factory. 
D)  All of the above are correct.

Question 12

According to liquidity preference theory, if the price level decreases, then

Accepted Answer

A)  the interest rate falls because money demand shifts right. 
B)  the interest rate falls because money demand shifts left. 
C)  the interest rate rises because money supply shifts right. 
D)  the interest rate rises because money supply shifts left. 
A)  the interest rate falls because money demand shifts right. 
B)  the interest rate falls because money demand shifts left. 
C)  the interest rate rises because money supply shifts right. 
D)  the interest rate rises because money supply shifts left.

Question 13

As the interest rate falls,

Accepted Answer

A)  the quantity of money demanded falls, which would reduce a shortage. 
B)  the quantity of money demanded falls, which would reduce a surplus. 
C)  the quantity of money demanded rises, which would reduce a shortage. 
D)  the quantity of money demanded rises, which would reduce a surplus. 
A)  the quantity of money demanded falls, which would reduce a shortage. 
B)  the quantity of money demanded falls, which would reduce a surplus. 
C)  the quantity of money demanded rises, which would reduce a shortage. 
D)  the quantity of money demanded rises, which would reduce a surplus.

Question 14

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

Accepted Answer

A)  a decrease in the money supply 
B)  an increase in tax rates 
C)  an increase in government purchases 
D)  an increase in interest rates. 
A)  a decrease in the money supply 
B)  an increase in tax rates 
C)  an increase in government purchases 
D)  an increase in interest rates.

Question 15

The lag problem associated with fiscal policy is due mostly to

Accepted Answer

A)  the fact that business firms make investment plans far in advance. 
B)  the political system of checks and balances that slows down the process of implementing fiscal policy. 
C)  the time it takes for changes in government spending or taxes to affect the interest rate. 
D)  All of the above are correct. 
A)  the fact that business firms make investment plans far in advance. 
B)  the political system of checks and balances that slows down the process of implementing fiscal policy. 
C)  the time it takes for changes in government spending or taxes to affect the interest rate. 
D)  All of the above are correct.

Question 16

Monetary policy and fiscal policy are the only factors that influence aggregate demand.

Accepted Answer

A) True 
 B)False

Question 17

People will want to hold more money if the price level

Accepted Answer

A)  or if the interest rate increases. 
B)  or if the interest rate decreases. 
C)  increases or if the interest rate decreases. 
D)  decreases or if the interest rate increases. 
A)  or if the interest rate increases. 
B)  or if the interest rate decreases. 
C)  increases or if the interest rate decreases. 
D)  decreases or if the interest rate increases.

Question 18

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 19

When the Fed decreases the money supply, we expect

Accepted Answer

A)  interest rates and stock prices to rise. 
B)  interest rates and stock prices to fall. 
C)  interest rates to rise and stock prices to fall. 
D)  interest rates to fall and stock prices to rise. 
A)  interest rates and stock prices to rise. 
B)  interest rates and stock prices to fall. 
C)  interest rates to rise and stock prices to fall. 
D)  interest rates to fall and stock prices to rise.

Question 20

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

Accepted Answer

A)  the MPC is small and changes in the interest rate have a small effect on investment 
B)  the MPC is small and changes in the interest rate have a large effect on investment 
C)  the MPC is large and changes in the interest rate have a small effect on investment 
D)  the MPC is large and changes in the interest rate have a large effect on investment 
A)  the MPC is small and changes in the interest rate have a small effect on investment 
B)  the MPC is small and changes in the interest rate have a large effect on investment 
C)  the MPC is large and changes in the interest rate have a small effect on investment 
D)  the MPC is large and changes in the interest rate have a large effect on investment

Exam 21: The Influence of Monetary and Fiscal Policy on Aggregate Demand

When households decide to hold more money,

Permanent tax cuts shift the AD curve

Both monetary policy and fiscal policy affect aggregate demand.

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

The logic of the multiplier effect applies

A severe problem that many economists have with the active use of monetary policy and fiscal policy to stabilize the economy is that, while those policies obviously work well in practice, they are not well understood on a theoretical level.

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

According to classical macroeconomic theory,

In the short run, open-market sales

Other things the same, which of the following responses would we expect from an increase in U.S. interest rates?

According to liquidity preference theory, if the price level decreases, then

As the interest rate falls,

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

The lag problem associated with fiscal policy is due mostly to

Monetary policy and fiscal policy are the only factors that influence aggregate demand.

People will want to hold more money if the price level

When the interest rate is below the equilibrium level,

When the Fed decreases the money supply, we expect

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

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

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 Macroeconomics: Basic Concepts

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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