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

Figure 34-10 -Refer to Figure 34-10. Suppose the multiplier is 4 and the economy is currently at point A. An increase in government purchases of $10 will increase aggregate demand to $ if there is no crowding-out. If crowding- out exists, then aggregate demand will likely to increase to $ .

When the interest rate increases, the opportunity cost of holding money

Fiscal policy refers to the idea that aggregate demand is affected by changes in

Figure 34-8 -Refer to Figure 34-8. An increase in government purchases will

The lag problem associated with monetary policy is due mostly to

The interest-rate effect

The multiplier effect

According to the theory of liquidity preference, if the interest rate rises

According to the theory of liquidity preference, the interest rate adjusts to balance the supply of, and demand for, loanable funds.

The interest rate that the Federal Reserve pays banks on the reserves they hold is called the

The process of the investment accelerator involves

The additional shifts in aggregate demand that result when there is an increase in government spending is known as the _____.

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

Suppose an increase in interest rates causes rising unemployment and falling output. To counter this, the Federal Reserve would

Figure 34-2. 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 34-2. What is measured along the horizontal axis of the left-hand graph?

As the MPC gets close to 1, the value of the multiplier approaches

If the multiplier is 3, then the MPC is

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

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.

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