Question 1

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. C

Question 2

What is the difference between monetary policy and fiscal policy?

Accepted Answer

The Federal Reserve Bank conducts U.S. monetary policy. It consists of policies to affect the financial side of the economy-most notably the supply of money in the economy. Fiscal policy is conducted by the executive and legislative branches of government, and entails decisions about taxes and government spending.

Question 3

A tax cut shifts the aggregate demand curve the farthest if

Accepted Answer

A)  the MPC is large and if the tax cut is permanent. 
B)  the MPC is large and if the tax cut is temporary. 
C)  the MPC is small and if the tax cut is permanent. 
D)  the MPC is small and if the tax cut is temporary. 
A)  the MPC is large and if the tax cut is permanent. 
B)  the MPC is large and if the tax cut is temporary. 
C)  the MPC is small and if the tax cut is permanent. 
D)  the MPC is small and if the tax cut is temporary. A

Question 4

People are likely to want to hold more money if the interest rate

Accepted Answer

A)  increases, making the opportunity cost of holding money rise. 
B)  increases, making the opportunity cost of holding money fall. 
C)  decreases, making the opportunity cost of holding money rise. 
D)  decreases, making the opportunity cost of holding money fall. 
A)  increases, making the opportunity cost of holding money rise. 
B)  increases, making the opportunity cost of holding money fall. 
C)  decreases, making the opportunity cost of holding money rise. 
D)  decreases, making the opportunity cost of holding money fall.

Question 5

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Accepted Answer

If the interest rate is above equilibriu

Question 6

A decrease in government spending initially and primarily shifts

Accepted Answer

A)  aggregate demand to the right. 
B)  aggregate demand to the left. 
C)  aggregate supply to the right. 
D)  neither aggregate demand nor aggregate supply. 
A)  aggregate demand to the right. 
B)  aggregate demand to the left. 
C)  aggregate supply to the right. 
D)  neither aggregate demand nor aggregate supply.

Question 7

If the inflation rate is zero, then the nominal and real interest rate are the same.

Accepted Answer

A) True 
 B)False

Question 8

Supply-side economists focus more than other economists on

Accepted Answer

A)  how fiscal policy affects consumption. 
B)  the multiplier effect of fiscal policy. 
C)  how fiscal policy affects aggregate supply. 
D)  the money supply. 
A)  how fiscal policy affects consumption. 
B)  the multiplier effect of fiscal policy. 
C)  how fiscal policy affects aggregate supply. 
D)  the money supply.

Question 9

A decrease in taxes ____ aggregate demand through larger _____ by households.

Accepted Answer

increases,

Question 10

According to the theory of liquidity preference,

Accepted Answer

A)  if the interest rate is below the equilibrium level, then the quantity of money people want to hold is less than the quantity of money the Fed has created. 
B)  if the interest rate is above the equilibrium level, then the quantity of money people want to hold is greater than the quantity of money the Fed has created. 
C)  the demand for money is represented by a downward-sloping line on a supply-and-demand graph. 
D)  All of the above are correct. 
A)  if the interest rate is below the equilibrium level, then the quantity of money people want to hold is less than the quantity of money the Fed has created. 
B)  if the interest rate is above the equilibrium level, then the quantity of money people want to hold is greater than the quantity of money the Fed has created. 
C)  the demand for money is represented by a downward-sloping line on a supply-and-demand graph. 
D)  All of the above are correct.

Question 11

Unemployment insurance and welfare programs work as automatic stabilizers.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A)  supply of money until the interest rate increases. 
B)  supply of money until the interest rate decreases. 
C)  demand for money until the interest rate increases. 
D)  demand for money until the interest rate decreases. 
A)  supply of money until the interest rate increases. 
B)  supply of money until the interest rate decreases. 
C)  demand for money until the interest rate increases. 
D)  demand for money until the interest rate decreases.

Question 13

Figure 34-3  
-Refer to Figure 34-3. For an economy such as the United States, what component of the demand for goods and services is most responsible for the decrease in output from Y1 to Y2?

Accepted Answer

A)  consumption 
B)  investment 
C)  net exports 
D)  government spending 
A)  consumption 
B)  investment 
C)  net exports 
D)  government spending

Question 14

Figure 34-3  
-Refer to Figure 34-3. Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect?

Accepted Answer

A)  1, 2, 3, 4 
B)  1, 4, 3, 2 
C)  3, 4, 2, 1 
D)  3, 2, 1, 4 
A)  1, 2, 3, 4 
B)  1, 4, 3, 2 
C)  3, 4, 2, 1 
D)  3, 2, 1, 4

Question 15

If the marginal propensity to consume is 6/7, then the multiplier is 7.

Accepted Answer

A) True 
 B)False

Question 16

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. If the money-supply curve MS on the left-hand graph were to shift to the left, this would

Accepted Answer

A)  represent an action taken by the Federal Reserve. 
B)  shift the AD curve to the left. 
C)  create, until the interest rate adjusted, an excess demand for money at the interest rate that equilibrated the money market before the shift. 
D)  All of the above are correct. 
A)  represent an action taken by the Federal Reserve. 
B)  shift the AD curve to the left. 
C)  create, until the interest rate adjusted, an excess demand for money at the interest rate that equilibrated the money market before the shift. 
D)  All of the above are correct.

Question 17

The multiplier effect

Accepted Answer

A)  and the crowding-out effect both amplify the effects of an increase in government expenditures. 
B)  and the crowding-out effect both diminish the effects of an increase in government expenditures. 
C)  diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects. 
D)  amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects. 
A)  and the crowding-out effect both amplify the effects of an increase in government expenditures. 
B)  and the crowding-out effect both diminish the effects of an increase in government expenditures. 
C)  diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects. 
D)  amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.

Question 18

If people decide to hold less money, then

Accepted Answer

A)  money demand decreases, there is an excess supply of money, and interest rates rise. 
B)  money demand decreases, there is an excess supply of money, and interest rates fall. 
C)  money demand increases, there is an excess demand for money, and interest rates fall. 
D)  money demand increases, there is an excess demand for money, and interest rates rise. 
A)  money demand decreases, there is an excess supply of money, and interest rates rise. 
B)  money demand decreases, there is an excess supply of money, and interest rates fall. 
C)  money demand increases, there is an excess demand for money, and interest rates fall. 
D)  money demand increases, there is an excess demand for money, and interest rates rise.

Question 19

Which of the following actions might we logically expect to result from rising stock prices?

Accepted Answer

A)  Jim decreases his consumption spending. 
B)  Firms sell fewer shares of new stock. 
C)  Firms spend more on investment. 
D)  None of the above is correct. 
A)  Jim decreases his consumption spending. 
B)  Firms sell fewer shares of new stock. 
C)  Firms spend more on investment. 
D)  None of the above is correct.

Question 20

Assume the MPC is 0.625. Assume there is a multiplier effect and that the total crowding-out effect is $12 billion. An increase in government purchases of $30 billion will shift aggregate demand to the

Accepted Answer

A)  left by $60 billion. 
B)  left by $36 billion. 
C)  right by $68 billion. 
D)  right by $36 billion. 
A)  left by $60 billion. 
B)  left by $36 billion. 
C)  right by $68 billion. 
D)  right by $36 billion.

Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

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

What is the difference between monetary policy and fiscal policy?

A tax cut shifts the aggregate demand curve the farthest if

People are likely to want to hold more money if the interest rate

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

A decrease in government spending initially and primarily shifts

If the inflation rate is zero, then the nominal and real interest rate are the same.

Supply-side economists focus more than other economists on

A decrease in taxes ____ aggregate demand through larger _____ by households.

According to the theory of liquidity preference,

Unemployment insurance and welfare programs work as automatic stabilizers.

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

Figure 34-3 -Refer to Figure 34-3. For an economy such as the United States, what component of the demand for goods and services is most responsible for the decrease in output from Y1 to Y2?

Figure 34-3 -Refer to Figure 34-3. Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect?

If the marginal propensity to consume is 6/7, then the multiplier is 7.

The multiplier effect

If people decide to hold less money, then

Which of the following actions might we logically expect to result from rising stock prices?

Assume the MPC is 0.625. Assume there is a multiplier effect and that the total crowding-out effect is $12 billion. An increase in government purchases of $30 billion will shift aggregate demand to the

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 Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Monopolistic Competition

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

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

Filters

A decrease in taxes aggregate demand through larger _ by households.