Question 1

Which of the following effects results from the change in the interest rate created by an increase in government 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 crowding out nor the investment accelerator 
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 crowding out nor the investment accelerator

Question 2

An decrease in taxes shifts aggregate demand

Accepted Answer

A)  to the right. The larger the multiplier is, the farther it shifts. 
B)  to the right. The larger the multiplier is, the less it shifts. 
C)  to the left. The larger the multiplier is, the farther it shifts. 
D)  to the left. The larger the multiplier is, the less it shifts. 
A)  to the right. The larger the multiplier is, the farther it shifts. 
B)  to the right. The larger the multiplier is, the less it shifts. 
C)  to the left. The larger the multiplier is, the farther it shifts. 
D)  to the left. The larger the multiplier is, the less it shifts.

Question 3

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then

Accepted Answer

A)  1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 1.96. 
B)  1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3. 
C)  1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3. 
D)  1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 2.5. 
A)  1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 1.96. 
B)  1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3. 
C)  1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3. 
D)  1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 2.5.

Question 4

If the MPC = 0.75, then the government purchases multiplier is about

Accepted Answer

A)  1.33. 
B)  7. 
C)  4. 
D)  3. 
A)  1.33. 
B)  7. 
C)  4. 
D)  3.

Question 5

The lag problem associated with monetary 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 determining monetary policy. 
C)  the time it takes for changes in government spending 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 determining monetary policy. 
C)  the time it takes for changes in government spending to affect the interest rate. 
D)  All of the above are correct.

Question 6

Suppose there were a large decline in net exports. If the Fed wanted to stabilize output, it could

Accepted Answer

A)  buy bonds to raise interest rates. 
B)  buy bonds to lower interest rates. 
C)  sell bonds to raise interest rates. 
D)  sell bonds to lower interest rates. 
A)  buy bonds to raise interest rates. 
B)  buy bonds to lower interest rates. 
C)  sell bonds to raise interest rates. 
D)  sell bonds to lower interest rates.

Question 7

When the interest rate is above the equilibrium level,

Accepted Answer

A)  the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. 
B)  people respond by buying interest-bearing bonds or by depositing money in 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 people want to hold is less than the quantity of money that the Federal Reserve has supplied. 
B)  people respond by buying interest-bearing bonds or by depositing money in 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 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

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 10

According to liquidity preference theory, an increase in the price level causes the interest rate to

Accepted Answer

A)  increase, which increases the quantity of goods and services demanded. 
B)  increase, which decreases the quantity of goods and services demanded. 
C)  decrease, which increases the quantity of goods and services demanded. 
D)  decrease, which decreases the quantity of goods and services demanded. 
A)  increase, which increases the quantity of goods and services demanded. 
B)  increase, which decreases the quantity of goods and services demanded. 
C)  decrease, which increases the quantity of goods and services demanded. 
D)  decrease, which decreases the quantity of goods and services demanded.

Question 11

Opponents of active stabilization policy

Accepted Answer

A)  generally don't believe, even in theory, that fiscal policy can stabilize the economy. 
B)  generally agree that fiscal policy has no impact in the long run. 
C)  believe some effects of monetary policy may be long-lived. 
D)  think the Fed should simply try to fine tune the economy. 
A)  generally don't believe, even in theory, that fiscal policy can stabilize the economy. 
B)  generally agree that fiscal policy has no impact in the long run. 
C)  believe some effects of monetary policy may be long-lived. 
D)  think the Fed should simply try to fine tune the economy.

Question 12

The interest rate would fall and the quantity of money demanded would

Accepted Answer

A)  increase if there were a surplus in the money market. 
B)  increase if there were a shortage in the money market. 
C)  decrease if there were a surplus in the money market. 
D)  decrease if there were a shortage in the money market. 
A)  increase if there were a surplus in the money market. 
B)  increase if there were a shortage in the money market. 
C)  decrease if there were a surplus in the money market. 
D)  decrease if there were a shortage in the money market.

Question 13

When the interest rate is above equilibrium, there is excess _____ of money. Households will _____ interest-earning assets, which _____ the interest rate.

Accepted Answer

supply, pu

Question 14

If there is excess money supply, people will

Accepted Answer

A)  deposit more into interest-bearing accounts, and the interest rate will fall. 
B)  deposit more into interest-bearing accounts, and the interest rate will rise. 
C)  withdraw money from interest-bearing accounts, and the interest rate will fall. 
D)  withdraw money from interest-bearing accounts, and the interest rate will rise. 
A)  deposit more into interest-bearing accounts, and the interest rate will fall. 
B)  deposit more into interest-bearing accounts, and the interest rate will rise. 
C)  withdraw money from interest-bearing accounts, and the interest rate will fall. 
D)  withdraw money from interest-bearing accounts, and the interest rate will rise.

Question 15

Figure 34-9  
-Refer to Figure 34-9. Suppose the economy is currently at point A. To restore full employment, the appropriate fiscal response

Accepted Answer

A)  requires the central bank to purchase government bonds, which will increase the money supply. 
B)  is a reduction in government purchases. 
C)  is a reduction in taxes. 
D)  requires the central bank to sell government bonds, which will reduce the money supply. 
A)  requires the central bank to purchase government bonds, which will increase the money supply. 
B)  is a reduction in government purchases. 
C)  is a reduction in taxes. 
D)  requires the central bank to sell government bonds, which will reduce the money supply.

Question 16

In the short run, an increase in the money supply causes interest rates to

Accepted Answer

A)  increase, and aggregate demand to shift right. 
B)  increase, and aggregate demand to shift left. 
C)  decrease, and aggregate demand to shift right. 
D)  decrease, and aggregate demand to shift left. 
A)  increase, and aggregate demand to shift right. 
B)  increase, and aggregate demand to shift left. 
C)  decrease, and aggregate demand to shift right. 
D)  decrease, and aggregate demand to shift left.

Question 17

The interest-rate effect

Accepted Answer

A)  depends on the idea that increases in interest rates increase the quantity of money demanded. 
B)  depends on the idea that increases in interest rates increase the quantity of money supplied. 
C)  is the most important reason, in the case of the United States, for the downward slope of the aggregate- demand curve. 
D)  is the least important reason, in the case of the United States, for the downward slope of the aggregate- demand curve. 
A)  depends on the idea that increases in interest rates increase the quantity of money demanded. 
B)  depends on the idea that increases in interest rates increase the quantity of money supplied. 
C)  is the most important reason, in the case of the United States, for the downward slope of the aggregate- demand curve. 
D)  is the least important reason, in the case of the United States, for the downward slope of the aggregate- demand curve.

Question 18

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

Accepted Answer

A)  zero. 
B)  likely smaller than if the cut had been permanent. 
C)  likely about the same as if the cut had been permanent. 
D)  likely larger than if the cut had been permanent. 
A)  zero. 
B)  likely smaller than if the cut had been permanent. 
C)  likely about the same as if the cut had been permanent. 
D)  likely larger than if the cut had been permanent.

Question 19

In the long run, changes in the money supply affect

Accepted Answer

A)  prices. 
B)  output. 
C)  unemployment rates. 
D)  All of the above. 
A)  prices. 
B)  output. 
C)  unemployment rates. 
D)  All of the above.

Question 20

Figure 34-9  
-Refer to Figure 34-9. Suppose the economy is currently at point A. To restore full employment, the Federal Reserve should

Accepted Answer

A)  purchase government bonds, which will increase the money supply. 
B)  purchase government bonds, which will reduce the money supply. 
C)  sell government bonds, which will increase the money supply. 
D)  sell government bonds, which will reduce the money supply. 
A)  purchase government bonds, which will increase the money supply. 
B)  purchase government bonds, which will reduce the money supply. 
C)  sell government bonds, which will increase the money supply. 
D)  sell government bonds, which will reduce the money supply.

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

Which of the following effects results from the change in the interest rate created by an increase in government spending?

An decrease in taxes shifts aggregate demand

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then

If the MPC = 0.75, then the government purchases multiplier is about

The lag problem associated with monetary policy is due mostly to

Suppose there were a large decline in net exports. If the Fed wanted to stabilize output, it could

When the interest rate is above the equilibrium level,

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

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

According to liquidity preference theory, an increase in the price level causes the interest rate to

Opponents of active stabilization policy

The interest rate would fall and the quantity of money demanded would

When the interest rate is above equilibrium, there is excess _____ of money. Households will _____ interest-earning assets, which _____ the interest rate.

If there is excess money supply, people will

Figure 34-9 -Refer to Figure 34-9. Suppose the economy is currently at point A. To restore full employment, the appropriate fiscal response

In the short run, an increase in the money supply causes interest rates to

The interest-rate effect

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

In the long run, changes in the money supply affect

Figure 34-9 -Refer to Figure 34-9. Suppose the economy is currently at point A. To restore full employment, the Federal Reserve should

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

When the interest rate is above equilibrium, there is excess ___ of money. Households will _ interest-earning assets, which ___ the interest rate.