Question 1

To stabilize interest rates, the Federal Reserve will respond to an increase in money demand by

Accepted Answer

A)  buying government bonds, which decreases the supply of money. 
B)  selling government bonds, which increases the supply of money. 
C)  buying government bonds, which increases the supply of money. 
D)  selling government bonds, which decreases the supply of money. 
A)  buying government bonds, which decreases the supply of money. 
B)  selling government bonds, which increases the supply of money. 
C)  buying government bonds, which increases the supply of money. 
D)  selling government bonds, which decreases the supply of money.

Question 2

The multiplier is computed as MPC / (1 - MPC).

Accepted Answer

A) True 
 B)False

Question 3

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Accepted Answer

A) True 
 B)False

Question 4

For the following questions, use the diagram below:
Figure 34-7  
-Refer to Figure 34-7. Which of the following is correct?

Accepted Answer

A)  A wave of optimism could move the economy from point a to point 
B)  
B)  If aggregate demand moves from AD1 to AD2, the economy will stay at point b in both the short run and long run. 
C)  It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2. 
D)  All of the above are correct. 
A)  A wave of optimism could move the economy from point a to point 
B)  
B)  If aggregate demand moves from AD1 to AD2, the economy will stay at point b in both the short run and long run. 
C)  It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2. 
D)  All of the above are correct.

Question 5

According to the theory of liquidity preference, if output decreases

Accepted Answer

A)  people want to hold more money. This response is shown as a movement along the money demand curve. 
B)  people want to hold more money. This response is shown as a shift of the money demand curve. 
C)  people want to hold less money. This response is shown as a movement along the money demand curve. 
D)  people want to hold less money. This response is shown as a shift of the money demand curve. 
A)  people want to hold more money. This response is shown as a movement along the money demand curve. 
B)  people want to hold more money. This response is shown as a shift of the money demand curve. 
C)  people want to hold less money. This response is shown as a movement along the money demand curve. 
D)  people want to hold less money. This response is shown as a shift of the money demand curve.

Question 6

Which of the following shifts aggregate demand to the right?

Accepted Answer

A)  The price level rises. 
B)  The price level falls. 
C)  The Fed purchases government bonds on the open market. 
D)  None of the above is correct. 
A)  The price level rises. 
B)  The price level falls. 
C)  The Fed purchases government bonds on the open market. 
D)  None of the above is correct.

Question 7

When taxes increase, the interest rate

Accepted Answer

A)  increases, making the change in aggregate demand larger. 
B)  increases, making the change in aggregate demand smaller 
C)  decreases, making the change in aggregate demand larger. 
D)  decreases, making the change in aggregate demand smaller. 
A)  increases, making the change in aggregate demand larger. 
B)  increases, making the change in aggregate demand smaller 
C)  decreases, making the change in aggregate demand larger. 
D)  decreases, making the change in aggregate demand smaller.

Question 8

Figure 34-8  
-Refer to Figure 34-8. An increase in taxes will

Accepted Answer

A)  shift aggregate demand from AD1 to AD2. 
B)  shift aggregate demand from AD1 to AD3. 
C)  cause movement from point A to point B along AD1. 
D)  have no effect on aggregate demand. 
A)  shift aggregate demand from AD1 to AD2. 
B)  shift aggregate demand from AD1 to AD3. 
C)  cause movement from point A to point B along AD1. 
D)  have no effect on aggregate demand.

Question 9

Policymakers use _____ policy and _____ policy to stabilize _____ and _____ in the short run.

Accepted Answer

monetary,

Question 10

If the price level rises, then

Accepted Answer

A)  the interest rate falls and spending on goods and services falls. 
B)  the interest rate falls and spending on goods and services rises. 
C)  the interest rate rises and spending on goods and services falls. 
D)  the interest rate rises and spending on goods and services rises. 
A)  the interest rate falls and spending on goods and services falls. 
B)  the interest rate falls and spending on goods and services rises. 
C)  the interest rate rises and spending on goods and services falls. 
D)  the interest rate rises and spending on goods and services rises.

Question 11

Sometimes, changes in monetary policy and/or fiscal policy are intended to offset changes to aggregate demand over which policymakers have little or no control.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following correctly explains the crowding-out effect?

Accepted Answer

A)  An increase in government expenditures decreases the interest rate and so increases investment spending. 
B)  An increase in government expenditures increases the interest rate and so reduces investment spending. 
C)  A decrease in government expenditures increases the interest rate and so increases investment spending. 
D)  A decrease in government expenditures decreases the interest rate and so reduces investment spending. 
A)  An increase in government expenditures decreases the interest rate and so increases investment spending. 
B)  An increase in government expenditures increases the interest rate and so reduces investment spending. 
C)  A decrease in government expenditures increases the interest rate and so increases investment spending. 
D)  A decrease in government expenditures decreases the interest rate and so reduces investment spending.

Question 13

How does a reduction in the money supply by the Fed make owning stocks less attractive?

Accepted Answer

The reduction in the money supply raises

Question 14

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

Accepted Answer

A)  wealth effect, exchange-rate effect, interest-rate effect 
B)  exchange-rate effect, interest-rate effect, wealth effect 
C)  interest-rate effect, wealth effect, exchange-rate effect 
D)  interest-rate effect, exchange-rate effect, wealth effect 
A)  wealth effect, exchange-rate effect, interest-rate effect 
B)  exchange-rate effect, interest-rate effect, wealth effect 
C)  interest-rate effect, wealth effect, exchange-rate effect 
D)  interest-rate effect, exchange-rate effect, wealth effect

Question 15

An increase 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 in either direction. 
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 in either direction.

Question 16

Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could

Accepted Answer

A)  increase the money supply. This increase would also move the price level closer to its value before the rise in stock prices. 
B)  increase the money supply. However, this increase would move the price level farther from its value before the rise in stock prices. 
C)  decrease the money supply. This decrease would also move the price level closer to its value before the rise in stock prices. 
D)  decrease the money supply. However, this decrease would move the price level farther from its value before the rise in stock prices. 
A)  increase the money supply. This increase would also move the price level closer to its value before the rise in stock prices. 
B)  increase the money supply. However, this increase would move the price level farther from its value before the rise in stock prices. 
C)  decrease the money supply. This decrease would also move the price level closer to its value before the rise in stock prices. 
D)  decrease the money supply. However, this decrease would move the price level farther from its value before the rise in stock prices.

Question 17

According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

Accepted Answer

A)  rises and the aggregate quantity of goods demanded rises. 
B)  rises and the aggregate quantity of goods demanded falls. 
C)  falls and the aggregate quantity of goods demanded rises. 
D)  falls and the aggregate quantity of goods demanded falls. 
A)  rises and the aggregate quantity of goods demanded rises. 
B)  rises and the aggregate quantity of goods demanded falls. 
C)  falls and the aggregate quantity of goods demanded rises. 
D)  falls and the aggregate quantity of goods demanded falls.

Question 18

In a certain economy, when income is $400, consumer spending is $325. The value of the multiplier for this economy is 3.33. It follows that, when income is $450, consumer spending is

Accepted Answer

A)  $360. For this economy, an initial increase of $50 in consumer spending translates into a $266.67 increase in aggregate demand. 
B)  $360. For this economy, an initial increase of $50 in consumer spending translates into a $166.50 increase in aggregate demand. 
C)  $341.67. For this economy, an initial increase of $50 in consumer spending translates into a $266.67 increase in aggregate demand. 
D)  $341.67. For this economy, an initial increase of $50 in consumer spending translates into a $166.25 increase in aggregate demand. 
A)  $360. For this economy, an initial increase of $50 in consumer spending translates into a $266.67 increase in aggregate demand. 
B)  $360. For this economy, an initial increase of $50 in consumer spending translates into a $166.50 increase in aggregate demand. 
C)  $341.67. For this economy, an initial increase of $50 in consumer spending translates into a $266.67 increase in aggregate demand. 
D)  $341.67. For this economy, an initial increase of $50 in consumer spending translates into a $166.25 increase in aggregate demand.

Question 19

The Fed is concerned about stock market booms because the booms

Accepted Answer

A)  increase consumption spending. 
B)  increase investment spending. 
C)  increase both consumption and investment spending. 
D)  None of the above is correct. 
A)  increase consumption spending. 
B)  increase investment spending. 
C)  increase both consumption and investment spending. 
D)  None of the above is correct.

Question 20

According to liquidity preference theory, the money-supply curve would shift if the Fed

Accepted Answer

A)  engaged in open-market operations. 
B)  increased money demand. 
C)  increase the real income. 
D)  did any of the above. 
A)  engaged in open-market operations. 
B)  increased money demand. 
C)  increase the real income. 
D)  did any of the above.

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

To stabilize interest rates, the Federal Reserve will respond to an increase in money demand by

The multiplier is computed as MPC / (1 - MPC).

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

For the following questions, use the diagram below: Figure 34-7 -Refer to Figure 34-7. Which of the following is correct?

According to the theory of liquidity preference, if output decreases

Which of the following shifts aggregate demand to the right?

When taxes increase, the interest rate

Figure 34-8 -Refer to Figure 34-8. An increase in taxes will

Policymakers use _____ policy and _____ policy to stabilize _____ and _____ in the short run.

If the price level rises, then

Sometimes, changes in monetary policy and/or fiscal policy are intended to offset changes to aggregate demand over which policymakers have little or no control.

Which of the following correctly explains the crowding-out effect?

How does a reduction in the money supply by the Fed make owning stocks less attractive?

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

An increase in government spending initially and primarily shifts

Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could

According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

In a certain economy, when income is $400, consumer spending is $325. The value of the multiplier for this economy is 3.33. It follows that, when income is $450, consumer spending is

The Fed is concerned about stock market booms because the booms

According to liquidity preference theory, the money-supply curve would shift if the Fed

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

Policymakers use ___ policy and _ policy to stabilize _ and ___ in the short run.