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

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is your answer affected by the presence of the multiplier, crowding-out, taxes, and investment-accelerator effects?

An example of an automatic stabilizer is

Which among the following assets is the most liquid?

Figure 34-14 -Refer to Figure 34-14. Households' desired money holdings are given by MD1. If the current rate of interest is r3, then there is excess _____. Households will _____ interest-earning assets, which causes the interest rate to _____.

Fiscal policy is determined by

Scenario 34-1. Take the following information as given for a small, imaginary economy: -When income is $10,000, consumption spending is $6,500. -When income is $11,000, consumption spending is $7,250. -Refer to Scenario 34-1. The multiplier for this economy is

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

When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right.

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

An increase in taxes shifts the aggregate curve to the .

Scenario 34-2. The following facts apply to a small, imaginary economy. -Consumption spending is $6,720 when income is $8,000. -Consumption spending is $7,040 when income is $8,500. -Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500?

When the government reduces taxes, which of the following decreases?

Other things the same, as the price level rises,

The theory of liquidity preference was developed by Irving Fisher.

Which of the following sequences best represents the crowding-out effect?

Changes in the interest rate bring the money market into equilibrium according to

In liquidity preference theory, an increase in the interest rate, other things the same, decreases the quantity of money demanded, but does not shift the money demand curve.

The interest-rate effect

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the current equilibrium interest rate is r3. Let Y3 represent the corresponding quantity of goods and services demanded, and let P3 represent the corresponding price level. Starting from this situation, if the Federal Reserve decreases the money supply and if the price level remains at P3, then