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

Question 1

Which of the following Fed actions would both increase the money supply?

A)buy bonds and raise the reserve requirement
B)buy bonds and lower the reserve requirement
C)sell bonds and raise the reserve requirement
D)sell bonds and lower the reserve requirement

Answer 1

B

Question 2

Which of the following claims concerning the importance of effects that explain the slope of the U.S.aggregate demand curve is correct?

A)The exchange-rate effect is relatively small because exports and imports are a small part of real GDP.
B)The interest-rate effect is relatively small because investment spending is not very responsive to interest rate changes.
C)The wealth effect is relatively large because money holdings are a significant portion of most households' wealth.
D)None of the above is correct.

Answer 2

A

Question 3

The theory of liquidity preference assumes that the nominal supply of money is determined by the

A)level of real GDP.
B)rate of inflation.
C)interest rate.
D)the Federal Reserve.

Answer 3

D

Question 4

If expected inflation is constant and the nominal interest rate increased 3 percentage points,the real interest rate would

A)increase 3 percentage points.
B)increase, but by less than 3 percentage points.
C)decrease, but by less than 3 percentage points.
D)decrease by 3 percentage points.

Question 5

The wealth effect helps explain the slope of the aggregate demand curve.This effect is

A)relatively important in the United States because expenditures on consumer durables is very responsive to changes in wealth.
B)relatively important in the United States because consumption spending is a large part of GDP.
C)relatively unimportant in the United States because money holdings are a small part of consumer wealth.
D)relatively unimportant because it takes a large change in wealth to make a significant change in interest rates.

Question 6

Which of the following is not a response that would result from a decrease in the price level and so help to explain the slope of the aggregate demand curve?

A)When interest rates fall, Sleepwell Hotels decides to build some new hotels.
B)The exchange rate falls, so French restaurants in Paris buy more Iowa pork.
C)Janet feels wealthier because of the price drop and so she decides to remodel her bathroom.
D)With prices down and wages fixed by contract, Millio's Frozen Pizzas decides to lay off workers.

Question 7

According to liquidity preference theory,the money supply curve would shift right

A)if the money demand curve shifted right.
B)if the Federal Reserve chose to increase money supply.
C)if the interest rate increased.
D)All of the above are correct.

Question 8

Fiscal policy affects the economy

A)only in the short run.
B)only in the long run.
C)in both the short and long run.
D)in neither the short nor long run.

Question 9

When the Fed buys government bonds,the reserves of the banking system

A)increase, so the money supply increases.
B)increase, so the money supply decreases.
C)decrease, so the money supply increases.
D)decrease, so the money supply decreases.

Question 10

Which of the following is not a reason the aggregate demand curve slopes downward? As the price level increases

A)firms may believe the relative price of their output has risen.
B)real wealth declines.
C)the interest rate increases.
D)the exchange rate increases.

Question 11

According to liquidity preference theory,equilibrium in the money market is achieved by adjustments in

A)the price level.
B)the interest rate.
C)the exchange rate.
D)real wealth.

Question 12

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

A)engaged in open-market transactions.
B)changed the discount rate.
C)changed the reserve requirement.
D)did any of the above.

Question 13

If expected inflation is constant,then when the nominal interest rate falls,the real interest rate

A)falls by more than the change in the nominal interest rate.
B)falls by the change in the nominal interest rate.
C)rises by the change in the nominal interest rate.
D)rises by more than the change in the nominal interest rate.

Question 14

Liquidity preference theory is most relevant to the

A)short run and supposes that the price level adjusts to bring money supply and money demand into balance.
B)short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.
C)long run and supposes that the price level adjusts to bring money supply and money demand into balance.
D)long run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

Question 15

Which of the following is likely more important for explaining the slope of the aggregate demand curve of a small economy than it is for the United States?

A)the wealth effect
B)the interest-rate effect
C)the exchange-rate effect
D)the real-wage effect

Question 16

According to the theory of liquidity preference,the money supply

A)and money demand are positively related to the interest rate.
B)and money demand are negatively related to the interest rate.
C)is negatively related to the interest rate while money demand is positively related to the interest rate.
D)is independent of the interest rate, while money demand is negatively related to the interest rate.

Question 17

For the U.S.economy,which of the following is the most important reason for the downward slope of the aggregate-demand curve?

A)the wealth effect
B)the interest-rate effect
C)the exchange-rate effect
D)the real-wage effect

Question 18

Liquidity preference refers directly to Keynes' theory concerning

A)the effects of changes in money demand and supply on interest rates.
B)the effects of changes in money demand and supply on exchange rates.
C)the effects of wealth on expenditures.
D)the difference between temporary and permanent changes in income.

Question 19

According to liquidity preference theory,the money supply curve is

A)upward sloping.
B)downward sloping.
C)vertical.
D)horizontal.

Question 20

If expected inflation is constant,then when the nominal interest rate increases,the real interest rate

A)increases by more than the change in the nominal interest rate.
B)increases by the change in the nominal interest rate.
C)decreases by the change in the nominal interest rate.
D)decreases by more than the change in the nominal interest rate.

Question 21

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

A)increases, so the quantity of money demanded increases.
B)increases, so the quantity of money demanded decreases.
C)decreases, so the quantity of money demanded increases.
D)decreases, so the quantity of money demanded decreases.

Question 22

Liquidity refers to

A)the relation between the price and interest rate of an asset.
B)the risk of an asset relative to its selling price.
C)the ease with which an asset is converted into a medium of exchange.
D)the sensitivity of investment spending to changes in the interest rate.

Question 23

For the following questions, consult the diagram below:
Figure 34-1

Refer to Figure 34-1.At an interest rate of 4 percent there is excess

A)money demand equal to the distance between a andb
B)money demand equal to the distance between b and c.
C)money supply equal to the distance between b and a.
D)money supply equal to the distance between c and b.

Question 24

According to liquidity preference theory,if the quantity of money demanded is greater than the quantity supplied,the interest rate will

A)increase and the quantity of money demanded will decrease.
B)increase and the quantity of money demanded will increase.
C)decrease and the quantity of money demanded will decrease.
D)decrease and the quantity of money demanded will increase.

Question 25

People own or hold money primarily because it

A)has a guaranteed nominal return.
B)serves as a store of value.
C)can directly be used to buy goods and services.
D)functions as a unit of account.

Question 26

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

A)increases, so the quantity of money demanded increases.
B)increases, so the quantity of money demanded decreases.
C)decreases, so the quantity of money demanded increases.
D)decreases, so the quantity of money demanded decreases.

Question 27

According to liquidity preference theory,the slope of the money demand curve is explained as follows:

A)interest rates rise as the Fed reduces the quantity of money demanded.
B)interest rates fall as the Fed reduces the supply of money.
C)people will want to hold less money as the cost of holding it falls.
D)people will want to hold more money as the cost of holding it falls.

Question 28

The opportunity cost of holding money

A)decreases when the interest rate increases, so people desire to hold more of it.
B)decreases when the interest rate increases, so people desire to hold less of it.
C)increases when the interest rate increases, so people desire to hold more of it.
D)increases when the interest rate increases, so people desire to hold less of it.

Question 29

For the following questions, consult the diagram below:
Figure 34-1

Refer to Figure 34-1.If the current interest rate is 2 percent,

A)there is excess money supply.
B)people will sell more bonds, which drives interest rates up.
C)as the money market moves to equilibrium, people will buy more goods.
D)All of the above are correct.

Question 30

When the Fed sells government bonds,the reserves of the banking system

A)increase, so the money supply increases.
B)increase, so the money supply decreases.
C)decrease, so the money supply increases.
D)decrease, so the money supply decreases.

Question 31

For the following questions, consult the diagram below:
Figure 34-1

Refer to Figure 34-1.There is excess money demand at an interest rate of

A)2 percent.
B)3 percent.
C)4 percent.
D)None of the above is correct.

Question 32

Which of the following is the most liquid asset?

A)corporate bonds.
B)fine art.
C)deposits that can be withdrawn using ATMs.
D)mutual funds.

Question 33

For the following questions, consult the diagram below:
Figure 34-1

Refer to Figure 34-1.Which of the following is correct?

A)If the interest rate is 4 percent, there is excess money demand, and the interest rate will fall.
B)If the interest rate is 3 percent, there is excess money supply, and the interest rate will rise.
C)If the interest rate is 4 percent, the demand for goods will rise when the money market is in its new equilibrium.
D)None of the above is correct.

Question 34

Which of the following is the most liquid asset?

A)capital goods
B)stocks and bonds with a low risk
C)stocks and bonds with a high risk
D)funds in a checking account

Question 35

According to liquidity preference theory,an increase in money demand for some reason other than a change in the price level causes

A)the interest rate to fall so aggregate demand shifts right.
B)the interest rate to fall so aggregate demand shifts left.
C)the interest rate to rise so aggregate demand shifts right.
D)the interest rate to rise so aggregate demand shifts left.

Question 36

According to liquidity preference theory,if the quantity of money supplied is greater than the quantity demanded the interest rate will

A)increase and the quantity of money demanded will decrease.
B)increase and the quantity of money demanded will increase.
C)decrease and the quantity of money demanded will decrease.
D)decrease and the quantity of money demanded will increase.

Question 37

According to liquidity preference theory,the opportunity cost of holding money is

A)the interest rate on bonds.
B)the inflation rate.
C)the cost of converting bonds to a medium of exchange.
D)the difference between the inflation rate and the interest rate on bonds.

Question 38

According to liquidity preference theory,

A)an increase in the interest rate reduces the quantity of money demanded.This is shown as a movement along the curve.An increase in the price level shifts money demand right.
B)an increase in the interest rate increases the quantity of money demanded.This is shown as a movement along the curve.An increase in the price level shifts money demand left.
C)an increase in the price level reduces the quantity of money demanded.This is shown as a movement along the curve.An increase in the interest rate shifts money demand right.
D)an increase in the price level increases the quantity of money demanded.This is shown as a movement along the curve.An increase in the interest rate shifts money demand left.

Question 39

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

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 40

According to the theory of liquidity preference,which variable adjusts to balance the supply and demand for money?

A)interest rate
B)money supply
C)quantity of output
D)price level

Question 41

If at some interest rate the quantity of money demanded is greater than the quantity of money supplied,people will desire to

A)sell interest-bearing assets causing the interest rate to decrease.
B)sell interest-bearing assets causing the interest rate to increase.
C)buy interest-bearing assets causing the interest rate to decrease.
D)buy interest-bearing assets causing the interest rate to increase.

Question 42

If at some interest rate the quantity of money supplied is greater than the quantity of money demanded,people will desire to

A)sell interest-bearing assets causing the interest rate to decrease.
B)sell interest-bearing assets causing the interest rate to increase.
C)buy interest-bearing assets causing the interest rate to decrease.
D)buy interest-bearing assets causing the interest rate to increase.

Question 43

Which of the following shifts money demand to the right?

A)an increase in the price level
B)a decrease in the price level
C)an increase in the interest rate
D)a decrease in the interest rate

Question 44

If the interest rate increases

A)or the price level increases, people will want to hold more money.
B)or the price level increases, people will want to hold less money.
C)or the price level decreases, people will want to hold more money.
D)or the price level decreases, people will want to hold less money.

Question 45

Which of the following statements is correct?

A)In the long run, 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)In the long run, 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)In the long run, 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 is stuck.
D)In the long run, 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.

Question 46

Which of the following is correct?

A)Both liquidity preference and classical theory assume the interest rate adjusts to bring the money market into equilibrium.
B)Both liquidity preference and classical theory assume the price level adjusts to bring the money market into equilibrium.
C)Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium.Classical theory assumes the price level adjusts to bring the money market into equilibrium.
D)Liquidity preference theory assumes the price level adjusts to bring the money market into equilibrium.Classical theory assumes the interest rate adjusts to bring the money market into equilibrium.

Question 47

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

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 48

If there is excess money supply,people will

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 49

Which of the following shifts money demand left?

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 50

The short-run effects on the interest rate are

A)shown equally well using either liquidity preference theory or classical theory.
B)best shown using classical theory.
C)best shown using liquidity preference theory.
D)not shown well by either liquidity preference theory or classical theory.

Question 51

According to liquidity preference theory,if there were a shortage of money,then

A)the interest rate would be above equilibrium and the quantity of money demanded would be too large for equilibrium.
B)the interest rate would be above equilibrium and the quantity of money demanded would be too small for equilibrium.
C)the interest rate would be below equilibrium and the quantity of money demanded would be too small for equilibrium.
D)the interest rate would be below equilibrium and the quantity of money demanded would be too large for equilibrium.

Question 52

Which of the following shifts money demand to the left?

A)an increase in the price level
B)a decrease in the price level
C)an increase in the interest rate
D)a decrease in the interest rate

Question 53

If there is excess money demand,people will

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 54

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

A)both liquidity preference theory and classical theory.
B)neither liquidity preference theory nor classical theory.
C)liquidity preference theory, but not classical theory.
D)classical theory, but not liquidity preference theory.

Question 55

People might deposit more into interest-bearing accounts,

A)making the interest rate fall, if there is a surplus in the money market.
B)making the interest rate rise, if there is a surplus in the money market.
C)making the interest rate fall, if there is a shortage in the money market.
D)making the interest rate rise, if there is a shortage in the money market.

Question 56

People will want to hold more money if the price level

A)or the interest rate increases.
B)or the interest rate decreases.
C)increases or the interest rate decreases.
D)decreases or the interest rate increases.

Question 57

People will want to hold less money if the price level

A)or the interest rate increases.
B)or the interest rate decreases.
C)increases or the interest rate decreases.
D)decreases or the interest rate increases.

Question 58

A surplus or shortage in the money market is eliminated by adjustments in the price level according to

A)both liquidity preference theory and classical theory.
B)neither liquidity preference theory nor classical theory.
C)liquidity preference theory, but not classical theory.
D)classical theory, but not liquidity preference theory.

Question 59

Which of the following shifts money demand right?

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 60

Which of the following statements is correct?

A)In the short run, 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)In the short run, 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)In the short run, 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 stuck.
D)In the short run, 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.

Question 61

Figure 34-2

In Figure 34-2,which of the following sequences shows the logic of the interest rate effect?

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

Question 62

According to liquidity preference theory,a decrease in the price level shifts the

A)money demand curve right so the interest rate increases.
B)money demand curve right so the interest rate decreases.
C)money demand curve left so the interest rate decreases.
D)money demand curve left so the interest rate increases.

Question 63

An increase in the U.S.interest rate

A)reduces the opportunity cost of holding dollars.
B)induces households to increase consumption.
C)shifts money demand to the right.
D)leads to an appreciation of the U.S.dollar.

Question 64

According to liquidity preference theory,a decrease in the price level causes the interest rate to

A)increase, which makes output demanded increase.
B)increase, which makes output demanded decrease.
C)decrease, which makes output demanded increase.
D)decrease, which makes output demanded decrease.

Question 65

Other things the same,which of the following responses would we expect to result from an decrease in U.S.interest rates?

A)U.S.citizens decide to hold more foreign bonds.
B)people choose to hold more currency.
C)You decide to purchase a new oven for your cookie factory.
D)All of the above are correct.

Question 66

Other things the same,which of the following responses would we expect to result from an increase in U.S.interest rates?

A)Your aunt puts more money in her savings account.
B)Foreign citizens decide to buy fewer U.S.bonds.
C)You decide to purchase a new oven for your cookie factory.
D)All of the above are correct.

Question 67

According to liquidity preference theory,an increase in the price level shifts the

A)money demand curve right so the interest rate increases.
B)money demand curve right so the interest rate decreases.
C)money demand curve left so the interest rate decreases.
D)money demand curve left so the interest rate increases.

Question 68

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

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 69

According to liquidity preference theory,if the price level decreases,then

A)the interest rate falls because money demand shifts right.
B)the interest rate falls because money demand shifts left.
C)the interest rate rises because money supply shifts right.
D)the interest rate rises because money supply shifts left.

Question 70

Other things equal,in the short run a higher price level leads households to

A)increase consumption and firms to buy more capital goods.
B)increase consumption and firms to buy fewer capital goods.
C)decrease consumption and firms to buy more capital goods.
D)decrease consumption and firms to buy fewer capital goods.

Question 71

Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate demand curve?

A)As the money supply increases, the interest rate falls, so spending rises.
B)As the money supply increases, the interest rate rises, so spending falls.
C)As the price level increases, the interest rate falls, so spending rises.
D)As the price level increases, the interest rate rises, so spending falls.

Question 72

According to liquidity preference theory investment spending would rise if the price level

A)fell making the interest rate rise.
B)fell making the interest rate fall.
C)rose making the interest rate rise.
D)rose making the interest rate fall.

Question 73

The theory of liquidity preference is most helpful in understanding

A)the wealth effect.
B)the exchange-rate effect.
C)the interest-rate effect.
D)misperceptions theory.

Question 74

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

A)rises and the aggregate quantity of goods demand 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 75

The most important reason for the slope of the aggregate demand curve is that as the price level

A)increases, interest rates increase, and investment decreases.
B)increases, interest rates decrease, and investment increases.
C)decreases, interest rates increase, and investment increases.
D)decreases, interest rates decrease, and investment decreases.

Question 76

Other things the same,a decrease in the U.S.interest rate

A)induces firms to invest more.
B)shifts money demand to the left.
C)makes the U.S.dollar appreciate.
D)increases the opportunity cost of holding dollars.

Question 77

According to the theory of liquidity preference,a decrease in the price level causes the

A)interest rate and investment to rise.
B)interest rate and investment to fall.
C)interest rate to rise and investment to fall.
D)interest rate to fall and investment to rise.

Question 78

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

A)interest rate and investment to rise.
B)interest rate and investment to fall.
C)interest rate to rise and investment to fall.
D)interest rate to fall and investment to rise.

Question 79

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

A)increase, which makes output demanded increase.
B)increase, which makes output demanded decrease.
C)decrease, which makes output demanded increase.
D)decrease, which makes output demanded decrease.

Question 80

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

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.