Deck 34: Essay

Question 1

An open-market purchase by the Federal Reserve creates an excess ----- of money.This causes interest rates to ----- and investment to -----.The change in investment causes aggregate demand to shift to the -----.

Answer 1

increase,increase

Question 2

According to the Theory of Liquidity Preference,a fall in the ----- reduces the amount of money that people wish to hold.As a result,falling interest rates stimulates investment spending and aggregate -----.

Answer 2

sell,rise

Question 3

The wealth-effect notes that a ----- price level increases the real value of households' wealth.The larger real wealth ----- the quantity of goods and services demanded.

Answer 3

price level,increase,exchange-rate

Question 4

The theory of ----- states that the ----- adjusts to bring money supply and money demand into balance.

Question 5

When the Federal Funds rate is above the Federal Reserve's target,it will ---- bonds to ----- the money supply.

Question 6

Open-market purchases cause a(n)----- in interest rates and a(n)----- in real GDP in the short run.

Question 7

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

Question 8

The ease with which an asset can be converted into the medium of exchange is known as -----.

Question 9

Figure 34-14
Refer to Figure 34-14.Initial equilibrium exists at point A.A decline in prices will cause households to ----- their desired money holdings,moving the interest rate to -----.

Question 10

If the Federal Reserve's goal is to stabilize aggregate demand,then it will ----- the money supply in response to a stock market boom.This causes interest rates to -----.

Question 11

When the money supply increases,there is an excess ----- of money.As a result,interest rates ----- and aggregate demand -----.

Question 12

A decrease in the domestic ----- causes domestic goods to become less expensive relative to foreign goods and increases net exports.The increase in net exports causes a(n)----- in the quantity of domestic aggregate goods and services demanded and is known as the ----- effect.

Question 13

The ----- effect states that a lower price level reduces the amount of money people wish to hold.When they lend out their excess savings,the ----- falls causing investment spending to rise and increases the quantity of goods and services demanded.

Question 14

Suppose the Federal Reserve lowers the target on the interest rate in the Federal Funds market.The Federal Reserve will ----- the money supply and aggregate demand will -----.

Question 15

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 -----.

Question 16

Changes in aggregate demand can cause fluctuations in ----- and ----- in the short run,and only ---- in the long run.

Question 17

When there is an excess demand for money,households will ----- interest-bearing bonds,causing interest rates to -----.

Question 18

An increase in households' desired money holding causes a(n)----- in interest rates.This causes a(n)----- in investment spending and aggregate demand.

Question 19

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

Question 20

The Federal Reserve sets ----- policy,while the president and Congress set ----- policy.These two policies influence aggregate -----.

Question 21

The idea that aggregate demand fluctuates due to irrational waves of pessimism by households and firms is known as -----.

Question 22

The potential positive feedback that government spending may have on investment is known as the -----.The potential negative effect that government spending may have on investment is known as the ----- effect.

Question 23

To reduce aggregate demand,the government may reduce ----- or increase -----.

Question 24

The government's choices regarding the overall level of government purchases and taxes is known as -----.

Question 25

Figure 34-10
Refer to Figure 34-10.Suppose the multiplier is 2 and there is no crowding-out,but there is an accelerator effect.If the economy is currently at point A,then an increase in government purchases of $10 will likely increase aggregate demand to point ----- where output is $-----.

Question 26

The additional shifts in aggregate demand that result when there is an increase in government spending is known as the -----.

Question 27

Permanent tax changes have a ----- effect on aggregate demand compared to temporary tax changes.

Question 28

A European recession that reduces U.S.net exports by $50 billion may ultimately lead to a $----- billion reduction in aggregate demand if the MPC is 0.75.

Question 29

The crowding-out effect occurs because an increase in government spending ----- interest rates,causing ----- to fall.

Question 30

If the Federal Reserve's goal is to stabilize aggregate demand,then in response to an increase in money demand,the Federal Reserve will ----- the money supply.

Question 31

What is the value of the multiplier if the marginal propensity to consume is 0.5?

Question 32

Figure 34-10
Refer to Figure 34-10.Suppose the multiplier is 4 and the economy is currently at point A.An increase in government purchases of $10 will increase aggregate demand to $----- if there is no crowding-out.If crowding-out exists,then aggregate demand will likely to increase to $-----.

Question 33

When the Federal Reserve conducts an open-market purchase,the money supply ----- and aggregate demand -----.

Question 34

Last year,total income increased $1,000 and consumption increased $800.An increase in government spending equal to $10 would cause output to increase by $----- because the multiplier is ------.

Question 35

A decrease in taxes will shift aggregate demand to the -----,cause consumption to -----,and cause output to -----.Due to the crowding-out effect,investment will -----.

Question 36

An increase in taxes shifts the aggregate ----- curve to the -----.

Question 37

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

Question 38

To offset increased pessimism by households,the government may ----- government spending and/or ----- taxes.

Question 39

To stabilize output,the Federal Reserve will ----- the money supply when aggregate demand falls.

Question 40

The goal of stabilization policy is to stabilize aggregate -----.As a result,stabilization policy will also stabilize ----- and -----.

Question 41

The ----- is the most important automatic stabilizer.

Question 42

Suppose households attempt to increase money holdings.To stabilize output and employment,the Federal Reserve will -----.

Question 43

Unemployment insurance benefits are an example of -----.

Question 44

To increase output,policymakers can ----- the money supply,----- taxes,and/or ----- government purchases.

Question 45

Critics of stabilization policy argue that monetary and fiscal policies affect the economy with -----.

Question 46

Figure 34-13
Refer to Figure 34-13.The economy is currently at point A.Given the current situation,the Federal Reserve will ----- bonds,which causes interest rates to -----.

Question 47

Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion.Suppose that the MPC is .80 and that there are no crowding out or accelerator effects.What is the combined effects of these changes? Why is the combined change not equal to zero?

Question 48

Explain why the interest rate is the opportunity cost of holding currency.What is the benefit of holding currency?

Question 49

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

Question 50

Use the money market to explain the interest-rate effect and its relation to the slope of the aggregate demand curve.

Question 51

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

Question 52

Figure 34-12
Refer to Figure 34-12.Suppose the multiplier is 5 and the economy is currently at point A.To stabilize output at $1000,the government should ----- purchases by $-----.

Question 53

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Question 54

What is the difference between monetary policy and fiscal policy?

Question 55

There are three factors that help explain the slope of the aggregate demand curve.Which two are less important? Why are they less important?

Question 56

Figure 34-11
Refer to Figure 34-11.The economy is currently at point A.To stabilize output,the president and Congress can reduce ----- and/or increase -----.

Question 57

Suppose a wave of optimism causes firms to increase investment.To stabilize output and employment,the Federal Reserve will -----.

Question 58

Suppose that there are no crowding-out effects and the MPC is .9.By how much must the government increase expenditures to shift the aggregate demand curve right by $10 billion?

Question 59

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?

Question 60

----- are changes in fiscal policy that stimulate aggregate demand when the economy goes into recession without policymakers having to take any deliberate action.