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

Question 1

For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

Answer 1

True

Question 2

The theory of liquidity preference was developed by Irving Fisher.

Answer 2

False

Question 3

Other things the same, an increase in the price level causes the real value of the dollar to fall in the market for foreign-currency exchange.

Answer 3

False

Question 4

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.

Question 5

Monetary policy and fiscal policy are the only factors that influence aggregate demand.

Question 6

An increase in the price level shifts the money demand curve to the left, causing interest rates to increase.

Question 7

An increase in the money supply shifts the aggregate-supply curve to the right.

Question 8

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

Question 9

When the Fed announces a target for the federal funds rate, it essentially accommodates the day-to-day fluctuations in money demand by adjusting the money supply accordingly.

Question 10

Both monetary policy and fiscal policy affect aggregate demand.

Question 11

Stock prices often rise when the Fed raises interest rates.

Question 12

For a country such as the U.S., the wealth effect exerts a very important influence on the slope of the aggregate-demand curve, since U.S. wealth is large relative to wealth in most other countries.

Question 13

If the inflation rate is zero, then the nominal and real interest rate are the same.

Question 14

Other things equal, the higher the price level, the higher is the real wealth of households.

Question 15

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

Question 16

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.

Question 17

An increase in the money supply decreases the interest rate in the short run.

Question 18

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.

Question 19

An increase in the money supply decreases the equilibrium interest rate and shifts the aggregate-demand curve to the right.

Question 20

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

Question 21

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

Question 22

If the spending multiplier is 8, then the marginal propensity to consume must be 7/8.

Question 23

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Question 24

A significant lag for monetary policy is the time it takes to for a change in the money supply to change the economy. A significant lag for fiscal policy is the time it takes to pass legislation authorizing it.

Question 25

If the marginal propensity to consume is 6/7, then the multiplier is 7.

Question 26

An essential piece of the liquidity preference theory is the demand for money.

Question 27

The theory of liquidity preference is largely at odds with the basic ideas of supply and demand.

Question 28

The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.

Question 29

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Question 30

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

Question 31

During recessions, unemployment insurance payments tend to rise.

Question 32

If the MPC is 4/5, the multiplier is 5/4.

Question 33

Government expenditures on capital goods such as roads could increase aggregate supply. Such effects on aggregate supply are likely to matter more in the short run than in the long run.

Question 34

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

Question 35

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

Question 36

Other things the same, an increase in taxes shifts aggregate demand to the left. In the short run this makes output fall which makes the interest rate rise.

Question 37

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Question 38

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Question 39

Some economists, called supply-siders, argue that changes in the money supply exert a strong influence on aggregate supply.

Question 40

Unemployment insurance and welfare programs work as automatic stabilizers.

Question 41

During recessions, the government tends to run a budget deficit.

Question 42

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

Question 43

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

Question 44

An implication of the Employment Act of 1946 is that the government should respond to changes in the private economy to stabilize aggregate demand.

Question 45

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 _____.

Question 46

The automatic stabilizers in the U.S. economy are sufficiently strong to prevent recessions.​

Question 47

One of President Obama's first policy initiatives was a stimulus bill that included large increases in government spending.

Question 48

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 49

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

Question 50

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

Question 51

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.

Question 52

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

Question 53

​According to the IGM poll, most economists think that the benefits of ARRA exceeded the costs.​

Question 54

​According to the IGM poll, most economists think that the crowding out effects were stronger than the stimulative effects of ARRA.

Question 55

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

Question 56

During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.

Question 57

​Many economists oppose a constitutional amendment that would require a balanced budget for the federal government because it would probably make the business cycle more volatile.

Question 58

If the government faced a balanced budget rule, it would be forced to raise taxes or decrease spending during a recession.​

Question 59

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 60

A severe problem that many economists have with the active use of monetary policy and fiscal policy to stabilize the economy is that, while those policies obviously work well in practice, they are not well understood on a theoretical level.

Question 61

Figure 34-8 ​
Refer to Figure 34-8. Initial equilibrium exists at point A. A decline in prices will cause households to _____ their desired money holdings, moving the interest rate to _____.

Question 62

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 63

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 _____.

Question 64

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 65

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 66

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

Question 67

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

Question 68

Figure 34-9 ​
Refer to Figure 34-9. 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 69

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

Question 70

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

Question 71

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

Question 72

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

Question 73

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

Question 74

Figure 34-8 ​
Refer to Figure 34-8. 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 75

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

Question 76

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 77

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

Question 78

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

Question 79

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

Question 80

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 _____.