Question 1

Suppose that the government spends more on replacing old school buildings with new ones. What does this do to aggregate demand? Please cite the presence of the multiplier effect, the crowding-out effect and taxes.

Accepted Answer

The increase in expenditures on a new sc...

Question 2

When the central bank contracts the money supply, the interest rate rises to bring the money market into equilibrium and reduces the quantity of goods and services demanded for any given price level. This:

Accepted Answer

A)   shifts the aggregate demand curve to the right.
B)   shifts the aggregate demand curve to the left.
C)   shifts the aggregate supply curve to the right.
D)   shifts the aggregate supply curve to the left.E) B) and D)
F) B) and C) B

Question 3

Different theories of the interest rate are useful for different purposes. When thinking about the long-run determinants of interest rates, it is best to keep in mind:

Accepted Answer

A)   the loanable funds theory.
B)   the liquidity preference theory.
C)   the classical economic theory.
D)   the price level theory.E) All of the above
F) None of the above

Question 4

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

Accepted Answer

The nominal interest rate on currency is...

Question 5

Different theories of the interest rate are useful for different purposes. When thinking about the short-run determinants of interest rates, it is best to keep in mind:

Accepted Answer

A)   the loanable funds theory.
B)   the liquidity preference theory.
C)   the classical economic theory.
D)   the price level theory.E) A) and D)
F) All of the above

Question 6

The crowding-out effect is caused by

Accepted Answer

A)   an increase in the money supply increases the demand for goods and services, and thus crowds out investment.
B)   an increase in government purchases reduces the demand for goods and services, and thus crowds out investment.
C)   an increase in consumer income increases the demand for goods and services, and thus crowds out investment.
D)   an increase in government purchases increases the demand for goods and services, and thus crowds out investment.E) B) and D)
F) All of the above

Question 7

The equilibrium interest rate is the rate at which the quantity of money demanded exactly balances the quantity of money supplied.

Accepted Answer

A) True 
 B)False

Question 8

Keynes thought that the behaviour of the economy in the short run was influenced by what he called "animal spirits." By this he meant that business people sometimes felt good about the economy, and carried out lots of investment, and at other times felt bad about the economy, and so cut back on their investment spending. Explain how such fluctuations in investment would lead to fluctuations in real GDP and prices.

Accepted Answer

Fluctuations in investment cause the agg...

Question 9

In 2009, Professor Mankiw wrote an article in the New York Times suggesting negative interest rates. The logic is that consumers would spend more money. The additional spending would:

Accepted Answer

A)   increase aggregate demand and act as a boost to the economy.
B)   decrease aggregate demand and act as a boost to the economy.
C)   increase aggregate demand and slow down the economy.
D)   decrease aggregate demand and slow down the economy.E) A) and B)
F) A) and C) A

Question 10

The equilibrium interest rate occurs in the money market where the:

Accepted Answer

A)   quantity of money available is zero.
B)   maximum quantity of funds has been borrowed and loaned.
C)   money supply is equal to the money demanded.
D)   quantity of money demanded is zero.E) A) and B)
F) A) and D) C

Question 11

More reflective of current central bank policy is to treat the money supply, rather than the interest rate, as its policy instrument.

Accepted Answer

A) True 
 B)False

Question 12

Briefly discuss the theory of liquidity preference.

Accepted Answer

In his classic book, The General Theory ...

Question 13

If asset markets are driven by the "animal spirits" of investors, then

Accepted Answer

A)   those markets reflect rational behaviour.
B)   those markets reflect irrational behaviour.
C)   the efficient markets hypothesis is correct.
D)   the stock market exhibits informational efficiency.E) A) and C)
F) A) and B)

Question 14

What is the difference between monetary policy and fiscal policy?

Accepted Answer

The Bank of England, the European Centra...

Question 15

John Maynard Keynes's liquidity preference theory suggests that the interest rate is determined by:

Accepted Answer

A)   the supply of and demand for loanable funds.
B)   aggregate supply and aggregate demand.
C)   the commercial banks.
D)   the supply of and demand for money.E) B) and C)
F) A) and C)

Question 16

As the interest rate falls, people become more willing to hold money until, at the equilibrium interest rate, people are happy:

Accepted Answer

A)   to demand the central bank for more money.
B)   to hold exactly the amount of money the central bank has supplied.
C)   to demand less than the amount of money the central bank has supplied.
D)   to demand more than the amount of money the central bank has supplied.E) A) and B)
F) B) and C)

Question 17

An increase in the interest rate reduces the quantity of goods and services demanded, because borrowing is less expensive.

Accepted Answer

A) True 
 B)False

Question 18

A tax change is a determinant of the size of the shift in the aggregate demand curve. The shift in aggregate demand curve will be affected by

Accepted Answer

A)   households' perceptions about whether the tax change is on income or on goods.
B)   households' perceptions about whether the tax change is local or national.
C)   households' perceptions about whether the tax change is good or bad.
D)   households' perceptions about whether the tax change is permanent or temporary.E) None of the above
F) B) and D)

Question 19

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

Accepted Answer

When the money supply increases, the int...

Question 20

The multiplier effect means that aggregate demand curve will shift by a larger amount than the increase in _____________.

Accepted Answer

A)   consumer spending.
B)   budget revenues.
C)   government spending.
D)   the aggregate supply.E) All of the above
F) B) and C)

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

Suppose that the government spends more on replacing old school buildings with new ones. What does this do to aggregate demand? Please cite the presence of the multiplier effect, the crowding-out effect and taxes.

Correct Answer
verified
The increase in expenditures on a new sc...
View Answer

When the central bank contracts the money supply, the interest rate rises to bring the money market into equilibrium and reduces the quantity of goods and services demanded for any given price level. This:

Correct Answer
verified
B

Different theories of the interest rate are useful for different purposes. When thinking about the long-run determinants of interest rates, it is best to keep in mind:

Correct Answer
verified

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

Correct Answer
verified
The nominal interest rate on currency is...
View Answer

Different theories of the interest rate are useful for different purposes. When thinking about the short-run determinants of interest rates, it is best to keep in mind:

Correct Answer
verified

The crowding-out effect is caused by

Correct Answer
verified

The equilibrium interest rate is the rate at which the quantity of money demanded exactly balances the quantity of money supplied.

Correct Answer
verified

Correct Answer
verified
Fluctuations in investment cause the agg...
View Answer

In 2009, Professor Mankiw wrote an article in the New York Times suggesting negative interest rates. The logic is that consumers would spend more money. The additional spending would:

Correct Answer
verified
A

The equilibrium interest rate occurs in the money market where the:

Correct Answer
verified
C

More reflective of current central bank policy is to treat the money supply, rather than the interest rate, as its policy instrument.

Correct Answer
verified

Briefly discuss the theory of liquidity preference.

Correct Answer
verified
In his classic book, The General Theory ...
View Answer

If asset markets are driven by the "animal spirits" of investors, then

Correct Answer
verified

What is the difference between monetary policy and fiscal policy?

Correct Answer
verified
The Bank of England, the European Centra...
View Answer

John Maynard Keynes's liquidity preference theory suggests that the interest rate is determined by:

Correct Answer
verified

As the interest rate falls, people become more willing to hold money until, at the equilibrium interest rate, people are happy:

Correct Answer
verified

An increase in the interest rate reduces the quantity of goods and services demanded, because borrowing is less expensive.

Correct Answer
verified

A tax change is a determinant of the size of the shift in the aggregate demand curve. The shift in aggregate demand curve will be affected by

Correct Answer
verified

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

Correct Answer
verified
When the money supply increases, the int...
View Answer

The multiplier effect means that aggregate demand curve will shift by a larger amount than the increase in _____________.

Correct Answer
verified

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

Suppose that the government spends more on replacing old school buildings with new ones. What does this do to aggregate demand? Please cite the presence of the multiplier effect, the crowding-out effect and taxes.

Correct AnswerverifiedThe increase in expenditures on a new sc...View AnswerShow Answer

When the central bank contracts the money supply, the interest rate rises to bring the money market into equilibrium and reduces the quantity of goods and services demanded for any given price level. This:

Correct AnswerverifiedB

Different theories of the interest rate are useful for different purposes. When thinking about the long-run determinants of interest rates, it is best to keep in mind:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedThe nominal interest rate on currency is...View AnswerShow Answer

Different theories of the interest rate are useful for different purposes. When thinking about the short-run determinants of interest rates, it is best to keep in mind:

Correct AnswerverifiedShow Answer

The crowding-out effect is caused by

Correct AnswerverifiedShow Answer

The equilibrium interest rate is the rate at which the quantity of money demanded exactly balances the quantity of money supplied.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedFluctuations in investment cause the agg...View AnswerShow Answer

In 2009, Professor Mankiw wrote an article in the New York Times suggesting negative interest rates. The logic is that consumers would spend more money. The additional spending would:

Correct AnswerverifiedA

The equilibrium interest rate occurs in the money market where the:

Correct AnswerverifiedC

More reflective of current central bank policy is to treat the money supply, rather than the interest rate, as its policy instrument.

Correct AnswerverifiedShow Answer

Briefly discuss the theory of liquidity preference.

Correct AnswerverifiedIn his classic book, The General Theory ...View AnswerShow Answer

If asset markets are driven by the "animal spirits" of investors, then

Correct AnswerverifiedShow Answer

What is the difference between monetary policy and fiscal policy?

Correct AnswerverifiedThe Bank of England, the European Centra...View AnswerShow Answer

John Maynard Keynes's liquidity preference theory suggests that the interest rate is determined by:

Correct AnswerverifiedShow Answer

As the interest rate falls, people become more willing to hold money until, at the equilibrium interest rate, people are happy:

Correct AnswerverifiedShow Answer

An increase in the interest rate reduces the quantity of goods and services demanded, because borrowing is less expensive.

Correct AnswerverifiedShow Answer

A tax change is a determinant of the size of the shift in the aggregate demand curve. The shift in aggregate demand curve will be affected by

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedWhen the money supply increases, the int...View AnswerShow Answer

The multiplier effect means that aggregate demand curve will shift by a larger amount than the increase in _____________.

Correct AnswerverifiedShow Answer

Correct Answer
verified
The increase in expenditures on a new sc...
View Answer

Correct Answer
verified
B

Correct Answer
verified

Correct Answer
verified
The nominal interest rate on currency is...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Fluctuations in investment cause the agg...
View Answer

Correct Answer
verified
A

Correct Answer
verified
C

Correct Answer
verified

Correct Answer
verified
In his classic book, The General Theory ...
View Answer

Correct Answer
verified

Correct Answer
verified
The Bank of England, the European Centra...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
When the money supply increases, the int...
View Answer

Correct Answer
verified