Question 1

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $80 billion to the left. The government wants to change spending to offset this decrease in demand. The MPC is 0.75. Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in real GDP?

Accepted Answer

A)   Raise both taxes and expenditures by $80 billion dollars.
B)   Raise both taxes and expenditures by $10 billion dollars.
C)   Reduce both taxes and expenditures by $80 billion dollars.
D)   Reduce both taxes and expenditures by $10 billion dollars.E) C) and D)
F) B) and C)

Question 2

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

Accepted Answer

A)   price level ↑ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
B)   price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↓
C)   price level ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↑
D)   price level ↓ ⇒ equilibrium interest rate ↓ ⇒ demand for money ↑ ⇒ quantity of goods and services demanded ↑E) None of the above
F) B) and C)

Question 3

If the interest rate is above the Fed's target, the Fed should

Accepted Answer

A)   buy bonds to increase the money supply.
B)   buy bonds to decrease the money supply.
C)   sell bonds to increase the money supply.
D)   sell bonds to decrease the money supply.E) B) and C)
F) None of the above

Question 4

Which of the following statements generates the greatest amount of disagreement among economists?

Accepted Answer

A)   Increases in the money supply shift aggregate demand to the right.
B)   In the long run, increases in the money supply increase prices, but not output.
C)   Recessions are associated with decreases in consumption, investment, and employment.
D)   Government should use fiscal policy to try to stabilize the economy.E) A) and D)
F) A) and C)

Question 5

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

Accepted Answer

A)   buy bonds to raise interest rates.
B)   buy bonds to lower interest rates.
C)   sell bonds to raise interest rates.
D)   sell bonds to lower interest rates.E) A) and B)
F) B) and C)

Question 6

In the short run, a decrease in the money supply causes interest rates to

Accepted Answer

A)   increase, and aggregate demand to shift right.
B)   increase, and aggregate demand to shift left.
C)   decrease, and aggregate demand to shift right.
D)   decrease, and aggregate demand to shift left.E) C) and D)
F) None of the above

Question 7

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

Accepted Answer

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.E) B) and C)
F) None of the above

Question 8

In which of the following cases would the quantity of money demanded be largest?

Accepted Answer

A)   r = 0.03, P = 1.2
B)   r = 0.03, P = 1.3
C)   r = 0.04, P = 1.2
D)   r = 0.05, P = 0.9E) B) and D)
F) All of the above

Question 9

Liquidity refers to

Accepted Answer

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.E) B) and C)
F) A) and D)

Question 10

Which of the following statements is correct for the long run?

Accepted Answer

A)   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)   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)   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 relatively slow to adjust.
D)   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.E) A) and D)
F) A) and C)

Question 11

Which of the following shifts aggregate demand to the right?

Accepted Answer

A)   The price level rises.
B)   The price level falls.
C)   The money supply falls.
D)   None of the above is correct.E) All of the above
F) B) and C)

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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 decrease in the equilibrium interest rate from r1 to r3?

Accepted Answer

A)   a decrease in the price level
B)   a decrease in the number of firms building new factories and buying new equipment
C)   an increase in the price level
D)   an increase in the number of firms building new factories and buying new equipmentE) None of the above
F) B) and C)

Question 14

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?

Accepted Answer

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

Question 15

Because the liquidity-preference framework focuses on the

Accepted Answer

A)   short run, it assumes the price level adjusts to bring the money market to equilibrium.
B)   short run, it assumes the interest rate adjusts to bring the money market to equilibrium.
C)   long run, it assumes the price level adjusts to bring the money market to equilibrium.
D)   long run, it assumes the interest rate adjusts to bring the money market to equilibrium.E) B) and C)
F) None of the above

Question 16

In the graph of the money market, the money supply curve is

Accepted Answer

A)   vertical. It shifts rightward if the Fed buys bonds.
B)   vertical. It shifts rightward if the Fed sells bonds.
C)   upward sloping. It shifts rightward if the Fed buys bonds.
D)   upward sloping. It shifts rightward if the Fed sells bonds.E) A) and C)
F) C) and D)

Question 17

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

Accepted Answer

A)   MPC = 1/2, and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures.
B)   MPC = 2/3, and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures
C)   MPC = 3/4, and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures
D)   All of the above are correct.E) A) and B)
F) A) and C)

Question 18

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

Accepted Answer

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.E) A) and C)
F) None of the above

Question 19

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

Accepted Answer

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.E) B) and C)
F) A) and D)

Question 20

Both monetary policy and fiscal policy affect aggregate demand.

Accepted Answer

A) True 
 B)False

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

Correct Answer
verified

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

Correct Answer
verified

Because the liquidity-preference framework focuses on the

Correct Answer
verified

Which of the following statements generates the greatest amount of disagreement among economists?

Correct Answer
verified

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 decrease in the equilibrium interest rate from r1 to r3?

Correct Answer
verified

In the graph of the money market, the money supply curve is

Correct Answer
verified

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

Correct Answer
verified

Both monetary policy and fiscal policy affect aggregate demand.

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is correct for the long run?

Correct Answer
verified

In which of the following cases would the quantity of money demanded be largest?

Correct Answer
verified

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?

Correct Answer
verified

If the interest rate is above the Fed's target, the Fed should

Correct Answer
verified

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

Correct Answer
verified

Which of the following shifts aggregate demand to the right?

Correct Answer
verified

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

Correct Answer
verified

Liquidity refers to

Correct Answer
verified

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

Correct Answer
verified

In the short run, a decrease in the money supply causes interest rates to

Correct Answer
verified

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

Correct AnswerverifiedShow Answer

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

Correct AnswerverifiedShow Answer

Because the liquidity-preference framework focuses on the

Correct AnswerverifiedShow Answer

Which of the following statements generates the greatest amount of disagreement among economists?

Correct AnswerverifiedShow Answer

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 decrease in the equilibrium interest rate from r1 to r3?

Correct AnswerverifiedShow Answer

In the graph of the money market, the money supply curve is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Both monetary policy and fiscal policy affect aggregate demand.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is correct for the long run?

Correct AnswerverifiedShow Answer

In which of the following cases would the quantity of money demanded be largest?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

If the interest rate is above the Fed's target, the Fed should

Correct AnswerverifiedShow Answer

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

Correct AnswerverifiedShow Answer

Which of the following shifts aggregate demand to the right?

Correct AnswerverifiedShow Answer

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

Correct AnswerverifiedShow Answer

Liquidity refers to

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In the short run, a decrease in the money supply causes interest rates to

Correct AnswerverifiedShow Answer

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