Question 1

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

Accepted Answer

liquidity ...

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

When the interest rate decreases, 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) None of the above
F) A) and B)

Question 4

The short-run effects on the interest rate are

Accepted Answer

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

Question 5

Other things the same, automatic stabilizers tend to

Accepted Answer

A)   raise expenditures during expansions and recessions.
B)   lower expenditures during expansions and recessions.
C)   raise expenditures during recessions and lower expenditures during expansions.
D)   raise expenditures during expansions and lower expenditures during recessions.E) B) and C)
F) A) and D)

Question 6

Which of the following illustrates how the investment accelerator works?

Accepted Answer

A)   An increase in government expenditures increases aggregate spending so that SnoozeBargain Co. decides to modernize its motels.
B)   An increase in government expenditures increases the interest rate so that SnoozeBargain Co. decides to modernize its motels.
C)   An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by SnoozeBargain Co. rises.
D)   An increase in government expenditures decreases the interest rate so that SnoozeBargain Co. decides to modernize its motels.E) C) and D)
F) A) and C)

Question 7

Figure 34-7 
-Refer to Figure 34-7. The aggregate-demand curve could shift from AD1 to AD2 as a result of

Accepted Answer

A)   an increase in government purchases.
B)   a decrease in net exports.
C)   households saving a smaller fraction of their income.
D)   a decrease in the price level.E) C) and D)
F) B) and C)

Question 8

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $50 billion to the left. The government wants to change its spending to offset this decrease in demand. The MPC is 0.80. Suppose the effect on aggregate demand from a change in taxes is 4/5 the size of the change from government expenditures. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in aggregate demand?

Accepted Answer

A)   Raise both taxes and expenditures by $5.56 billion dollars.
B)   Raise taxes by $40 billion dollars and increase expenditures by $50 billion dollars.
C)   Reduce taxes by $10 billion dollars and increase expenditures by $10 billion dollars.
D)   Reduce taxes by $5.56 billion dollars and increase expenditures by $5.56 billion dollars.E) A) and D)
F) A) and C)

Question 9

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

Accepted Answer

A)   level of real output only.
B)   interest rate only.
C)   level of real output and by the interest rate.
D)   Federal Reserve.E) A) and B)
F) A) and D)

Question 10

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

Accepted Answer

The answer of The additional shifts in aggregate demand that...

Question 11

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

Accepted Answer

A)   interest rate
B)   money supply
C)   quantity of output
D)   price levelE) C) and D)
F) A) and C)

Question 12

The lag problem associated with monetary policy is due mostly to

Accepted Answer

A)   the fact that business firms make investment plans far in advance.
B)   the political system of checks and balances that slows down the process of determining monetary policy.
C)   the time it takes for changes in government spending to affect the interest rate.
D)   All of the above are correct.E) A) and B)
F) All of the above

Question 13

Which of the following is an example of an increase in government purchases?

Accepted Answer

A)   The government builds new roads.
B)   The Federal Reserve purchases government bonds.
C)   The government decreases personal income taxes.
D)   The government increases unemployment insurance benefit payments.E) None of the above
F) A) and B)

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Critics of stabilization policy argue that

Accepted Answer

A)   "animal spirits" must be offset by active monetary policy.
B)   active monetary policy is necessary for steady economic growth.
C)   the lag problem ends up being a cause of economic fluctuations.
D)   active fiscal policy is required for steady economic growth.E) None of the above
F) A) and B)

Question 16

The interest-rate effect

Accepted Answer

A)   depends on the idea that increases in interest rates increase the quantity of money demanded.
B)   depends on the idea that increases in interest rates increase the quantity of money supplied.
C)   is the most important reason, in the case of the United States, for the downward slope of the aggregate- demand curve.
D)   is the least important reason, in the case of the United States, for the downward slope of the aggregate- demand curve.E) A) and C)
F) A) and B)

Question 17

Assume the following.
• The MPC has a value of 0.8.
• The relationship between the interest rate, r, and investment, I, is given by the equation,
I = 20,000 - br,
Where b is a positive constant.
• Government purchases, G, are increased by $1,000.
In which of the following cases would there be no crowding out?

Accepted Answer

A)   b = 0
B)   b = 0.2
C)   b = 0.8
D)   b = 1E) A) and B)
F) A) and C)

Question 18

If the Fed conducts open-market sales, the money supply

Accepted Answer

A)   increases and aggregate demand shifts right.
B)   increases and aggregate demand shifts left.
C)   decreases and aggregate demand shifts right.
D)   decreases and aggregate demand shifts left.E) A) and B)
F) C) and D)

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

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

Exam 16: The Influence of Monetary and Fiscal Policy on Aggregate Demand

The short-run effects on the interest rate are

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

If the Fed conducts open-market sales, the money supply

Correct Answer
verified

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

Correct Answer
verified
liquidity ...
View Answer

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

Critics of stabilization policy argue that

Correct Answer
verified

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

Correct Answer
verified

Which of the following is an example of an increase in government purchases?

Correct Answer
verified

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.

Correct Answer
verified

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.

Correct Answer
verified

Other things the same, automatic stabilizers tend to

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

The lag problem associated with monetary policy is due mostly to

Correct Answer
verified

Which of the following illustrates how the investment accelerator works?

Correct Answer
verified

The interest-rate effect

Correct Answer
verified

Correct Answer
verified

Exam 16: The Influence of Monetary and Fiscal Policy on Aggregate Demand

The short-run effects on the interest rate are

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If the Fed conducts open-market sales, the money supply

Correct AnswerverifiedShow Answer

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

Correct Answerverifiedliquidity ...View AnswerShow Answer

Figure 34-7 -Refer to Figure 34-7. The aggregate-demand curve could shift from AD1 to AD2 as a result of

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Critics of stabilization policy argue that

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is an example of an increase in government purchases?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Other things the same, automatic stabilizers tend to

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The lag problem associated with monetary policy is due mostly to

Correct AnswerverifiedShow Answer

Which of the following illustrates how the investment accelerator works?

Correct AnswerverifiedShow Answer

The interest-rate effect

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
verified

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

Correct Answer
verified
liquidity ...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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