Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Assume the MPC is 0.75.Assume there is a multiplier effect and that the total crowding-out effect is $6 billion.An increase in government purchases of $10 billion will shift aggregate demand to the

Accepted Answer

A)   left by $24 billion.
B)   left by $36 billion.
C)   right by $34 billion.
D)   right by $36 billion.E) A) and C)
F) A) and D)

Question 3

Using the liquidity-preference model,when the Federal Reserve increases the money supply,

Accepted Answer

A)   the equilibrium interest rate decreases.
B)   the aggregate-demand curve shifts to the left.
C)   the quantity of goods and services demanded is unchanged for a given price level.
D)   the long-run aggregate-supply curve shifts to the right.E) B) and D)
F) A) and D)

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

Accepted Answer

A)   shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate.
B)   the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an interest rate.
C)   changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate.
D)   the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate.E) A) and C)
F) A) and D)

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

Automatic stabilizers

Accepted Answer

A)   increase the problems that lags cause in using fiscal policy as a stabilization tool.
B)   are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.
C)   are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession.
D)   All of the above are correct.E) None of the above
F) A) and C)

Question 8

Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference?

Accepted Answer

A)   only the nominal interest rate
B)   both the nominal interest rate and the real interest rate
C)   only the interest rate on long-term bonds
D)   only the interest rate on short-term government bondsE) A) and B)
F) None of the above

Question 9

Suppose foreigners find U.S.goods and services more desirable for some reason other than a change in the exchange rate.Which policies could be used to offset the resulting change in output?

Accepted Answer

A)   an increase in the money supply and an increase in taxes
B)   an increase in the money supply and a decrease in taxes
C)   a decrease in the money supply and an increase in taxes
D)   a decrease in the money supply and a decrease in taxesE) B) and D)
F) A) and D)

Question 10

Figure 24-2.On the left-hand graph,MS represents the supply of money and MD represents the demand for money; on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs.
 2 than it is at Y1. B)  the quantity of money is the same at Y1 as it is at Y2. C)  the price level is higher at r2 than it is at r1. D)  All of the above are correct." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 24-2.Assume the money market is always in equilibrium.Under the assumptions of the model,

Accepted Answer

A)   the real interest rate is higher at Y2 than it is at Y1.
B)   the quantity of money is the same at Y1 as it is at Y2.
C)   the price level is higher at r2 than it is at r1.
D)   All of the above are correct.E) A) and B)
F) All of the above

Question 11

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending,assuming policymakers want to stabilize output?

Accepted Answer

A)   increase taxes
B)   increase the money supply
C)   increase government expenditures
D)   All of the above are correct.E) B) and D)
F) None of the above

Question 12

Suppose stock prices rise.To offset the resulting change in output the Federal Reserve could

Accepted Answer

A)   increase the money supply.This increase would also move the price level closer to its value before the rise in stock prices.
B)   increase the money supply.However,this increase would move the price level farther from its value before the rise in stock prices.
C)   decrease the money supply.This decrease would also move the price level closer to its value before the rise in stock prices.
D)   decrease the money supply.However,this decrease would move the price level farther from its value before the rise in stock prices.E) B) and C)
F) B) and D)

Question 13

Supply-side economists focus more than other economists on

Accepted Answer

A)   how fiscal policy affects consumption.
B)   the multiplier affect of fiscal policy.
C)   how fiscal policy affects aggregate supply.
D)   the money supply.E) A) and C)
F) B) and D)

Question 14

Suppose the MPC is 0.9.There are no crowding out or investment accelerator effects.If the government increases its expenditures by $30 billion,then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion,then by how far does aggregate demand shift to the right?

Accepted Answer

A)   $283 billion and $254.7 billion
B)   $283 billion and $283 billion
C)   $300 billion and $270 billion
D)   $300 billion and $300 billionE) C) and D)
F) A) and C)

Question 15

As the interest rate falls,

Accepted Answer

A)   the quantity of money demanded falls,which would reduce a shortage.
B)   the quantity of money demanded falls,which would reduce a surplus.
C)   the quantity of money demanded rises,which would reduce a shortage.
D)   the quantity of money demanded rises,which would reduce a surplus.E) B) and C)
F) A) and D)

Question 16

Which of the following illustrates how the investment accelerator works?

Accepted Answer

A)   An increase in government expenditures increases the interest rate so that the Burgerville chain of restaurants decides to build fewer new restaurants.
B)   An increase in government expenditures increases aggregate spending so that Burgerville finds it profitable to build more new restaurants.
C)   An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by Burgerville increases.
D)   An increase in government expenditures decreases the interest rate so that Burgerville decides to build more new restaurants.E) A) and B)
F) A) and C)

Question 17

According to the theory of liquidity preference,

Accepted Answer

A)   if the interest rate is below the equilibrium level,then the quantity of money people want to hold is less than the quantity of money the Fed has created.
B)   if the interest rate is above the equilibrium level,then the quantity of money people want to hold is greater than the quantity of money the Fed has created.
C)   the demand for money is represented by a downward-sloping line on a supply-and-demand graph.
D)   All of the above are correct.E) None of the above
F) A) and D)

Question 18

In order to simplify the equation for the multiplier to its familiar,relatively simple form,we make use of the

Accepted Answer

A)   assumption that increases in government purchases have no effect on consumer spending.
B)   assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred.
C)   empirical evidence that points to a value of aboutfor the MPC.
D)   fact that the multiplier effect is represented by an infinite geometric series.E) B) and C)
F) A) and B)

Question 19

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) C) and D)
F) A) and B)

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 24: The Influence of Monetary and Fiscal Policy on Aggregate Demand

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

Correct Answer
verified

According to the theory of liquidity preference,

Correct Answer
verified

Assume the MPC is 0.75.Assume there is a multiplier effect and that the total crowding-out effect is $6 billion.An increase in government purchases of $10 billion will shift aggregate demand to the

Correct Answer
verified

Correct Answer
verified

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending,assuming policymakers want to stabilize output?

Correct Answer
verified

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

Correct Answer
verified

Suppose foreigners find U.S.goods and services more desirable for some reason other than a change in the exchange rate.Which policies could be used to offset the resulting change in output?

Correct Answer
verified

Which of the following illustrates how the investment accelerator works?

Correct Answer
verified

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

Correct Answer
verified

Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference?

Correct Answer
verified

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

Correct Answer
verified

In order to simplify the equation for the multiplier to its familiar,relatively simple form,we make use of the

Correct Answer
verified

Using the liquidity-preference model,when the Federal Reserve increases the money supply,

Correct Answer
verified

Correct Answer
verified

Supply-side economists focus more than other economists on

Correct Answer
verified

Suppose stock prices rise.To offset the resulting change in output the Federal Reserve could

Correct Answer
verified

As the interest rate falls,

Correct Answer
verified

Automatic stabilizers

Correct Answer
verified

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.

Correct Answer
verified

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

Correct Answer
verified

Exam 24: The Influence of Monetary and Fiscal Policy on Aggregate Demand

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

Correct AnswerverifiedShow Answer

According to the theory of liquidity preference,

Correct AnswerverifiedShow Answer

Assume the MPC is 0.75.Assume there is a multiplier effect and that the total crowding-out effect is $6 billion.An increase in government purchases of $10 billion will shift aggregate demand to the

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending,assuming policymakers want to stabilize output?

Correct AnswerverifiedShow Answer

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

Correct AnswerverifiedShow Answer

Suppose foreigners find U.S.goods and services more desirable for some reason other than a change in the exchange rate.Which policies could be used to offset the resulting change in output?

Correct AnswerverifiedShow Answer

Which of the following illustrates how the investment accelerator works?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In order to simplify the equation for the multiplier to its familiar,relatively simple form,we make use of the

Correct AnswerverifiedShow Answer

Using the liquidity-preference model,when the Federal Reserve increases the money supply,

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Supply-side economists focus more than other economists on

Correct AnswerverifiedShow Answer

Suppose stock prices rise.To offset the resulting change in output the Federal Reserve could

Correct AnswerverifiedShow Answer

As the interest rate falls,

Correct AnswerverifiedShow Answer

Automatic stabilizers

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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