Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Assume the money market is initially in equilibrium. If the price level decreases, then according to liquidity preference theory there is an excess

Accepted Answer

A)  supply of money until the interest rate increases.
B)  supply of money until the interest rate decreases.
C)  demand for money until the interest rate increases.
D)  demand for money until the interest rate decreases.E) None of the above
F) B) and C)

Question 3

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

Accepted Answer

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

Question 4

Most economists believe that fiscal policy

Accepted Answer

A)  only affects aggregate demand and not aggregate supply.
B)  primarily affects aggregate demand.
C)  primarily effects aggregate supply.
D)  only affects aggregate supply and not aggregate demand.E) A) and C)
F) A) and B)

Question 5

In a certain economy, when income is $400, consumer spending is $350. The value of the multiplier for this economy is 3.125. It follows that, when income is $450, consumer spending is

Accepted Answer

A)  $384. For this economy, an initial impulse of $50 in consumer spending translates into a $146.67 increase in aggregate demand.
B)  $384. For this economy, an initial impulse of $50 in consumer spending translates into a $156.25 increase in aggregate demand.
C)  $389.38. For this economy, an initial impulse of $50 in consumer spending translates into a $146.67 increase in aggregate demand.
D)  $389.38. For this economy, an initial impulse of $50 in consumer spending translates into a $156.25 increase in aggregate demand.E) B) and C)
F) None of the above

Question 6

According to liquidity preference theory,

Accepted Answer

A)  an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right.
B)  an increase in the interest rate increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand leftward.
C)  an increase in the price level reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand rightward.
D)  an increase in the price level increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand leftward.E) B) and D)
F) All of the above

Question 7

Shifts in aggregate demand affect the price level in

Accepted Answer

A)  the short run but not in the long run.
B)  the long run but not in the short run.
C)  both the short and long run.
D)  neither the short nor long run.E) C) and D)
F) None of the above

Question 8

An increase in the MPC

Accepted Answer

A)  increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
B)  increases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.
C)  decreases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
D)  decreases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.E) C) and D)
F) All of the above

Question 9

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 3. It follows that, when income is $101, consumer spending is

Accepted Answer

A)  $60.60.
B)  $60.67.
C)  $61.33.
D)  $63.00.E) None of the above
F) A) and C)

Question 10

Which of the following policy actions shifts the aggregate-demand curve?

Accepted Answer

A)  an increase in the money supply
B)  an increase in taxes
C)  an increase in government spending
D)  All of the above are correct.E) A) and B)
F) B) and C)

Question 11

A decrease in government spending initially and primarily shifts

Accepted Answer

A)  aggregate demand to the right.
B)  aggregate demand to the left.
C)  aggregate supply to the right.
D)  neither aggregate demand nor aggregate supply.E) A) and B)
F) B) and D)

Question 12

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 13

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) B) and C)
F) All of the above

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

Use the money market to explain the interest-rate effect and its relation to the slope of the aggregate demand curve.

Accepted Answer

When the price level falls, people need ...

Question 16

The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?

Accepted Answer

A)  increase government expenditures or increase the money supply
B)  increase government expenditures or decrease the money supply
C)  decrease government expenditures or increase the money supply
D)  decrease government expenditures or decrease the money supplyE) None of the above
F) A) and B)

Question 17

Fiscal policy affects the economy

Accepted Answer

A)  only in the short run.
B)  only in the long run.
C)  in both the short and long run.
D)  in neither the short nor the long run.E) A) and D)
F) A) and C)

Question 18

If expected inflation is constant, then when the nominal interest rate increases, the real interest rate

Accepted Answer

A)  increases by more than the change in the nominal interest rate.
B)  increases by the change in the nominal interest rate.
C)  decreases by the change in the nominal interest rate.
D)  decreases by more than the change in the nominal interest rate.E) A) and B)
F) A) and C)

Question 19

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?

Accepted Answer

A)  decrease the money supply
B)  increase government expenditures
C)  increase taxes
D)  All of the above are correct.E) A) and D)
F) A) and C)

Question 20

In the early 1960s, the Kennedy administration made considerable use of

Accepted Answer

A)  fiscal policy to stimulate the economy.
B)  fiscal policy to slow down the economy.
C)  monetary policy to stimulate the economy.
D)  monetary policy to slow down the economy.E) B) and C)
F) None of the above

Exam 21: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Which of the following policy actions shifts the aggregate-demand curve?

Correct AnswerverifiedShow Answer

In the early 1960s, the Kennedy administration made considerable use of

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

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 policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?

Correct AnswerverifiedShow Answer

In a certain economy, when income is $400, consumer spending is $350. The value of the multiplier for this economy is 3.125. It follows that, when income is $450, consumer spending is

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

The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?

Correct AnswerverifiedShow Answer

According to liquidity preference theory,

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Use the money market to explain the interest-rate effect and its relation to the slope of the aggregate demand curve.

Correct AnswerverifiedWhen the price level falls, people need ...View AnswerShow Answer

Shifts in aggregate demand affect the price level in

Correct AnswerverifiedShow Answer

If expected inflation is constant, then when the nominal interest rate increases, the real interest rate

Correct AnswerverifiedShow Answer

A decrease in government spending initially and primarily shifts

Correct AnswerverifiedShow Answer

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 3. It follows that, when income is $101, consumer spending is

Correct AnswerverifiedShow Answer

Fiscal policy affects the economy

Correct AnswerverifiedShow Answer

Most economists believe that fiscal policy

Correct AnswerverifiedShow Answer

An increase in the MPC

Correct AnswerverifiedShow Answer

Assume the money market is initially in equilibrium. If the price level decreases, then according to liquidity preference theory there is an excess

Correct AnswerverifiedShow Answer

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When the price level falls, people need ...
View Answer

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