Question 1

Critics of stabilization policy argue that monetary and fiscal policies affect the economy with .

Accepted Answer

The answer of Critics of stabilization policy argue that monetary...

Question 2

Which among the following assets is the most liquid?

Accepted Answer

A)   corporate bonds
B)   fine art
C)   deposits that can be withdrawn using ATMs
D)   shares of stockE) A) and D)
F) A) and C)

Question 3

If the marginal propensity to consume is 6/7, then the multiplier is 7.

Accepted Answer

A) True 
 B)False

Question 4

The exchange-rate effect is based, in part, on the idea that

Accepted Answer

A)   a decrease in the price level reduces the interest rate.
B)   an increase in the price level causes investors to move some of their funds overseas.
C)   an increase in the price level causes domestic goods to become less expensive relative to foreign goods.
D)   a decrease in the price level reduces spending on net exports.E) C) and D)
F) A) and D)

Question 5

According to liquidity preference theory, the money-supply curve would shift if the Fed

Accepted Answer

A)   engaged in open-market operations.
B)   increased money demand.
C)   increase the real income.
D)   did any of the above.E) A) and B)
F) C) and D)

Question 6

If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by

Accepted Answer

A)   increasing the money supply, which raises interest rates.
B)   increasing the money supply, which lowers interest rates.
C)   decreasing the money supply, which raises interest rates.
D)   decreasing the money supply, which lowers interest rates.E) A) and B)
F) A) and C)

Question 7

If the multiplier is 5.25, then the MPC is

Accepted Answer

A)   0.19.
B)   0.68.
C)   0.81.
D)   0.84.E) A) and C)
F) A) and B)

Question 8

An increase in the price level shifts the money demand curve to the left, causing interest rates to increase.

Accepted Answer

A) True 
 B)False

Question 9

The Employment Act of 1946 states that

Accepted Answer

A)   the Fed should use monetary policy only to control the rate of inflation.
B)   the government should promote full employment and production.
C)   the government should periodically increase the minimum wage and unemployment insurance benefits.
D)   All of the above are correct.E) B) and C)
F) B) and D)

Question 10

Which of the following events would shift money demand to the right?

Accepted Answer

A)   an increase in the price level
B)   a decrease in the price level
C)   an increase in the interest rate
D)   a decrease in the interest rateE) B) and D)
F) A) and C)

Question 11

Monetary policy and fiscal policy influence

Accepted Answer

A)   output and prices in the short run and the long run.
B)   output and prices in the short run only.
C)   output in the short run and the long run.
D)   output in the short run only.E) A) and C)
F) None of the above

Question 12

If Congress increases taxes to balance the federal budget, then to prevent unemployment and a recession the Fed will

Accepted Answer

A)   reduce interest rates by increasing the money supply.
B)   increase interest rates by decreasing the money supply.
C)   increase interest rates by increasing the money supply.
D)   reduce interest rates by decreasing the money supply.E) A) and C)
F) B) and D)

Question 13

Suppose aggregate demand shifts to the left and policymakers want to stabilize output. What can they do?

Accepted Answer

A)   repeal an investment tax credit or increase the money supply
B)   repeal an investment tax credit or decrease the money supply
C)   institute an investment tax credit or increase the money supply
D)   institute an investment tax credit or decrease the money supplyE) B) and D)
F) None of the above

Question 14

Suppose that there are no crowding-out effects and the MPC is .9. By how much must the government increase expenditures to shift the aggregate demand curve right by $10 billion?

Accepted Answer

An MPC of .9 means the multiplier = 1/1 ...

Question 15

Assume the multiplier is 5 and that the crowding-out effect is $30 billion. An increase in government purchases of $20 billion will shift the aggregate-demand curve to the

Accepted Answer

A)   right by $130 billion.
B)   right by $70 billion.
C)   right by $50 billion.
D)   right by $10 billion.E) A) and D)
F) C) and D)

Question 16

The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.

Accepted Answer

A) True 
 B)False

Question 17

The theory of liquidity preference was developed by Irving Fisher.

Accepted Answer

A) True 
 B)False

Question 18

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 19

Which of the following statements is correct?

Accepted Answer

A)   Both liquidity preference theory and classical theory assume the interest rate adjusts to bring the money market into equilibrium.
B)   Both liquidity preference theory and classical theory assume the price level adjusts to bring the money market into equilibrium.
C)   Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium; classical theory assumes the price level adjusts to bring the money market into equilibrium.
D)   Liquidity preference theory assumes the price level adjusts to bring the money market into equilibrium; classical theory assumes the interest rate adjusts to bring the money market into equilibrium.E) All of the above
F) B) and C)

Question 20

While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to
1) 25 percent," a more precise account of the Fed's action would be as follows:

Accepted Answer

A)   "Today the Fed told its bond traders to conduct open­market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent."
B)   "Today the Fed raised the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to rise by the same amount."
C)   "Today the Fed took steps to increase the money supply by an amount that is sufficient to increase the federal funds rate to 1.25 percent."
D)   "Today the Fed took a step toward expanding aggregate demand, and this was done by raising the federal funds rate to 1.25 percent."E) A) and B)
F) A) and C)

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

Critics of stabilization policy argue that monetary and fiscal policies affect the economy with .

Correct AnswerverifiedShow Answer

If Congress increases taxes to balance the federal budget, then to prevent unemployment and a recession the Fed will

Correct AnswerverifiedShow Answer

Suppose that there are no crowding-out effects and the MPC is .9. By how much must the government increase expenditures to shift the aggregate demand curve right by $10 billion?

Correct AnswerverifiedAn MPC of .9 means the multiplier = 1/1 ...View AnswerShow Answer

Which among the following assets is the most liquid?

Correct AnswerverifiedShow Answer

Assume the multiplier is 5 and that the crowding-out effect is $30 billion. An increase in government purchases of $20 billion will shift the aggregate-demand curve to the

Correct AnswerverifiedShow Answer

The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.

Correct AnswerverifiedShow Answer

The theory of liquidity preference was developed by Irving Fisher.

Correct AnswerverifiedShow Answer

If the multiplier is 5.25, then the MPC is

Correct AnswerverifiedShow Answer

An increase in the price level shifts the money demand curve to the left, causing interest rates to increase.

Correct AnswerverifiedShow Answer

While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1) 25 percent," a more precise account of the Fed's action would be as follows:

Correct AnswerverifiedShow Answer

The Employment Act of 1946 states that

Correct AnswerverifiedShow Answer

The exchange-rate effect is based, in part, on the idea that

Correct AnswerverifiedShow Answer

Which of the following events would shift money demand to the right?

Correct AnswerverifiedShow Answer

If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by

Correct AnswerverifiedShow Answer

Suppose aggregate demand shifts to the left and policymakers want to stabilize output. What can they do?

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

According to liquidity preference theory, the money-supply curve would shift if the Fed

Correct AnswerverifiedShow Answer

If the marginal propensity to consume is 6/7, then the multiplier is 7.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Monetary policy and fiscal policy influence

Correct AnswerverifiedShow Answer

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An MPC of .9 means the multiplier = 1/1 ...
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