Question 1

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Suppose the money-demand curve is currently MD1. If the current interest rate is r2, then

Accepted Answer

A)   the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied.
B)   people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts.
C)   bond issuers and banks will respond by lowering the interest rates they offer.
D)   in response, the money-demand curve will shift rightward from its current position to establish equilibrium in the money market.E) B) and C)
F) B) and D)

Question 2

Keynes argued that

Accepted Answer

A)   irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment.
B)   irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply.
C)   changes in business and consumer expectations generally stabilize the economy.
D)   All of the above are correct.E) None of the above
F) B) and D)

Question 3

According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in

Accepted Answer

A)   the price level.
B)   the interest rate.
C)   the exchange rate.
D)   real wealth.E) A) and D)
F) B) and D)

Question 4

The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates

Accepted Answer

A)   the accelerator effect.
B)   the multiplier effect.
C)   the chain effect.
D)   the bandwagon effect.E) C) and D)
F) All of the above

Question 5

According to the theory of liquidity preference, an increase in the price level causes the

Accepted Answer

A)   interest rate and investment to rise.
B)   interest rate and investment to fall.
C)   interest rate to rise and investment to fall.
D)   interest rate to fall and investment to rise.E) B) and C)
F) B) and D)

Question 6

Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures?

Accepted Answer

A)   an increase in government expenditures
B)   an increase in net exports
C)   an increase in investment spending
D)   All of the above are correct.E) B) and D)
F) B) and C)

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Question 9

Figure 34-6. 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.
 
-Refer to Figure 34-6. Suppose the graphs are drawn to show the effects of an increase in government purchases. If it were not for the increase in r from r1 to r2, then

Accepted Answer

A)   there would be no crowding out.
B)   the full multiplier effect of the increase in government purchases would be realized.
C)   the AD curves that actually apply, before and after the change in government purchases, would be separated horizontally by the distance equal to the multiplier times the change in government purchases.
D)   All of the above are correct.E) C) and D)
F) A) and C)

Question 10

Last year, total income increased $1,000 and consumption increased $800. An increase in government spending equal to $10 would cause output to increase by $_____ because the multiplier is ______.

Accepted Answer

The answer of Last year, total income increased $1,000 and...

Question 11

If households view a tax cut as temporary, then the tax cut

Accepted Answer

A)   has no effect on aggregate demand.
B)   has more of an effect on aggregate demand than if households view it as permanent.
C)   has the same effect as when households view the cut as permanent.
D)   has less of an effect on aggregate demand than if households view it as permanent.E) C) and D)
F) A) and B)

Question 12

The term crowding-out effect refers to

Accepted Answer

A)   the reduction in aggregate supply that results when a monetary expansion causes the interest rate to decrease.
B)   the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease.
C)   the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase.
D)   the reduction in aggregate demand that results when a decrease in government spending or an increase in taxes causes the interest rate to increase.E) B) and D)
F) A) and B)

Question 13

It is likely that a constitutional amendment that required the government always to run a balanced budget would

Accepted Answer

A)   contribute to a more stable level of output.
B)   mitigate the crowding-out effect.
C)   eliminate the economy's automatic stabilizers.
D)   All of the above are correct.E) A) and D)
F) B) and D)

Question 14

Changes in the interest rate

Accepted Answer

A)   shift aggregate demand whether they are caused by changes in the price level or by changes in fiscal or monetary policy.
B)   shift aggregate demand if they are caused by changes in the price level, but not if they are caused by changes in fiscal or monetary policy.
C)   shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level.
D)   do not shift aggregate demand.E) C) and D)
F) B) and C)

Question 15

Which of the following sequences best represents the crowding-out effect?

Accepted Answer

A)   government purchases ↑ ⇒ GDP ↑ ⇒ supply of money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
B)   government purchases ↓ ⇒ GDP ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↓
C)   government purchases ↑ ⇒ GDP ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
D)   taxes ↑ ⇒ GDP ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓E) B) and C)
F) B) and D)

Question 16

In liquidity preference theory, an increase in the interest rate, other things the same, decreases the quantity of money demanded, but does not shift the money demand curve.

Accepted Answer

A) True 
 B)False

Question 17

When the Fed buys 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) A) and B)
F) A) and C)

Question 18

If the MPC is 5/6 then the multiplier is

Accepted Answer

A)   6/5, so a $200 increase in government spending increases aggregate demand by $240.
B)   5, so a $200 increase in government spending increases aggregate supply by $1000.
C)   6, so a $200 increase in government spending increases aggregate demand by $1200.
D)   6/5, so a $200 increase in government spending increases aggregate supply by $1200.E) A) and D)
F) A) and C)

Question 19

An decrease in taxes shifts aggregate demand

Accepted Answer

A)   to the right. The larger the multiplier is, the farther it shifts.
B)   to the right. The larger the multiplier is, the less it shifts.
C)   to the left. The larger the multiplier is, the farther it shifts.
D)   to the left. The larger the multiplier is, the less it shifts.E) B) and D)
F) A) and C)

Question 20

If the multiplier is 6, then the MPC is

Accepted Answer

A)   0.16.
B)   0.83.
C)   0.71.
D)   0.86.E) B) and D)
F) None of the above

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

Correct Answer
verified

If households view a tax cut as temporary, then the tax cut

Correct Answer
verified

Keynes argued that

Correct Answer
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The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates

Correct Answer
verified

If the MPC is 5/6 then the multiplier is

Correct Answer
verified

Changes in the interest rate

Correct Answer
verified

According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in

Correct Answer
verified

The term crowding-out effect refers to

Correct Answer
verified

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

Correct Answer
verified

An decrease in taxes shifts aggregate demand

Correct Answer
verified

Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures?

Correct Answer
verified

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

Correct Answer
verified

According to the theory of liquidity preference, an increase in the price level causes the

Correct Answer
verified

In liquidity preference theory, an increase in the interest rate, other things the same, decreases the quantity of money demanded, but does not shift the money demand curve.

Correct Answer
verified

Last year, total income increased $1,000 and consumption increased $800. An increase in government spending equal to $10 would cause output to increase by $_ because the multiplier is __.

Correct Answer
verified

If the multiplier is 6, then the MPC is

Correct Answer
verified

Which of the following sequences best represents the crowding-out effect?

Correct Answer
verified

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the money-demand curve is currently MD1. If the current interest rate is r2, then

Correct Answer
verified

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

Correct Answer
verified

It is likely that a constitutional amendment that required the government always to run a balanced budget would

Correct Answer
verified

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

Correct AnswerverifiedShow Answer

If households view a tax cut as temporary, then the tax cut

Correct AnswerverifiedShow Answer

Keynes argued that

Correct AnswerverifiedShow Answer

The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates

Correct AnswerverifiedShow Answer

If the MPC is 5/6 then the multiplier is

Correct AnswerverifiedShow Answer

Changes in the interest rate

Correct AnswerverifiedShow Answer

According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in

Correct AnswerverifiedShow Answer

The term crowding-out effect refers to

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

An decrease in taxes shifts aggregate demand

Correct AnswerverifiedShow Answer

Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to the theory of liquidity preference, an increase in the price level causes the

Correct AnswerverifiedShow Answer

In liquidity preference theory, an increase in the interest rate, other things the same, decreases the quantity of money demanded, but does not shift the money demand curve.

Correct AnswerverifiedShow Answer

Last year, total income increased $1,000 and consumption increased $800. An increase in government spending equal to $10 would cause output to increase by $_____ because the multiplier is ______.

Correct AnswerverifiedShow Answer

If the multiplier is 6, then the MPC is

Correct AnswerverifiedShow Answer

Which of the following sequences best represents the crowding-out effect?

Correct AnswerverifiedShow Answer

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the money-demand curve is currently MD1. If the current interest rate is r2, then

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

It is likely that a constitutional amendment that required the government always to run a balanced budget would

Correct AnswerverifiedShow Answer

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Last year, total income increased $1,000 and consumption increased $800. An increase in government spending equal to $10 would cause output to increase by $_ because the multiplier is __.

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