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According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, then the interest rate will


A) increase and the quantity of money demanded will decrease.
B) increase and the quantity of money demanded will increase.
C) decrease and the quantity of money demanded will decrease.
D) decrease and the quantity of money demanded will increase.

E) C) and D)
F) B) and D)

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According to the theory of liquidity preference, money demand


A) and the money supply are positively related to the interest rate.
B) and the money supply are negatively related to the interest rate.
C) is negatively related to the interest rate, while the money supply is independent of the interest rate.
D) is independent of the interest rate, while money supply is negatively related to the interest rate.

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

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According to liquidity preference theory,


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

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For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve?


A) An increase in the price level decreases the interest rate.
B) An increase in the price level increases the interest rate.
C) An increase in the money supply decreases the interest rate.
D) An increase in the money supply increases the interest rate.

E) A) and B)
F) A) and C)

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The positive feedback from aggregate demand to investment is called


A) the investment multiplier.
B) the crowding-out effect.
C) the investment accelerator.
D) the crowding-in multiplier.

E) All of the above
F) None of the above

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An aide to a U.S. Congressman computes the effect on aggregate demand of a $20 billion tax cut. The actual increase in aggregate demand is less than the aide expected. Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand?


A) The actual MPC was larger than the MPC the aide used to compute the multiplier.
B) The aide thought the tax cut would be permanent, but the actual tax cut was temporary.
C) The increase in income shifted money demand less than the aide had anticipated.
D) The increase in income resulted in investment rising more than the aide had anticipated.

E) None of the above
F) All of the above

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If the MPC is 3/5 then the multiplier is


A) 4, so a $100 increase in government spending increases aggregate demand by $400.
B) 1.5, so a $100 increase in government spending increases output by $150.
C) 2.5, so a $100 increase in government spending increases aggregate demand by $250.
D) 1.67, so a $100 increase in government spending increases output by $166.67.

E) A) and B)
F) B) and C)

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Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?


A) the crowding-out effect
B) the multiplier effect
C) the exchange-rate effect
D) the interest-rate effect

E) None of the above
F) B) and D)

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In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?


A) the interest rate falls and aggregate supply is relatively flat
B) the interest rate falls and aggregate supply is relatively steep
C) the interest rate rises and aggregate supply is relatively flat
D) the interest rate rises and aggregate supply is relatively steep

E) A) and B)
F) A) and C)

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


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

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Supply-side economists focus more than other economists on


A) how fiscal policy affects consumption.
B) the multiplier effect of fiscal policy.
C) how fiscal policy affects aggregate supply.
D) the money supply.

E) A) and B)
F) All of the above

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The short-run effects on the interest rate are


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

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


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) B) and C)

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During recessions, automatic stabilizers tend to make the government's budget


A) move toward deficit.
B) move toward surplus.
C) move toward balance.
D) not necessarily move the budget in any particular direction.

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

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If there is excess demand for money, then people will


A) deposit more money into interest-bearing accounts, and the interest rate will fall.
B) deposit more money into interest-bearing accounts, and the interest rate will rise.
C) withdraw money from interest-bearing accounts, and the interest rate will fall.
D) withdraw money from interest-bearing accounts, and the interest rate will rise.

E) None of the above
F) A) and C)

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

A) True
B) False

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Other things equal, the higher the price level, the higher is the real wealth of households.

A) True
B) False

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Liquidity preference refers directly to Keynes' theory concerning


A) the effects of changes in money demand and supply on interest rates.
B) the effects of changes in money demand and supply on exchange rates.
C) the effects of wealth on expenditures.
D) the difference between temporary and permanent changes in income.

E) A) and C)
F) All of the above

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are changes in fiscal policy that stimulate aggregate demand when the economy goes into recession without policymakers having to take any deliberate action.

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Automatic ...

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Suppose there is an increase in government spending. To stabilize output, the Federal Reserve would


A) increase government spending.
B) increase the money supply.
C) decrease government spending.
D) decrease the money supply.

E) All of the above
F) A) and C)

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