Question 1

When the interest rate is below the equilibrium level,

Accepted Answer

A)   the quantity of money that the Federal Reserve has supplied exceeds the quantity of money that people want to hold.
B)   people respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts.
C)   bond issuers and banks respond by lowering the interest rates they offer.
D)   All of the above are correct.E) B) and C)
F) A) and D)

Question 2

According to liquidity preference theory, if the price level decreases, then

Accepted Answer

A)   the interest rate falls because money demand shifts right.
B)   the interest rate falls because money demand shifts left.
C)   the interest rate rises because money supply shifts right.
D)   the interest rate rises because money supply shifts left.E) A) and B)
F) A) and C)

Question 3

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

Question 4

When households decide to hold more money,

Accepted Answer

A)   interest rates fall and investment decreases.
B)   interest rates fall and investment increases.
C)   interest rates rise and investment increases.
D)   interest rates rise and investment decreases.E) B) and C)
F) A) and B)

Question 5

Other things the same, which of the following responses would we expect from an increase in U.S. interest rates?

Accepted Answer

A)   Your aunt puts more money in her savings account.
B)   Foreign citizens decide to buy fewer U.S. bonds.
C)   You decide to purchase a new oven for your cookie factory.
D)   All of the above are correct.E) B) and D)
F) B) and C)

Question 6

Assume the following. • The MPC has a value of 0.8.
• The relationship between the interest rate, r, and investment, I, is given by the equation,
I = 20,000 - br,
Where b is a positive constant.
• Government purchases, G, are increased by $1,000.
In which of the following cases would there be no crowding out?

Accepted Answer

A)   b = 0
B)   b = 0.2
C)   b = 0.8
D)   b = 1E) C) and D)
F) B) and C)

Question 7

Both monetary policy and fiscal policy affect aggregate demand.

Accepted Answer

A) True 
 B)False

Question 8

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?

Accepted Answer

A)   the MPC is small and changes in the interest rate have a small effect on investment
B)   the MPC is small and changes in the interest rate have a large effect on investment
C)   the MPC is large and changes in the interest rate have a small effect on investment
D)   the MPC is large and changes in the interest rate have a large effect on investmentE) A) and B)
F) A) and C)

Question 9

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

Accepted Answer

A)   a decrease in the money supply
B)   an increase in tax rates
C)   an increase in government purchases
D)   an increase in interest rates.E) A) and D)
F) A) and C)

Question 10

The lag problem associated with fiscal policy is due mostly to

Accepted Answer

A)   the fact that business firms make investment plans far in advance.
B)   the political system of checks and balances that slows down the process of implementing fiscal policy.
C)   the time it takes for changes in government spending or taxes to affect the interest rate.
D)   All of the above are correct.E) A) and C)
F) None of the above

Question 11

In the short run, open-market sales

Accepted Answer

A)   increase the price level and real GDP.
B)   decrease the price level and real GDP.
C)   increases the price level and decreases real GDP.
D)   decreases the price level and increases real GDP.E) None of the above
F) C) and D)

Question 12

Permanent tax cuts shift the AD curve

Accepted Answer

A)   farther to the right than do temporary tax cuts.
B)   not as far to the right as do temporary tax cuts.
C)   farther to the left than do temporary tax cuts.
D)   not as far to the left as do temporary tax cuts.E) None of the above
F) C) and D)

Question 13

Monetary policy and fiscal policy are the only factors that influence aggregate demand.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A)   an increase in the interest rate or an increase in the price level
B)   an increase in the interest rate, but not an increase in the price level
C)   an increase in the price level, but not an increase in the interest rate
D)   neither an increase in the interest rate nor an increase in the price levelE) A) and B)
F) A) and C)

Question 15

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Accepted Answer

A) True 
 B)False

Question 16

People will want to hold more money if the price level

Accepted Answer

A)   or if the interest rate increases.
B)   or if the interest rate decreases.
C)   increases or if the interest rate decreases.
D)   decreases or if the interest rate increases.E) A) and B)
F) A) and C)

Question 17

When the Fed decreases the money supply, we expect

Accepted Answer

A)   interest rates and stock prices to rise.
B)   interest rates and stock prices to fall.
C)   interest rates to rise and stock prices to fall.
D)   interest rates to fall and stock prices to rise.E) A) and B)
F) A) and D)

Question 18

According to classical macroeconomic theory,

Accepted Answer

A)   output is determined by the supplies of capital and labor and the available production technology.
B)   for any given level of output, the interest rate adjusts to balance the supply of, and demand for, loanable funds.
C)   given output and the interest rate, the price level adjusts to balance the supply of, and demand for, money.
D)   All of the above are correct.E) A) and B)
F) B) and C)

Question 19

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 20

The logic of the multiplier effect applies

Accepted Answer

A)   only to changes in government spending.
B)   to any change in spending on any component of GDP.
C)   only to changes in the money supply.
D)   only when the crowding-out effect is sufficiently strong.E) A) and D)
F) A) and B)

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

According to liquidity preference theory, if the price level decreases, then

Correct Answer
verified

The logic of the multiplier effect applies

Correct Answer
verified

The lag problem associated with fiscal policy is due mostly to

Correct Answer
verified

When households decide to hold more money,

Correct Answer
verified

When the interest rate is below the equilibrium level,

Correct Answer
verified

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Correct Answer
verified

In the short run, open-market sales

Correct Answer
verified

Both monetary policy and fiscal policy affect aggregate demand.

Correct Answer
verified

Monetary policy and fiscal policy are the only factors that influence aggregate demand.

Correct Answer
verified

Permanent tax cuts shift the AD curve

Correct Answer
verified

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

Correct Answer
verified

People will want to hold more money if the price level

Correct Answer
verified

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

Correct Answer
verified

When the Fed decreases the money supply, we expect

Correct Answer
verified

Other things the same, which of the following responses would we expect from an increase in U.S. interest rates?

Correct Answer
verified

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 Answer
verified

Correct Answer
verified

According to classical macroeconomic theory,

Correct Answer
verified

As the interest rate falls,

Correct Answer
verified

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?

Correct Answer
verified

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

According to liquidity preference theory, if the price level decreases, then

Correct AnswerverifiedShow Answer

The logic of the multiplier effect applies

Correct AnswerverifiedShow Answer

The lag problem associated with fiscal policy is due mostly to

Correct AnswerverifiedShow Answer

When households decide to hold more money,

Correct AnswerverifiedShow Answer

When the interest rate is below the equilibrium level,

Correct AnswerverifiedShow Answer

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Correct AnswerverifiedShow Answer

In the short run, open-market sales

Correct AnswerverifiedShow Answer

Both monetary policy and fiscal policy affect aggregate demand.

Correct AnswerverifiedShow Answer

Monetary policy and fiscal policy are the only factors that influence aggregate demand.

Correct AnswerverifiedShow Answer

Permanent tax cuts shift the AD curve

Correct AnswerverifiedShow Answer

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

Correct AnswerverifiedShow Answer

People will want to hold more money if the price level

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

When the Fed decreases the money supply, we expect

Correct AnswerverifiedShow Answer

Other things the same, which of the following responses would we expect from an increase in U.S. interest rates?

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

Correct AnswerverifiedShow Answer

According to classical macroeconomic theory,

Correct AnswerverifiedShow Answer

As the interest rate falls,

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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