Question 1

People might deposit more money into interest-bearing accounts,

Accepted Answer

A)   making the interest rate fall, if there is a surplus in the money market.
B)   making the interest rate rise, if there is a surplus in the money market.
C)   making the interest rate fall, if there is a shortage in the money market.
D)   making the interest rate rise, if there is a shortage in the money market.E) B) and C)
F) B) and D)

Question 2

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 C)
F) B) and D)

Question 3

A 2009 article in The Economist noted that

Accepted Answer

A)   recent research has allowed economists to estimate the values of fiscal multipliers with a great deal of precision.
B)   research on multipliers indicates that multipliers for permanent tax cuts tend to be smaller than multipliers for temporary tax cuts.
C)   most of the evidence on multipliers for government spending is based on changes in military expenditures.
D)   All of the above are correct.E) C) and D)
F) B) and C)

Question 4

Which particular interest rate(s)  do we attempt to explain using the theory of liquidity preference?

Accepted Answer

A)   only the nominal interest rate
B)   both the nominal interest rate and the real interest rate
C)   only the interest rate on long-term bonds
D)   only the interest rate on short-term government bondsE) A) and D)
F) None of the above

Question 5

Automatic stabilizers

Accepted Answer

A)   increase the problems that lags cause in using fiscal policy as a stabilization tool.
B)   are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.
C)   are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession.
D)   All of the above are correct.E) B) and C)
F) A) and D)

Question 6

Some economists argue that

Accepted Answer

A)   monetary policy should actively be used to stabilize the economy.
B)   fiscal policy should actively be used to stabilize the economy.
C)   fiscal policy can be used to shift the AD curve.
D)   All of the above are correct.E) C) and D)
F) B) and D)

Question 7

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) None of the above
F) C) and D)

Question 8

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Accepted Answer

A) True 
 B)False

Question 9

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

Question 10

The interest rate that the Federal Reserve pays banks on the reserves they hold is called the

Accepted Answer

A)   open-market rate.
B)   discount rate.
C)   preference rate.
D)   None of the above are correct.E) A) and B)
F) None of the above

Question 11

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures shifts aggregate demand

Accepted Answer

A)   right by more than $100 billion.
B)   right by $100 billion.
C)   left by more than $100 billion.
D)   left by $100 billion.E) None of the above
F) A) and D)

Question 12

The wealth effect stems from the idea that a higher price level

Accepted Answer

A)   increases the real value of households' money holdings.
B)   decreases the real value of households' money holdings.
C)   increases the real value of the domestic currency in foreign-exchange markets.
D)   decreases the real value of the domestic currency in foreign-exchange markets.E) A) and C)
F) B) and C)

Question 13

Assume the MPC is 0.75. Assume there is a multiplier effect and that the total crowding-out effect is $6 billion. An increase in government purchases of $10 billion will shift aggregate demand to the

Accepted Answer

A)   left by $24 billion.
B)   left by $36 billion.
C)   right by $34 billion.
D)   right by $36 billion.E) A) and B)
F) B) and C)

Question 14

If the price level falls, then

Accepted Answer

A)   the interest rate falls and spending on goods and services falls.
B)   the interest rate falls and spending on goods and services rises.
C)   the interest rate rises and spending on goods and services falls.
D)   the interest rate rises and spending on goods and services rises.E) B) and C)
F) A) and B)

Question 15

The opportunity cost of holding money

Accepted Answer

A)   decreases when the interest rate increases, so people desire to hold more of it.
B)   decreases when the interest rate increases, so people desire to hold less of it.
C)   increases when the interest rate increases, so people desire to hold more of it.
D)   increases when the interest rate increases, so people desire to hold less of it.E) C) and D)
F) All of the above

Question 16

Which of the following statements is correct for the short run?

Accepted Answer

A)   Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for money; the price level adjusts to balance the supply and demand for loanable funds.
B)   Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.
C)   Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for money; the price level is relatively slow to adjust.
D)   Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.E) A) and B)
F) All of the above

Question 17

Suppose foreigners find U.S. goods and services more desirable for some reason other than a change in the exchange rate. Which policies could be used to offset the resulting change in output?

Accepted Answer

A)   an increase in the money supply and an increase in taxes
B)   an increase in the money supply and a decrease in taxes
C)   a decrease in the money supply and an increase in taxes
D)   a decrease in the money supply and a decrease in taxesE) C) and D)
F) B) and D)

Question 18

Figure 16-3.
 
-Refer to Figure 16-3. Which of the following sequences (numbered arrows)  shows the logic of the interest-rate effect?

Accepted Answer

A)   1, 2, 3, 4
B)   1, 4, 3, 2
C)   3, 4, 2, 1
D)   3, 2, 1, 4E) B) and C)
F) A) and C)

Question 19

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

Accepted Answer

A) True 
 B)False

Question 20

Liquidity preference refers directly to Keynes' theory concerning

Accepted Answer

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 B)
F) B) and D)

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

People might deposit more money into interest-bearing accounts,

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Some economists argue that

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Liquidity preference refers directly to Keynes' theory concerning

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The wealth effect stems from the idea that a higher price level

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If the price level falls, then

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The interest rate that the Federal Reserve pays banks on the reserves they hold is called the

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Assume the MPC is 0.75. Assume there is a multiplier effect and that the total crowding-out effect is $6 billion. An increase in government purchases of $10 billion will shift aggregate demand to the

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

Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference?

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Which of the following statements is correct for the short run?

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The opportunity cost of holding money

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

Correct AnswerverifiedShow Answer

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures shifts aggregate demand

Correct AnswerverifiedShow Answer

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

Correct AnswerverifiedShow Answer

Suppose foreigners find U.S. goods and services more desirable for some reason other than a change in the exchange rate. Which policies could be used to offset the resulting change in output?

Correct AnswerverifiedShow Answer

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Correct AnswerverifiedShow Answer

According to liquidity preference theory,

Correct AnswerverifiedShow Answer

Figure 16-3. -Refer to Figure 16-3. Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect?

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A 2009 article in The Economist noted that

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Automatic stabilizers

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