Question 1

Keynes argued that aggregate demand is

Accepted Answer

A)   stable, because the economy tends to return to its long-run equilibrium quickly after any disturbance to aggregate demand.
B)   stable, because changes in consumption are mostly offset by changes in investment and vice versa.
C)   unstable, because waves of pessimism and optimism create fluctuations in aggregate demand.
D)   unstable, because of long and variable policy lags that worsen economic fluctuations.E) B) and D)
F) A) and B)

Question 2

Figure 34-7 
-Refer to Figure 34-7. The aggregate-demand curve could shift from AD1 to AD2 as a result of

Accepted Answer

A)   an increase in government purchases.
B)   a decrease in net exports.
C)   households saving a smaller fraction of their income.
D)   a decrease in the price level.E) A) and B)
F) B) and C)

Question 3

When the Federal Reserve conducts an open-market purchase, the money supply and aggregate demand _____.

Accepted Answer

increases,...

Question 4

When households find themselves holding too much money, they respond by

Accepted Answer

A)   purchasing interest-earning financial assets and interest rates fall.
B)   purchasing interest-earning financial assets and interest rates rise.
C)   holding the extra money and interest rates rise.
D)   selling interest-earning financial assets, which eliminates the excess supply of money.E) B) and C)
F) A) and D)

Question 5

In recent years, the Federal Reserve has conducted policy by setting a target for the

Accepted Answer

A)   size of the money supply.
B)   growth rate of the money supply.
C)   federal funds rate.
D)   discount rate.E) A) and B)
F) C) and D)

Question 6

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

Accepted Answer

A)   buy bonds to raise interest rates.
B)   buy bonds to lower interest rates.
C)   sell bonds to raise interest rates.
D)   sell bonds to lower interest rates.E) A) and B)
F) A) and C)

Question 7

Because the liquidity-preference framework focuses on the

Accepted Answer

A)   short run, it assumes the price level adjusts to bring the money market to equilibrium.
B)   short run, it assumes the interest rate adjusts to bring the money market to equilibrium.
C)   long run, it assumes the price level adjusts to bring the money market to equilibrium.
D)   long run, it assumes the interest rate adjusts to bring the money market to equilibrium.E) A) and B)
F) B) and C)

Question 8

Suppose the MPC is 0.9. There are no crowding out or investment accelerator effects. If the government increases its expenditures by $30 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion, then by how far does aggregate demand shift to the right?

Accepted Answer

A)   $283 billion and $254.7 billion
B)   $283 billion and $283 billion
C)   $300 billion and $270 billion
D)   $300 billion and $300 billionE) A) and C)
F) B) and D)

Question 9

For a country such as the U.S., the wealth effect exerts a very important influence on the slope of the aggregate- demand curve, since U.S. wealth is large relative to wealth in most other countries.

Accepted Answer

A) True 
 B)False

Question 10

A decrease in taxes will shift aggregate demand to the _____, cause consumption to _____, and cause output to _____. Due to the crowding-out effect, investment will _____.

Accepted Answer

right, inc...

Question 11

Opponents of active stabilization policy

Accepted Answer

A)   generally don't believe, even in theory, that fiscal policy can stabilize the economy.
B)   generally agree that fiscal policy has no impact in the long run.
C)   believe some effects of monetary policy may be long-lived.
D)   think the Fed should simply try to fine tune the economy.E) A) and D)
F) B) and C)

Question 12

If the spending multiplier is 8, then the marginal propensity to consume must be 7/8.

Accepted Answer

A) True 
 B)False

Question 13

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

Question 14

Which of the following is likely more important for explaining the slope of the aggregate-demand curve of a small economy than it is for the United States?

Accepted Answer

A)   the wealth effect
B)   the interest-rate effect
C)   the exchange-rate effect
D)   the real-wage effectE) None of the above
F) B) and C)

Question 15

Figure 34-1 
-Refer to Figure 34-1. If the current interest rate is 2 percent,

Accepted Answer

A)   there is an excess supply of money.
B)   people will sell more bonds, which drives interest rates up.
C)   as the money market moves to equilibrium, people will buy more goods.
D)   All of the above are correct.E) A) and D)
F) A) and B)

Question 16

A decrease in government spending initially and primarily shifts

Accepted Answer

A)   aggregate demand to the right.
B)   aggregate demand to the left.
C)   aggregate supply to the right.
D)   neither aggregate demand nor aggregate supply.E) A) and B)
F) A) and C)

Question 17

When the Federal Funds rate is above the Federal Reserve's target, it will ____ bonds to _____ the money supply.

Accepted Answer

The answer of When the Federal Funds rate is above...

Question 18

The goal of monetary policy and fiscal policy is to

Accepted Answer

A)   offset the shifts in aggregate demand and thereby eliminate unemployment.
B)   offset shifts in aggregate demand and thereby stabilize the economy.
C)   enhance the shifts in aggregate demand and thereby create fluctuations in output and employment.
D)   enhance the shifts in aggregate demand and thereby increase economic growthE) A) and B)
F) A) and D)

Question 19

The crowding-out effect occurs because an increase in government spending _____ interest rates, causing _____ to fall.

Accepted Answer

increases,...

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

Exam 24: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Which of the following is likely more important for explaining the slope of the aggregate-demand curve of a small economy than it is for the United States?

Correct Answer
verified

A decrease in taxes will shift aggregate demand to the ___, cause consumption to _, and cause output to _. Due to the crowding-out effect, investment will ___.

Correct Answer
verified
right, inc...
View 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 Answer
verified

When the Federal Reserve conducts an open-market purchase, the money supply and aggregate demand _____.

Correct Answer
verified
increases,...
View 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 Answer
verified

If the spending multiplier is 8, then the marginal propensity to consume must be 7/8.

Correct Answer
verified

The goal of monetary policy and fiscal policy is to

Correct Answer
verified

Because the liquidity-preference framework focuses on the

Correct Answer
verified

Keynes argued that aggregate demand is

Correct Answer
verified

In recent years, the Federal Reserve has conducted policy by setting a target for the

Correct Answer
verified

When households find themselves holding too much money, they respond by

Correct Answer
verified

Figure 34-1 -Refer to Figure 34-1. If the current interest rate is 2 percent,

Correct Answer
verified

A decrease in government spending initially and primarily shifts

Correct Answer
verified

For a country such as the U.S., the wealth effect exerts a very important influence on the slope of the aggregate- demand curve, since U.S. wealth is large relative to wealth in most other countries.

Correct Answer
verified

The crowding-out effect occurs because an increase in government spending _ interest rates, causing _ to fall.

Correct Answer
verified
increases,...
View Answer

Opponents of active stabilization policy

Correct Answer
verified

Correct Answer
verified

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

Correct Answer
verified

When the Federal Funds rate is above the Federal Reserve's target, it will bonds to _ the money supply.

Correct Answer
verified

Correct Answer
verified

Exam 24: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Which of the following is likely more important for explaining the slope of the aggregate-demand curve of a small economy than it is for the United States?

Correct AnswerverifiedShow Answer

A decrease in taxes will shift aggregate demand to the _____, cause consumption to _____, and cause output to _____. Due to the crowding-out effect, investment will _____.

Correct Answerverifiedright, inc...View AnswerShow 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

When the Federal Reserve conducts an open-market purchase, the money supply and aggregate demand _____.

Correct Answerverifiedincreases,...View AnswerShow 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

If the spending multiplier is 8, then the marginal propensity to consume must be 7/8.

Correct AnswerverifiedShow Answer

The goal of monetary policy and fiscal policy is to

Correct AnswerverifiedShow Answer

Because the liquidity-preference framework focuses on the

Correct AnswerverifiedShow Answer

Keynes argued that aggregate demand is

Correct AnswerverifiedShow Answer

In recent years, the Federal Reserve has conducted policy by setting a target for the

Correct AnswerverifiedShow Answer

When households find themselves holding too much money, they respond by

Correct AnswerverifiedShow Answer

Figure 34-1 -Refer to Figure 34-1. If the current interest rate is 2 percent,

Correct AnswerverifiedShow Answer

A decrease in government spending initially and primarily shifts

Correct AnswerverifiedShow Answer

For a country such as the U.S., the wealth effect exerts a very important influence on the slope of the aggregate- demand curve, since U.S. wealth is large relative to wealth in most other countries.

Correct AnswerverifiedShow Answer

The crowding-out effect occurs because an increase in government spending _____ interest rates, causing _____ to fall.

Correct Answerverifiedincreases,...View AnswerShow Answer

Opponents of active stabilization policy

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

Correct AnswerverifiedShow Answer

When the Federal Funds rate is above the Federal Reserve's target, it will ____ bonds to _____ the money supply.

Correct AnswerverifiedShow Answer

Figure 34-7 -Refer to Figure 34-7. The aggregate-demand curve could shift from AD1 to AD2 as a result of

Correct AnswerverifiedShow Answer

Correct Answer
verified

A decrease in taxes will shift aggregate demand to the ___, cause consumption to _, and cause output to _. Due to the crowding-out effect, investment will ___.

Correct Answer
verified
right, inc...
View Answer

Correct Answer
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Correct Answer
verified
increases,...
View Answer

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Correct Answer
verified

The crowding-out effect occurs because an increase in government spending _ interest rates, causing _ to fall.

Correct Answer
verified
increases,...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

When the Federal Funds rate is above the Federal Reserve's target, it will bonds to _ the money supply.

Correct Answer
verified

Correct Answer
verified