Question 1

When the government reduces taxes, which of the following decreases?

Accepted Answer

A)   consumption
B)   take-home pay
C)   household saving
D)   None of the above is correct.E) A) and B)
F) A) and C)

Question 2

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

Question 3

An increase in taxes shifts the aggregate curve to the .

Accepted Answer

The answer of An increase in taxes shifts the aggregate...

Question 4

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

Accepted Answer

A)   a decrease in the price level
B)   a decrease in the cost of borrowing
C)   an increase in the price level
D)   an increase in the cost of borrowingE) A) and D)
F) B) and D)

Question 5

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 6

The theory of liquidity preference was developed by Irving Fisher.

Accepted Answer

A) True 
 B)False

Question 7

Scenario 34-1. Take the following information as given for a small, imaginary economy:
-When income is $10,000, consumption spending is $6,500.
-When income is $11,000, consumption spending is $7,250.
-Refer to Scenario 34-1. The multiplier for this economy is

Accepted Answer

A)   2.85.
B)   1.53.
C)   4.00.
D)   7.00.E) A) and B)
F) A) and C)

Question 8

Other things the same, as the price level rises,

Accepted Answer

A)   the interest rate rises causing aggregate demand to shift.
B)   the interest rate rises causing a movement along a given aggregate-demand curve.
C)   the interest rate falls causing aggregate demand to shift.
D)   the interest rate falls causing a movement along a given aggregate-demand curve.E) B) and C)
F) A) and B)

Question 9

Which among the following assets is the most liquid?

Accepted Answer

A)   corporate bonds
B)   fine art
C)   deposits that can be withdrawn using ATMs
D)   shares of stockE) B) and C)
F) A) and D)

Question 10

Fiscal policy is determined by

Accepted Answer

A)   the president and Congress and involves changing government spending and taxation.
B)   the president and Congress and involves changing the money supply.
C)   the Federal Reserve and involves changing government spending and taxation.
D)   the Federal Reserve and involves changing the money supply.E) B) and C)
F) A) and D)

Question 11

Changes in the interest rate bring the money market into equilibrium according to

Accepted Answer

A)   both liquidity preference theory and classical theory.
B)   neither liquidity preference theory nor classical theory.
C)   liquidity preference theory, but not classical theory.
D)   classical theory, but not liquidity preference theory.E) B) and D)
F) None of the above

Question 12

Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is your answer affected by the presence of the multiplier, crowding-out, taxes, and investment-accelerator effects?

Accepted Answer

The increase in expenditures means that ...

Question 13

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Suppose the current equilibrium interest rate is r3. Let Y3 represent the corresponding quantity of goods and services demanded, and let P3 represent the corresponding price level. Starting from this situation, if the Federal Reserve decreases the money supply and if the price level remains at P3, then

Accepted Answer

A)   there will be an increase in the equilibrium quantity of goods and services demanded.
B)   there will be a decrease in the equilibrium interest rate.
C)   the aggregate-demand curve will shift to the right.
D)   fewer firms will choose to borrow to build new factories and buy new equipment.E) B) and C)
F) A) and D)

Question 14

The interest-rate effect

Accepted Answer

A)   depends on the idea that decreases in interest rates increase the quantity of goods and services demanded.
B)   depends on the idea that decreases in interest rates decrease the quantity of goods and services demanded.
C)   is responsible for the downward slope of the money-demand curve.
D)   is the least important reason, in the case of the United States, for the downward slope of the aggregate- demand curve.E) A) and B)
F) B) and D)

Question 15

When the interest rate decreases, the opportunity cost of holding money

Accepted Answer

A)   increases, so the quantity of money demanded increases.
B)   increases, so the quantity of money demanded decreases.
C)   decreases, so the quantity of money demanded increases.
D)   decreases, so the quantity of money demanded decreases.E) B) and C)
F) B) and D)

Question 16

An example of an automatic stabilizer is

Accepted Answer

A)   unemployment benefits.
B)   a lowering of interest rates by the Fed.
C)   a decrease in money demand.
D)   a decrease in tax rates in response to a recession.E) B) and C)
F) A) and D)

Question 17

Figure 34-14 
-Refer to Figure 34-14. Households' desired money holdings are given by MD1. If the current rate of interest is r3, then there is excess _____. Households will _____ interest-earning assets, which causes the interest rate to _____.

Accepted Answer

The answer of Figure 34-14 
-Refer to Figure 34-14. Households'...

Question 18

Scenario 34-2. The following facts apply to a small, imaginary economy.
-Consumption spending is $6,720 when income is $8,000.
-Consumption spending is $7,040 when income is $8,500.
-Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500?

Accepted Answer

A)   A stock­market boom increases households' wealth by $500, and there is an operative crowding­out effect.
B)   A stock­market boom increases households' wealth by $575, and there is an operative crowding­out effect.
C)   An economic boom overseas increases the demand for U.S. net exports by $600, and there is no crowding- out effect.
D)   Aggregate demand could increase by $1,500 in response to any of these events.E) B) and C)
F) A) and C)

Question 19

When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right.

Accepted Answer

A) True 
 B)False

Question 20

According to the theory of liquidity preference, the interest rate adjusts to balance the supply of, and demand for, loanable funds.

Accepted Answer

A) True 
 B)False

Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

An increase in taxes shifts the aggregate curve to the .

Correct Answer
verified

According to the theory of liquidity preference, the interest rate adjusts to balance the supply of, and demand for, loanable funds.

Correct Answer
verified

An example of an automatic stabilizer is

Correct Answer
verified

Which among the following assets is the most liquid?

Correct Answer
verified

When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right.

Correct Answer
verified

Figure 34-14 -Refer to Figure 34-14. Households' desired money holdings are given by MD1. If the current rate of interest is r3, then there is excess ___. Households will _ interest-earning assets, which causes the interest rate to ___.

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. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

Correct Answer
verified

The interest-rate effect

Correct Answer
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When the interest rate decreases, the opportunity cost of holding money

Correct Answer
verified

Other things the same, as the price level rises,

Correct Answer
verified

When the government reduces taxes, which of the following decreases?

Correct Answer
verified

Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is your answer affected by the presence of the multiplier, crowding-out, taxes, and investment-accelerator effects?

Correct Answer
verified
The increase in expenditures means that ...
View Answer

Fiscal policy is determined by

Correct Answer
verified

Correct Answer
verified

Scenario 34-1. Take the following information as given for a small, imaginary economy: -When income is $10,000, consumption spending is $6,500. -When income is $11,000, consumption spending is $7,250. -Refer to Scenario 34-1. The multiplier for this economy is

Correct Answer
verified

Scenario 34-2. The following facts apply to a small, imaginary economy. -Consumption spending is $6,720 when income is $8,000. -Consumption spending is $7,040 when income is $8,500. -Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500?

Correct Answer
verified

Changes in the interest rate bring the money market into equilibrium according to

Correct Answer
verified

The theory of liquidity preference was developed by Irving Fisher.

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

Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

An increase in taxes shifts the aggregate curve to the .

Correct AnswerverifiedShow Answer

According to the theory of liquidity preference, the interest rate adjusts to balance the supply of, and demand for, loanable funds.

Correct AnswerverifiedShow Answer

An example of an automatic stabilizer is

Correct AnswerverifiedShow Answer

Which among the following assets is the most liquid?

Correct AnswerverifiedShow Answer

When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right.

Correct AnswerverifiedShow Answer

Figure 34-14 -Refer to Figure 34-14. Households' desired money holdings are given by MD1. If the current rate of interest is r3, then there is excess _____. Households will _____ interest-earning assets, which causes the interest rate to _____.

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. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

Correct AnswerverifiedShow Answer

The interest-rate effect

Correct AnswerverifiedShow Answer

When the interest rate decreases, the opportunity cost of holding money

Correct AnswerverifiedShow Answer

Other things the same, as the price level rises,

Correct AnswerverifiedShow Answer

When the government reduces taxes, which of the following decreases?

Correct AnswerverifiedShow Answer

Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is your answer affected by the presence of the multiplier, crowding-out, taxes, and investment-accelerator effects?

Correct AnswerverifiedThe increase in expenditures means that ...View AnswerShow Answer

Fiscal policy is determined by

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Scenario 34-1. Take the following information as given for a small, imaginary economy: -When income is $10,000, consumption spending is $6,500. -When income is $11,000, consumption spending is $7,250. -Refer to Scenario 34-1. The multiplier for this economy is

Correct AnswerverifiedShow Answer

Scenario 34-2. The following facts apply to a small, imaginary economy. -Consumption spending is $6,720 when income is $8,000. -Consumption spending is $7,040 when income is $8,500. -Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500?

Correct AnswerverifiedShow Answer

Changes in the interest rate bring the money market into equilibrium according to

Correct AnswerverifiedShow Answer

The theory of liquidity preference was developed by Irving Fisher.

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

Correct Answer
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Figure 34-14 -Refer to Figure 34-14. Households' desired money holdings are given by MD1. If the current rate of interest is r3, then there is excess ___. Households will _ interest-earning assets, which causes the interest rate to ___.

Correct Answer
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The increase in expenditures means that ...
View Answer

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Correct Answer
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