Question 1

Keynes argued that

Accepted Answer

A)  irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment.
B)  irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply.
C)  changes in business and consumer expectations generally stabilize the economy.
D)  All of the above are correct.E) A) and D)
F) C) and D)

Question 2

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Accepted Answer

A) True 
 B)False

Question 3

If the inflation rate is zero, then

Accepted Answer

A)  both the nominal interest rate and the real interest rate can fall below zero.
B)  the nominal interest rate can fall below zero, but the real interest rate cannot fall below zero.
C)  the real interest rate can fall below zero, but the nominal interest rate cannot fall below zero.
D)  neither the nominal interest rate nor the real interest rate can fall below zero.E) C) and D)
F) All of the above

Question 4

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

Accepted Answer

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

Question 5

If the MPC is 0.75 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by

Accepted Answer

A)  $80 billion.
B)  $125 billion.
C)  $400 billion.
D)  $500 billion.E) None of the above
F) All of the above

Question 6

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. 1. Which of the following events would cause the equilibrium interest rate to increase? A) The Federal Reserve increases the money supply. B) Money demand increases. C) The price level decreases. D) All of the above are correct." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 21-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?

Accepted Answer

A)  The Federal Reserve increases the money supply.
B)  Money demand increases.
C)  The price level decreases.
D)  All of the above are correct.E) B) and D)
F) A) and B)

Question 7

A reduction in U.S net exports would shift U.S. aggregate demand

Accepted Answer

A)  rightward. In an attempt to stabilize the economy, the government could raise taxes.
B)  rightward. In an attempt to stabilize the economy, the government could cut taxes.
C)  leftward. In an attempt to stabilize the economy, the government could raise taxes.
D)  leftward. In an attempt to stabilize the economy, the government could cut taxes.E) None of the above
F) A) and D)

Question 8

Which of the following statements is correct?

Accepted Answer

A)  Both liquidity preference theory and classical theory assume the interest rate adjusts to bring the money market into equilibrium.
B)  Both liquidity preference theory and classical theory assume the price level adjusts to bring the money market into equilibrium.
C)  Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium; classical theory assumes the price level adjusts to bring the money market into equilibrium.
D)  Liquidity preference theory assumes the price level adjusts to bring the money market into equilibrium; classical theory assumes the interest rate adjusts to bring the money market into equilibrium.E) None of the above
F) A) and C)

Question 9

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

Accepted Answer

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

Question 10

If the Federal Reserve decided to lower interest rates, it could

Accepted Answer

A)  buy bonds to lower the money supply.
B)  buy bonds to raise the money supply.
C)  sell bonds to lower the money supply.
D)  sell bonds to raise the money supply.E) A) and B)
F) B) and C)

Question 11

Critics of stabilization policy argue that

Accepted Answer

A)  policy affects aggregate demand quickly, but the effects on aggregate demand are long-lived.
B)  policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived.
C)  policy affects aggregate demand with a lag, but the effects are short-lived.
D)  policy does not affect aggregate demand.E) A) and D)
F) A) 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

If the Fed conducts open-market sales, the money supply

Accepted Answer

A)  increases and aggregate demand shifts right.
B)  increases and aggregate demand shifts left.
C)  decreases and aggregate demand shifts right.
D)  decreases and aggregate demand shifts left.E) A) and B)
F) None of the above

Question 14

Figure 21-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. 2 than it is at P1. B) the quantity of money is higher at Y1 than it is at Y2. C) an increase in r from r1 to r2 is associated with a decrease in Y from Y1 to Y2. D) All of the above are correct." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 21-2. Assume the money market is always in equilibrium. Under the assumptions of the model,

Accepted Answer

A)  the quantity of goods and services demanded is higher at P2 than it is at P1.
B)  the quantity of money is higher at Y1 than it is at Y2.
C)  an increase in r from r1 to r2 is associated with a decrease in Y from Y1 to Y2.
D)  All of the above are correct.E) A) and B)
F) A) and C)

Question 15

Figure 21-1 
-Refer to Figure 21-1. 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 C)
F) All of the above

Question 16

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

Accepted Answer

A)  demand rightward by more than $100 billion.
B)  demand rightward by less than $100 billion.
C)  supply leftward by more than $100 billion.
D)  supply leftward by less than $100 billion.E) A) and C)
F) B) and D)

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

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Correct Answer
verified

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

Correct Answer
verified

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

Correct Answer
verified

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₁. Which of the following events would cause the equilibrium interest rate to increase?

Correct Answer
verified

If the Federal Reserve decided to lower interest rates, it could

Correct Answer
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Correct Answer
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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

Correct Answer
verified

Figure 21-1 -Refer to Figure 21-1. If the current interest rate is 2 percent,

Correct Answer
verified

If the inflation rate is zero, then

Correct Answer
verified

If the MPC is 0.75 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by

Correct Answer
verified

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

Correct Answer
verified

Critics of stabilization policy argue that

Correct Answer
verified

If the Fed conducts open-market sales, the money supply

Correct Answer
verified

Keynes argued that

Correct Answer
verified

A reduction in U.S net exports would shift U.S. aggregate demand

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

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

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Correct AnswerverifiedShow Answer

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?

Correct AnswerverifiedShow Answer

If the Federal Reserve decided to lower interest rates, it could

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Figure 21-1 -Refer to Figure 21-1. If the current interest rate is 2 percent,

Correct AnswerverifiedShow Answer

If the inflation rate is zero, then

Correct AnswerverifiedShow Answer

If the MPC is 0.75 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Critics of stabilization policy argue that

Correct AnswerverifiedShow Answer

If the Fed conducts open-market sales, the money supply

Correct AnswerverifiedShow Answer

Keynes argued that

Correct AnswerverifiedShow Answer

A reduction in U.S net exports would shift U.S. aggregate demand

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

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Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₁. Which of the following events would cause the equilibrium interest rate to increase?

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