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 D)
F) A) and B)

Question 2

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $80 billion to the left. The government wants to change spending to offset this decrease in demand. The MPC is 0.75. Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in real GDP?

Accepted Answer

A)   Raise both taxes and expenditures by $80 billion dollars.
B)   Raise both taxes and expenditures by $10 billion dollars.
C)   Reduce both taxes and expenditures by $80 billion dollars.
D)   Reduce both taxes and expenditures by $10 billion dollars.E) B) and C)
F) A) and D)

Question 3

When government expenditures increase, the interest rate

Accepted Answer

A)   increases, making the change in aggregate demand larger.
B)   increases, making the change in aggregate demand smaller
C)   decreases, making the change in aggregate demand larger.
D)   decreases, making the change in aggregate demand smaller.E) B) and C)
F) B) and D)

Question 4

If the marginal propensity to consume is 5/6, and there is no investment accelerator or crowding out, a $20 billion increase in government expenditures would shift the aggregate demand curve right by

Accepted Answer

A)   $60 billion, but the effect would be larger if there were an investment accelerator.
B)   $60 billion, but the effect would be smaller if there were an investment accelerator.
C)   $120 billion, but the effect would be larger if there were an investment accelerator.
D)   $120 billion, but the effect would be smaller if there were an investment accelerator.E) None of the above
F) A) and B)

Question 5

According to liquidity preference theory, the money-supply curve would shift if the Fed

Accepted Answer

A)   engaged in open-market transactions.
B)   changed the discount rate.
C)   changed the reserve requirement.
D)   did any of the above.E) B) and C)
F) A) and D)

Question 6

According to John Maynard Keynes,

Accepted Answer

A)   the demand for money in a country is determined entirely by that nation's central bank.
B)   the supply of money in a country is determined by the overall wealth of the citizens of that country.
C)   the interest rate adjusts to balance the supply of, and demand for, money.
D)   the interest rate adjusts to balance the supply of, and demand for, goods and services.E) B) and C)
F) C) and D)

Question 7

An increase in government purchases is likely to

Accepted Answer

A)   decrease interest rates.
B)   result in a net decrease in aggregate demand.
C)   crowd out investment spending by business firms.
D)   decrease money demand.E) None of the above
F) A) and B)

Question 8

Opponents of active stabilization policy

Accepted Answer

A)   advocate a monetary policy designed to offset changes in the unemployment rate.
B)   argue that fiscal policy is unable to change aggregate demand or aggregate supply.
C)   believe that the political process creates lags in the implementation of fiscal policy.
D)   None of the above is correct.E) A) and B)
F) A) and C)

Question 9

Figure 16-3.
 
-Refer to Figure 16-3. What quantity is represented by the vertical line on the left-hand graph?

Accepted Answer

A)   the supply of money
B)   the demand for money
C)   the rate of inflation
D)   the quantity of bonds that was most recently sold or purchased by the Federal ReserveE) All of the above
F) A) and B)

Question 10

If the Federal Reserve increases the money supply, then initially people want to

Accepted Answer

A)   sell bonds so the interest rate rises.
B)   sell bonds so the interest rate falls.
C)   buy bonds so the interest rate rises.
D)   buy bonds so the interest rate falls.E) A) and C)
F) A) and D)

Question 11

Figure 16-6. 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.
 1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Finally, assume the horizontal distance between the curves AD1 and AD3 is $30 billion. The extent of crowding out, for any particular level of the price level, is A)  $25 billion. B)  $30 billion. C)  $45 billion. D)  $60 billion. " class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 16-6. Suppose the multiplier is 3 and the government increases its purchases by $25 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Finally, assume the horizontal distance between the curves AD1 and AD3 is $30 billion. The extent of crowding out, for any particular level of the price level, is

Accepted Answer

A)   $25 billion.
B)   $30 billion.
C)   $45 billion.
D)   $60 billion.E) All of the above
F) A) and B)

Question 12

An essential piece of the liquidity preference theory is the demand for money.

Accepted Answer

A) True 
 B)False

Question 13

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Accepted Answer

A) True 
 B)False

Question 14

An increase in the MPC

Accepted Answer

A)   increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
B)   increases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.
C)   decreases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
D)   decreases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.E) B) and D)
F) C) and D)

Question 15

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are

Accepted Answer

A)   smaller in closed economies than in open economies.
B)   larger in closed economies than in open economies.
C)   smaller in capitalist economies than in socialist economies.
D)   larger in capitalist economies than in socialist economies.E) B) and C)
F) All of the above

Question 16

Liquidity preference theory is most relevant to the

Accepted Answer

A)   short run and supposes that the price level adjusts to bring money supply and money demand into balance.
B)   short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.
C)   long run and supposes that the price level adjusts to bring money supply and money demand into balance.
D)   long run and supposes that the interest rate adjusts to bring money supply and money demand into balance.E) B) and C)
F) A) and D)

Question 17

The interest rate falls if

Accepted Answer

A)   the price level falls or the money supply falls.
B)   the price level falls or the money supply rises.
C)   the price level rises or the money supply falls.
D)   the price level rises or the money supply rises.E) B) and C)
F) A) and C)

Question 18

For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

Accepted Answer

A) True 
 B)False

Question 19

According to liquidity preference theory, if there were a shortage of money, then

Accepted Answer

A)   the interest rate would be above equilibrium and the quantity of money demanded would be too large for equilibrium.
B)   the interest rate would be above equilibrium and the quantity of money demanded would be too small for equilibrium.
C)   the interest rate would be below equilibrium and the quantity of money demanded would be too small for equilibrium.
D)   the interest rate would be below equilibrium and the quantity of money demanded would be too large for equilibrium.E) A) and B)
F) None of the above

Question 20

Paul Samuelson, a famous economist, said that

Accepted Answer

A)   "the bond market has predicted zero out of the past nine recessions."
B)   "the stock market has predicted zero out of the past nine recessions."
C)   "the bond market has predicted nine out of the past five recessions."
D)   "the stock market has predicted nine out of the past five recessions."E) A) and B)
F) A) and C)

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

An increase in the MPC

Correct Answer
verified

An essential piece of the liquidity preference theory is the demand for money.

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

According to John Maynard Keynes,

Correct Answer
verified

An increase in government purchases is likely to

Correct Answer
verified

Paul Samuelson, a famous economist, said that

Correct Answer
verified

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Correct Answer
verified

If the marginal propensity to consume is 5/6, and there is no investment accelerator or crowding out, a $20 billion increase in government expenditures would shift the aggregate demand curve right by

Correct Answer
verified

The interest rate falls if

Correct Answer
verified

For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

Correct Answer
verified

Opponents of active stabilization policy

Correct Answer
verified

When government expenditures increase, the interest rate

Correct Answer
verified

According to liquidity preference theory, the money-supply curve would shift if the Fed

Correct Answer
verified

Liquidity preference theory is most relevant to the

Correct Answer
verified

Figure 16-3. -Refer to Figure 16-3. What quantity is represented by the vertical line on the left-hand graph?

Correct Answer
verified

Correct Answer
verified

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are

Correct Answer
verified

If the Federal Reserve increases the money supply, then initially people want to

Correct Answer
verified

According to liquidity preference theory, if there were a shortage of money, then

Correct Answer
verified

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

An increase in the MPC

Correct AnswerverifiedShow Answer

An essential piece of the liquidity preference theory is the demand for money.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to John Maynard Keynes,

Correct AnswerverifiedShow Answer

An increase in government purchases is likely to

Correct AnswerverifiedShow Answer

Paul Samuelson, a famous economist, said that

Correct AnswerverifiedShow Answer

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Correct AnswerverifiedShow Answer

If the marginal propensity to consume is 5/6, and there is no investment accelerator or crowding out, a $20 billion increase in government expenditures would shift the aggregate demand curve right by

Correct AnswerverifiedShow Answer

The interest rate falls if

Correct AnswerverifiedShow Answer

For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

Correct AnswerverifiedShow Answer

Opponents of active stabilization policy

Correct AnswerverifiedShow Answer

When government expenditures increase, the interest rate

Correct AnswerverifiedShow Answer

According to liquidity preference theory, the money-supply curve would shift if the Fed

Correct AnswerverifiedShow Answer

Liquidity preference theory is most relevant to the

Correct AnswerverifiedShow Answer

Figure 16-3. -Refer to Figure 16-3. What quantity is represented by the vertical line on the left-hand graph?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are

Correct AnswerverifiedShow Answer

If the Federal Reserve increases the money supply, then initially people want to

Correct AnswerverifiedShow Answer

According to liquidity preference theory, if there were a shortage of money, then

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified