Question 1

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

Accepted Answer

A)  by $90 billion
B)  by $60 billion
C)  by $20 billion
D)  by $30 billionE) C) and D)
F) B) and D)

Question 2

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

Question 3

Consider the following sequence of events:
Price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑
⇒ quantity of goods and services demanded ↓
Τhis sequence explains why the

Accepted Answer

A)  money-supply curve is vertical.
B)  aggregate-demand curve shifts leftward in response to a monetary injection.
C)  aggregate-demand curve shifts rightward in response to a monetary injection.
D)  aggregate-demand curve slopes downward.E) A) and B)
F) B) and C)

Question 4

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 5

The primary argument against active monetary and fiscal policy is that

Accepted Answer

A)  attempts to stabilize the economy do not constitute a proper role for government in a democratic society.
B)  these policies affect the economy with a long lag.
C)  these policies affect the economy too quickly and with too much impact.
D)  history demonstrates that interest rates respond unpredictably to active policies, leading to unpredictable effects on income.E) B) and D)
F) All of the above

Question 6

Which of the following illustrates how the investment accelerator works?

Accepted Answer

A)  An increase in government expenditures increases aggregate spending so that SnoozeBargain Co. decides to modernize its motels.
B)  An increase in government expenditures increases the interest rate so that SnoozeBargain Co. decides to modernize its motels.
C)  An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by SnoozeBargain Co. rises.
D)  An increase in government expenditures decreases the interest rate so that SnoozeBargain Co. decides to modernize its motels.E) A) and C)
F) C) and D)

Question 7

Fiscal policy affects the economy

Accepted Answer

A)  only in the short run.
B)  only in the long run.
C)  in both the short and long run.
D)  in neither the short nor the long run.E) A) and C)
F) A) and B)

Question 8

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

Accepted Answer

A) True 
 B)False

Question 9

Assume the following.
• The MPC has a value of 0.8.
• The relationship between the interest rate, r, and investment, I, is given by the
Equation, 
,
Where b is a positive constant.
• Government purchases, G, are increased by $1,000.
In which of the following cases would there be no crowding out?

Accepted Answer

A)   
B)   
C)   
D)   E) A) and B)
F) B) and C)

Question 10

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) A) and D)

Question 11

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is

Accepted Answer

A)  relatively important in the United States because expenditures on consumer durables is very responsive to changes in wealth.
B)  relatively important in the United States because consumption spending is a large part of GDP.
C)  relatively unimportant in the United States because money holdings are a small part of consumer wealth.
D)  relatively unimportant because it takes a large change in wealth to cause a significant change in interest rates.E) A) and B)
F) All of the above

Question 12

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 stock-market boom increases households' wealth by $500, and there is an operative crowding-out effect.
B)  A stock-market boom increases households' wealth by $575, and there is an operative crowding-out 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 D)
F) C) and D)

Question 13

If the price level rises, 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) A) and D)
F) B) and C)

Question 14

If the multiplier is 3, then the MPC is

Accepted Answer

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

Question 15

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

Accepted Answer

A)  the equilibrium interest rate increases.
B)  the aggregate-demand curve shifts to the right.
C)  the quantity of goods and services demanded is unchanged for a given price level.
D)  the short-run aggregate-supply curve shifts to the left.E) A) and B)
F) None of the above

Question 16

Figure 34-10 
-Refer to Figure 34-10. Suppose the multiplier is 4 and the economy is currently at point A. An increase in government purchases of $10 will increase aggregate demand to $_____ if there is no crowding-out. If crowding-out exists, then aggregate demand will likely to increase to $_____.

Accepted Answer

The answer of Figure 34-10 
-Refer to Figure 34-10. Suppose...

Question 17

When the interest rate is below the equilibrium level,

Accepted Answer

A)  the quantity of money that the Federal Reserve has supplied exceeds the quantity of money that people want to hold.
B)  people respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts.
C)  bond issuers and banks respond by lowering the interest rates they offer.
D)  All of the above are correct.E) B) and C)
F) A) and C)

Question 18

Changes in aggregate demand can cause fluctuations in _____ and _____ in the short run, and only ____ in the long run.

Accepted Answer

output, pr...

Question 19

When the Fed buys government bonds, the reserves of the banking system

Accepted Answer

A)  increase, so the money supply increases.
B)  increase, so the money supply decreases.
C)  decrease, so the money supply increases.
D)  decrease, so the money supply decreases.E) A) and C)
F) B) and C)

Question 20

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) C) and D)
F) A) and D)

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

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

Correct Answer
verified

If the price level rises, then

Correct Answer
verified

When the interest rate is below the equilibrium level,

Correct Answer
verified

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

Correct Answer
verified

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

Correct Answer
verified

Figure 34-10 -Refer to Figure 34-10. Suppose the multiplier is 4 and the economy is currently at point A. An increase in government purchases of $10 will increase aggregate demand to $_ if there is no crowding-out. If crowding-out exists, then aggregate demand will likely to increase to $_.

Correct Answer
verified

Changes in aggregate demand can cause fluctuations in ___ and _ in the short run, and only __ in the long run.

Correct Answer
verified
output, pr...
View Answer

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is

Correct Answer
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Fiscal policy affects the economy

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

Because the liquidity-preference framework focuses on the

Correct Answer
verified

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

Which of the following illustrates how the investment accelerator works?

Correct Answer
verified

Correct Answer
verified

The primary argument against active monetary and fiscal policy is that

Correct Answer
verified

When the Fed buys government bonds, the reserves of the banking system

Correct Answer
verified

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

Correct Answer
verified

Consider the following sequence of events: Price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ Τhis sequence explains why the

Correct Answer
verified

If the multiplier is 3, then the MPC is

Correct Answer
verified

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

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

Correct AnswerverifiedShow Answer

If the price level rises, then

Correct AnswerverifiedShow Answer

When the interest rate is below the equilibrium level,

Correct AnswerverifiedShow Answer

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Figure 34-10 -Refer to Figure 34-10. Suppose the multiplier is 4 and the economy is currently at point A. An increase in government purchases of $10 will increase aggregate demand to $_____ if there is no crowding-out. If crowding-out exists, then aggregate demand will likely to increase to $_____.

Correct AnswerverifiedShow Answer

Changes in aggregate demand can cause fluctuations in _____ and _____ in the short run, and only ____ in the long run.

Correct Answerverifiedoutput, pr...View AnswerShow Answer

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is

Correct AnswerverifiedShow Answer

Fiscal policy affects the economy

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Because the liquidity-preference framework focuses on the

Correct AnswerverifiedShow Answer

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

Which of the following illustrates how the investment accelerator works?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The primary argument against active monetary and fiscal policy is that

Correct AnswerverifiedShow Answer

When the Fed buys government bonds, the reserves of the banking system

Correct AnswerverifiedShow Answer

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

Correct AnswerverifiedShow Answer

Consider the following sequence of events: Price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ Τhis sequence explains why the

Correct AnswerverifiedShow Answer

If the multiplier is 3, then the MPC is

Correct AnswerverifiedShow Answer

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Figure 34-10 -Refer to Figure 34-10. Suppose the multiplier is 4 and the economy is currently at point A. An increase in government purchases of $10 will increase aggregate demand to $_ if there is no crowding-out. If crowding-out exists, then aggregate demand will likely to increase to $_.

Correct Answer
verified

Changes in aggregate demand can cause fluctuations in ___ and _ in the short run, and only __ in the long run.

Correct Answer
verified
output, pr...
View Answer

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