Question 1

According to liquidity preference theory,if the price level increases,then the equilibrium interest rate

Accepted Answer

A)  rises and the aggregate quantity of goods demand rises.
B)  rises and the aggregate quantity of goods demanded falls.
C)  falls and the aggregate quantity of goods demanded rises.
D)  falls and the aggregate quantity of goods demanded falls.E) B) and D)
F) B) and C)

Question 2

According to liquidity preference theory,the money supply curve would shift right

Accepted Answer

A)  if the money demand curve shifted right.
B)  if the Federal Reserve chose to increase money supply.
C)  if the interest rate increased.
D)  All of the above are correct.E) C) and D)
F) B) and D)

Question 3

The theory of liquidity preference is most helpful in understanding

Accepted Answer

A)  the wealth effect.
B)  the exchange-rate effect.
C)  the interest-rate effect.
D)  misperceptions theory.E) C) and D)
F) All of the above

Question 4

Assume that the MPC is 0.75.Assuming that only the multiplier effect matters,a decrease in government purchases of $10 billion will shift the aggregate demand curve

Accepted Answer

A)  left by $13.5 billion.
B)  left by $40 billion.
C)  right by $75 billion.
D)  None of the above is correct.E) B) and D)
F) B) and C)

Question 5

If the Fed conducts open-market purchases,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 C)
F) A) and B)

Question 6

In the early 1960s,the Kennedy administration made considerable use of

Accepted Answer

A)  fiscal policy to stimulate the economy.
B)  fiscal policy to slow down the economy.
C)  monetary policy to stimulate the economy.
D)  monetary policy to slow down the economy.E) B) and C)
F) A) and D)

Question 7

The multiplier effect is the multiplied impact on

Accepted Answer

A)  the money supply of a given increase in government purchases.
B)  tax revenues of a given increase in government purchases.
C)  investment of a given increase in interest rates.
D)  aggregate demand of a given increase in government purchases.E) None of the above
F) B) and C)

Question 8

Explain why the interest rate is the opportunity cost of holding currency.What is the benefit of holding currency?

Accepted Answer

The nominal interest rate on currency is...

Question 9

A surplus or shortage in the money market is eliminated by adjustments in the price level 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) None of the above
F) A) and C)

Question 10

People might deposit more into interest-bearing accounts,

Accepted Answer

A)  making the interest rate fall, if there is a surplus in the money market.
B)  making the interest rate rise, if there is a surplus in the money market.
C)  making the interest rate fall, if there is a shortage in the money market.
D)  making the interest rate rise, if there is a shortage in the money market.E) A) and D)
F) B) and C)

Question 11

Assume the money market is initially in equilibrium.If the price level decreases,then according to liquidity preference theory there is an excess

Accepted Answer

A)  supply of money until the interest rate increases.
B)  supply of money until the interest rate decreases.
C)  demand for money until the interest rate increases.
D)  demand for money until the interest rate decreases.E) B) and D)
F) A) and B)

Question 12

According to liquidity preference theory,if the price level decreases,then

Accepted Answer

A)  the interest rate falls because money demand shifts right.
B)  the interest rate falls because money demand shifts left.
C)  the interest rate rises because money supply shifts right.
D)  the interest rate rises because money supply shifts left.E) A) and D)
F) A) and C)

Question 13

Which of the following properly describes the interest rate effect?

Accepted Answer

A)  A higher price level leads to higher money demand, higher money demand leads to higher interest rates, a higher interest rate increases the quantity of goods and services demanded.
B)  A higher price level leads to higher money demand, higher money demand leads to lower interest rates, a higher interest rate reduces the quantity of goods and services demanded.
C)  A lower price level leads to lower money demand, lower money demand leads to lower interest rates, a lower interest rate reduces the quantity of goods and services demanded.
D)  A lower price level leads to lower money demand, lower money demand leads to lower interest rates, a lower interest rate increases the quantity of goods and services demanded.E) B) and C)
F) A) and D)

Question 14

There are three factors that help explain that slope of the aggregate demand curve.Which two are less important? Why are they less important?

Accepted Answer

The wealth effect and the exchange-rate ...

Question 15

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 C)
F) A) and D)

Question 16

An aide to a U.S.Senator computes the effect on aggregate demand of a $20 billion tax cut.The actual increase in aggregate demand is less than the aide expected.Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand?

Accepted Answer

A)  The actual MPC was larger than the MPC the aide used to compute the multiplier.
B)  The aide thought the tax cut would be permanent, but the actual tax cut was temporary.
C)  The increase in income shifted money demand less than the aide had anticipated.
D)  The increase in income resulted in investment rising more than the aide had anticipated.E) A) and D)
F) A) and C)

Question 17

Assume that the MPC is 0.75.Assuming only the multiplier effect matters,an increase in government purchases of $200 billion will shift the aggregate demand curve

Accepted Answer

A)  left by $150 billion.
B)  left by $200 billion.
C)  right by $800 billion.
D)  None of the above is correct.E) A) and B)
F) A) and C)

Question 18

The lag problem associated with monetary policy is due mostly to

Accepted Answer

A)  the fact that business firms make investment plans far in advance.
B)  the political system of checks and balances that slows down the process of determining monetary policy.
C)  the time it takes for changes in government spending to affect the interest rate.
D)  All of the above are correct.E) B) and D)
F) B) and C)

Question 19

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Accepted Answer

When the money supply increases,the inte...

Question 20

The opportunity cost of holding money

Accepted Answer

A)  decreases when the interest rate increases, so people desire to hold more of it.
B)  decreases when the interest rate increases, so people desire to hold less of it.
C)  increases when the interest rate increases, so people desire to hold more of it.
D)  increases when the interest rate increases, so people desire to hold less of it.E) B) and D)
F) A) and D)

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

Explain why the interest rate is the opportunity cost of holding currency.What is the benefit of holding currency?

Correct AnswerverifiedThe nominal interest rate on currency is...View AnswerShow Answer

In the early 1960s,the Kennedy administration made considerable use of

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Assume the money market is initially in equilibrium.If the price level decreases,then according to liquidity preference theory there is an excess

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Correct AnswerverifiedWhen the money supply increases,the inte...View AnswerShow Answer

A surplus or shortage in the money market is eliminated by adjustments in the price level according to

Correct AnswerverifiedShow Answer

Assume that the MPC is 0.75.Assuming that only the multiplier effect matters,a decrease in government purchases of $10 billion will shift the aggregate demand curve

Correct AnswerverifiedShow Answer

The opportunity cost of holding money

Correct AnswerverifiedShow Answer

According to liquidity preference theory,if the price level increases,then the equilibrium interest rate

Correct AnswerverifiedShow Answer

Which of the following properly describes the interest rate effect?

Correct AnswerverifiedShow Answer

The multiplier effect is the multiplied impact on

Correct AnswerverifiedShow Answer

According to liquidity preference theory,the money supply curve would shift right

Correct AnswerverifiedShow Answer

According to liquidity preference theory,if the price level decreases,then

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Assume that the MPC is 0.75.Assuming only the multiplier effect matters,an increase in government purchases of $200 billion will shift the aggregate demand curve

Correct AnswerverifiedShow Answer

There are three factors that help explain that slope of the aggregate demand curve.Which two are less important? Why are they less important?

Correct AnswerverifiedThe wealth effect and the exchange-rate ...View AnswerShow Answer

The lag problem associated with monetary policy is due mostly to

Correct AnswerverifiedShow Answer

An aide to a U.S.Senator computes the effect on aggregate demand of a $20 billion tax cut.The actual increase in aggregate demand is less than the aide expected.Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand?

Correct AnswerverifiedShow Answer

The theory of liquidity preference is most helpful in understanding

Correct AnswerverifiedShow Answer

People might deposit more into interest-bearing accounts,

Correct AnswerverifiedShow Answer

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The nominal interest rate on currency is...
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Correct Answer
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Correct Answer
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Correct Answer
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When the money supply increases,the inte...
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Correct Answer
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Correct Answer
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Correct Answer
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The wealth effect and the exchange-rate ...
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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