Question 1

In the long run, the level of output

Accepted Answer

A)  depends on the money supply.
B)  depends on the price level.
C)  is determined by supply-side factors.
D)  All of the above are correct.E) B) and C)
F) B) and D)

Question 2

Explain how unemployment insurance acts as an automatic stabilizer.

Accepted Answer

As income falls, unemployment rises. Mor...

Question 3

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) C) and D)
F) B) and C)

Question 4

Which of the following Fed actions would both increase the money supply?

Accepted Answer

A)  buy bonds and raise the reserve requirement
B)  buy bonds and lower the reserve requirement
C)  sell bonds and raise the reserve requirement
D)  sell bonds and lower the reserve requirementE) A) and B)
F) A) and C)

Question 5

When Congress reduces spending in order to balance the government's budget, it needs to consider

Accepted Answer

A)  both the short-run effects on aggregate demand and aggregate supply, and the long-run effects on saving and growth.
B)  only the short-run effects on aggregate demand and aggregate supply.
C)  only the long-run effects on saving and growth.
D)  only the long-run effects on aggregate demand and aggregate supply.E) All of the above
F) None of the above

Question 6

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

Accepted Answer

A)  increased the money supply and increased interest rates.
B)  increased the money supply and decreased interest rates.
C)  decreased the money supply and increased interest rates.
D)  decreased the money supply and decreased interest rates.E) A) and C)
F) A) and D)

Question 7

Sometimes during wars, government expenditures are larger than normal. To reduce the effects this spending creates on interest rates,

Accepted Answer

A)  the Federal Reserve could increase the money supply by buying bonds.
B)  the Federal Reserve could increase the money supply by selling bonds.
C)  the Federal Reserve could decrease the money supply by buying bonds.
D)  the Federal Reserve could decrease the money supply by selling bonds.E) B) and C)
F) B) and D)

Question 8

Other things the same, an increase in the price level causes the real value of the dollar to fall in the market for foreign-currency exchange.

Accepted Answer

A) True 
 B)False

Question 9

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. 1. If the current interest rate is r2, then A) the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. B) people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. C) bond issuers and banks will respond by raising the interest rates they offer. D) in response, the money-demand curve will shift upward from its current position to establish equilibrium in the money market." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 21-4. Suppose the money-demand curve is currently MD1. If the current interest rate is r2, then

Accepted Answer

A)  the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied.
B)  people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts.
C)  bond issuers and banks will respond by raising the interest rates they offer.
D)  in response, the money-demand curve will shift upward from its current position to establish equilibrium in the money market.E) None of the above
F) A) and D)

Question 10

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Accepted Answer

A) True 
 B)False

Question 11

Suppose foreigners find U.S. goods and services more desirable for some reason other than a change in the exchange rate. Which policies could be used to offset the resulting change in output?

Accepted Answer

A)  an increase in the money supply and an increase in taxes
B)  an increase in the money supply and a decrease in taxes
C)  a decrease in the money supply and an increase in taxes
D)  a decrease in the money supply and a decrease in taxesE) A) and B)
F) A) and C)

Question 12

Liquidity refers to

Accepted Answer

A)  the relation between the price and interest rate of an asset.
B)  the risk of an asset relative to its selling price.
C)  the ease with which an asset is converted into a medium of exchange.
D)  the sensitivity of investment spending to changes in the interest rate.E) A) and B)
F) B) and D)

Question 13

An increase in the money supply shifts the aggregate-supply curve to the right.

Accepted Answer

A) True 
 B)False

Question 14

Consider the following sequence of events: price level  ↑⇒\uparrow \Rightarrow↑⇒ demand for money  ↑⇒\uparrow \Rightarrow↑⇒ equilibrium interest rate  ↑\uparrow↑ 
 ⇒\Rightarrow⇒  quantity of goods and services demanded  ↓\darr↓

This 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) C) and D)

Question 15

The change in aggregate demand that results from fiscal expansion changing the interest rate is called the

Accepted Answer

A)  multiplier effect.
B)  crowding-out effect.
C)  accelerator effect.
D)  Ricardian equivalence effect.E) A) and B)
F) None of the above

Question 16

Which of the following correctly explains the crowding-out effect?

Accepted Answer

A)  An increase in government expenditures decreases the interest rate and so increases investment spending.
B)  An increase in government expenditures increases the interest rate and so reduces investment spending.
C)  A decrease in government expenditures increases the interest rate and so increases investment spending.
D)  A decrease in government expenditures decreases the interest rate and so reduces investment spending.E) A) and B)
F) All of the above

Question 17

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) C) and D)

Question 18

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 B)

Question 19

Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures?

Accepted Answer

A)  an increase in government expenditures
B)  an increase in net exports
C)  an increase in investment spending
D)  All of the above are correct.E) A) and B)
F) A) and C)

Question 20

There are three factors that help explain the 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 ...

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

An increase in the money supply shifts the aggregate-supply curve to the right.

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The change in aggregate demand that results from fiscal expansion changing the interest rate is called the

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There are three factors that help explain the 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

When Congress reduces spending in order to balance the government's budget, it needs to consider

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Other things the same, an increase in the price level causes the real value of the dollar to fall in the market for foreign-currency exchange.

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Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures?

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Sometimes during wars, government expenditures are larger than normal. To reduce the effects this spending creates on interest rates,

Correct AnswerverifiedShow Answer

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

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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 money-demand curve is currently MD1. If the current interest rate is r2, then

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Explain how unemployment insurance acts as an automatic stabilizer.

Correct AnswerverifiedAs income falls, unemployment rises. Mor...View AnswerShow Answer

Suppose foreigners find U.S. goods and services more desirable for some reason other than a change in the exchange rate. Which policies could be used to offset the resulting change in output?

Correct AnswerverifiedShow Answer

Consider the following sequence of events: price level ↑⇒\uparrow \Rightarrow↑⇒ demand for money ↑⇒\uparrow \Rightarrow↑⇒ equilibrium interest rate ↑\uparrow↑ ⇒\Rightarrow⇒ quantity of goods and services demanded ↓\darr↓ This sequence explains why the

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Which of the following Fed actions would both increase the money supply?

Correct AnswerverifiedShow Answer

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

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

In the long run, the level of output

Correct AnswerverifiedShow Answer

Liquidity refers to

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

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Which of the following correctly explains the crowding-out effect?

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The wealth effect and the exchange-rate ...
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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 money-demand curve is currently MD₁. If the current interest rate is r₂, then

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As income falls, unemployment rises. Mor...
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Consider the following sequence of events: price level $\uparrow \Rightarrow$ demand for money $\uparrow \Rightarrow$ equilibrium interest rate $\uparrow$ $\Rightarrow$ quantity of goods and services demanded $\darr$ This sequence explains why the

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