Question 1

Both monetary policy and fiscal policy affect aggregate demand.

Accepted Answer

A) True 
 B)False

Question 2

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 D)
F) A) and B)

Question 3

A fiscal stimulus was initiated by President Obama in response to the economic downturn of 2008-2009. At that time, the president's economists estimated the multiplier to be

Accepted Answer

A)  3.2 for government purchases and 2.0 for tax cuts.
B)  2.4 for government purchases and 1.4 for tax cuts.
C)  1.6 for government purchases and 1.0 for tax cuts.
D)  1.6 for government purchases and 0.4 for tax cuts.E) None of the above
F) All of the above

Question 4

Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-demand curve?

Accepted Answer

A)  As the money supply increases, the interest rate falls, so spending rises.
B)  As the money supply increases, the interest rate rises, so spending falls.
C)  As the price level increases, the interest rate falls, so spending rises.
D)  As the price level increases, the interest rate rises, so spending falls.E) B) and C)
F) A) and C)

Question 5

Government expenditures on capital goods such as roads could increase aggregate supply. Such effects on aggregate supply are likely to matter more in the short run than in the long run.

Accepted Answer

A) True 
 B)False

Question 6

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

Accepted Answer

A)  liquidity preference.
B)  liquidity trap.
C)  open-market trap.
D)  interest-rate contraction.E) All of the above
F) A) and B)

Question 7

A tax cut shifts the aggregate demand curve the farthest if

Accepted Answer

A)  the MPC is large and if the tax cut is permanent.
B)  the MPC is large and if the tax cut is temporary.
C)  the MPC is small and if the tax cut is permanent.
D)  the MPC is small and if the tax cut is temporary.E) C) and D)
F) B) and D)

Question 8

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

Accepted Answer

A)  the MPC is small and changes in the interest rate have a small effect on investment
B)  the MPC is small and changes in the interest rate have a large effect on investment
C)  the MPC is large and changes in the interest rate have a small effect on investment
D)  the MPC is large and changes in the interest rate have a large effect on investmentE) C) and D)
F) A) and C)

Question 9

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 10

According to a 2009 article in The Economist, the multiplier effect and crowding-out effect would exactly offset each other when the economy is

Accepted Answer

A)  operating at full capacity.
B)  in recession.
C)  experiencing zero inflation.
D)  experiencing high rates of inflation.E) C) and D)
F) A) and B)

Question 11

Other things equal, the higher the price level, the higher is the real wealth of households.

Accepted Answer

A) True 
 B)False

Question 12

Fiscal policy refers to the idea that aggregate demand is affected by changes in

Accepted Answer

A)  the money supply.
B)  government spending and taxes.
C)  trade policy.
D)  All of the above are correct.E) C) and D)
F) B) and D)

Question 13

In recent years, the Federal Reserve has conducted policy by setting a target for

Accepted Answer

A)  bank reserves.
B)  the monetary growth rate.
C)  the exchange rate.
D)  the federal funds rate.E) A) and B)
F) A) and C)

Question 14

If it were not for the automatic stabilizers in the U.S. economy,

Accepted Answer

A)  the Federal Reserve would have less reason than it has now to monitor stock prices.
B)  it would be more desirable than it is now for the Federal Reserve to target an interest rate.
C)  a strict balanced-budget rule would be more desirable than it is now.
D)  output and employment would probably be more volatile than they are now.E) None of the above
F) A) and C)

Question 15

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

Accepted Answer

A) True 
 B)False

Question 16

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

Accepted Answer

A) True 
 B)False

Question 17

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

Question 18

For the following questions, use the diagram below:
Figure 21-7. 1 to AD2, the economy will stay at point b in both the short run and long run. C) It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2. D) All of the above are correct." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 21-7. Which of the following is correct?

Accepted Answer

A)  A wave of optimism could move the economy from point a to pointB
B)  If aggregate demand moves from AD1 to AD2, the economy will stay at point b in both the short run and long run.
C)  It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2.
D)  All of the above are correct.E) A) and B)
F) A) and C)

Question 19

Which of the following shifts aggregate demand to the right?

Accepted Answer

A)  The price level rises.
B)  The price level falls.
C)  The money supply falls.
D)  None of the above is correct.E) A) and C)
F) B) and D)

Question 20

The multiplier for changes in government spending is calculated as

Accepted Answer

A)  1/MPC.
B)  1/(1 - MP
C)  .
C)  MPC/(1 - MP
C)  .
D)  (1 - MP
C)  /MPC.E) A) and B)
F) A) and D)

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

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

Correct AnswerverifiedShow Answer

Government expenditures on capital goods such as roads could increase aggregate supply. Such effects on aggregate supply are likely to matter more in the short run than in the long run.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to a 2009 article in The Economist, the multiplier effect and crowding-out effect would exactly offset each other when the economy is

Correct AnswerverifiedShow Answer

For the following questions, use the diagram below: Figure 21-7. -Refer to Figure 21-7. Which of the following is correct?

Correct AnswerverifiedShow Answer

A tax cut shifts the aggregate demand curve the farthest if

Correct AnswerverifiedShow Answer

If it were not for the automatic stabilizers in the U.S. economy,

Correct AnswerverifiedShow Answer

The multiplier for changes in government spending is calculated as

Correct AnswerverifiedShow Answer

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

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

In recent years, the Federal Reserve has conducted policy by setting a target for

Correct AnswerverifiedShow Answer

Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-demand curve?

Correct AnswerverifiedShow Answer

Both monetary policy and fiscal policy affect aggregate demand.

Correct AnswerverifiedShow Answer

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

Correct AnswerverifiedShow Answer

Which of the following shifts aggregate demand to the right?

Correct AnswerverifiedShow Answer

Other things equal, the higher the price level, the higher is the real wealth of households.

Correct AnswerverifiedShow Answer

Fiscal policy refers to the idea that aggregate demand is affected by changes in

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A fiscal stimulus was initiated by President Obama in response to the economic downturn of 2008-2009. At that time, the president's economists estimated the multiplier to be

Correct AnswerverifiedShow Answer

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

Correct AnswerverifiedShow Answer

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