Question 1

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. 
A) the wealth effect. 
B) the exchange-rate effect. 
C) the interest-rate effect. 
D) misperceptions theory. C

Question 2

When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right.

Accepted Answer

A) True 
 B)False  True

Question 3

If the price level falls, 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. 
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. B

Question 4

During recessions, unemployment insurance payments tend to rise.

Accepted Answer

A) True 
 B)False

Question 5

In the short run,

Accepted Answer

A) the price level alone adjusts to balance the supply and demand for money. 
B) output responds to changes in the aggregate demand for goods and services. 
C) changes in the money supply cause a proportional change in the price level. 
D) increases in the money supply shift the aggregate supply curve causing output to rise. 
A) the price level alone adjusts to balance the supply and demand for money. 
B) output responds to changes in the aggregate demand for goods and services. 
C) changes in the money supply cause a proportional change in the price level. 
D) increases in the money supply shift the aggregate supply curve causing output to rise.

Question 6

For the U.S. economy, money holdings are a

Accepted Answer

A) large part of household wealth, and so the interest-rate effect is large. 
B) large part of household wealth, and so the wealth effect is large. 
C) small part of household wealth, and so the interest-rate effect is small. 
D) small part of household wealth, and so the wealth effect is small. 
A) large part of household wealth, and so the interest-rate effect is large. 
B) large part of household wealth, and so the wealth effect is large. 
C) small part of household wealth, and so the interest-rate effect is small. 
D) small part of household wealth, and so the wealth effect is small.

Question 7

A tax cut shifts aggregate demand

Accepted Answer

A) by more than the amount of the tax cut. 
B) by the same amount as the tax cut. 
C) by less than the tax cut. 
D) None of the above is necessarily correct. 
A) by more than the amount of the tax cut. 
B) by the same amount as the tax cut. 
C) by less than the tax cut. 
D) None of the above is necessarily correct.

Question 8

Changes in the interest rate bring the money market into equilibrium 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. 
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.

Question 9

Suppose the MPC is 0.60. Assume there are no crowding out or investment accelerator effects. If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion, then by how much does aggregate demand shift to the right?

Accepted Answer

A) $300 billion and $180 billion 
B) $300 billion and $300 billion 
C) $500 billion and $300 billion 
D) $500 billion and $500 billion 
A) $300 billion and $180 billion 
B) $300 billion and $300 billion 
C) $500 billion and $300 billion 
D) $500 billion and $500 billion

Question 10

People choose to hold a smaller quantity of money if

Accepted Answer

A) the interest rate rises, which causes the opportunity cost of holding money to rise. 
B) the interest rate falls, which causes the opportunity cost of holding money to rise. 
C) the interest rate rises, which causes the opportunity cost of holding money to fall. 
D) the interest rate falls, which causes the opportunity cost of holding money to fall. 
A) the interest rate rises, which causes the opportunity cost of holding money to rise. 
B) the interest rate falls, which causes the opportunity cost of holding money to rise. 
C) the interest rate rises, which causes the opportunity cost of holding money to fall. 
D) the interest rate falls, which causes the opportunity cost of holding money to fall.

Question 11

During recessions, the government tends to run a budget deficit.

Accepted Answer

A) True 
 B)False

Question 12

If the marginal propensity to consume is 6/7, then the multiplier is 7.

Accepted Answer

A) True 
 B)False

Question 13

Monetary policy and fiscal policy are the only factors that influence aggregate demand.

Accepted Answer

A) True 
 B)False

Question 14

When the interest rate decreases, the opportunity cost of holding money

Accepted Answer

A) increases, so the quantity of money demanded increases. 
B) increases, so the quantity of money demanded decreases. 
C) decreases, so the quantity of money demanded increases. 
D) decreases, so the quantity of money demanded decreases. 
A) increases, so the quantity of money demanded increases. 
B) increases, so the quantity of money demanded decreases. 
C) decreases, so the quantity of money demanded increases. 
D) decreases, so the quantity of money demanded decreases.

Question 15

Which of the following shifts aggregate demand to the right?

Accepted Answer

A) an increase in the price level 
B) an increase in the money supply 
C) a decrease in the price level 
D) a decrease in the money supply 
A) an increase in the price level 
B) an increase in the money supply 
C) a decrease in the price level 
D) a decrease in the money supply

Question 16

An increase in the U.S. interest rate

Accepted Answer

A) raises the opportunity cost of holding dollars. 
B) induces households to increase consumption. 
C) shifts money demand to the right. 
D) leads to a depreciation of the U.S. dollar. 
A) raises the opportunity cost of holding dollars. 
B) induces households to increase consumption. 
C) shifts money demand to the right. 
D) leads to a depreciation of the U.S. dollar.

Question 17

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. 
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.

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. 
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.

Question 19

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. 
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.

Question 20

The interest rate falls if

Accepted Answer

A) either money demand or money supply shifts right. 
B) money demand shifts right or money supply shifts left. 
C) either money demand or money supply shifts left. 
D) money demand shifts left or money supply shifts right. 
A) either money demand or money supply shifts right. 
B) money demand shifts right or money supply shifts left. 
C) either money demand or money supply shifts left. 
D) money demand shifts left or money supply shifts right.

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

The theory of liquidity preference is most helpful in understanding

When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right.

If the price level falls, then

During recessions, unemployment insurance payments tend to rise.

In the short run,

For the U.S. economy, money holdings are a

A tax cut shifts aggregate demand

Changes in the interest rate bring the money market into equilibrium according to

People choose to hold a smaller quantity of money if

During recessions, the government tends to run a budget deficit.

If the marginal propensity to consume is 6/7, then the multiplier is 7.

Monetary policy and fiscal policy are the only factors that influence aggregate demand.

When the interest rate decreases, the opportunity cost of holding money

Which of the following shifts aggregate demand to the right?

An increase in the U.S. interest rate

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

The lag problem associated with monetary policy is due mostly to

The opportunity cost of holding money

The interest rate falls if

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand, and Government Policies

Consumers, Producers, and the Efficiency of Markets

Application: The Costs of Taxation

Application: International Trade

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomic Models

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Trade-Off Between Inflation and Unemployment

Six Debates Over Macroeconomic Policy

Filters