Question 1

The positive feedback from aggregate demand to investment is called

Accepted Answer

A) the investment multiplier. 
B) the stock-market effect. 
C) the investment accelerator. 
D) the crowding-in multiplier. 
A) the investment multiplier. 
B) the stock-market effect. 
C) the investment accelerator. 
D) the crowding-in multiplier.

Question 2

How does a reduction in the money supply by the Fed make owning stocks less attractive?

Accepted Answer

The reduction in the money supply raises

Question 3

An increase in the money supply decreases the equilibrium interest rate and shifts the aggregate-demand curve to the right.

Accepted Answer

A) True 
 B)False

Question 4

As income rises

Accepted Answer

A) money demand rises, so the interest rate rises. 
B) money demand rises, so the interest rate falls 
C) money demand falls, so the interest rate rises. 
D) money demand falls, so the interest rate falls. 
A) money demand rises, so the interest rate rises. 
B) money demand rises, so the interest rate falls 
C) money demand falls, so the interest rate rises. 
D) money demand falls, so the interest rate falls.

Question 5

Which of the following illustrates how the investment accelerator works?

Accepted Answer

A) An increase in government expenditures increases the interest rate so that the Burgerville chain of restaurants decides to build fewer new restaurants. 
B) An increase in government expenditures increases aggregate spending so that Burgerville finds it profitable to build more new restaurants. 
C) An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by Burgerville increases. 
D) An increase in government expenditures decreases the interest rate so that Burgerville decides to build more new restaurants. 
A) An increase in government expenditures increases the interest rate so that the Burgerville chain of restaurants decides to build fewer new restaurants. 
B) An increase in government expenditures increases aggregate spending so that Burgerville finds it profitable to build more new restaurants. 
C) An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by Burgerville increases. 
D) An increase in government expenditures decreases the interest rate so that Burgerville decides to build more new restaurants.

Question 6

The multiplier is computed as MPC / (1 - MPC).

Accepted Answer

A) True 
 B)False

Question 7

Figure 21-1  
-Refer to Figure 21-1. Which of the following is correct?

Accepted Answer

A) If the interest rate is 4 percent, there is excess money demand, and the interest rate will fall. 
B) If the interest rate is 3 percent, there is excess money supply, and the interest rate will rise. 
C) Starting with an interest rate of 4 percent, the demand for goods and services will increase until the money market reaches a new equilibrium. 
D) None of the above is correct. 
A) If the interest rate is 4 percent, there is excess money demand, and the interest rate will fall. 
B) If the interest rate is 3 percent, there is excess money supply, and the interest rate will rise. 
C) Starting with an interest rate of 4 percent, the demand for goods and services will increase until the money market reaches a new equilibrium. 
D) None of the above is correct.

Question 8

The lag problem associated with fiscal 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 implementing fiscal policy. 
C) the time it takes for changes in government spending or taxes 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 implementing fiscal policy. 
C) the time it takes for changes in government spending or taxes to affect the interest rate. 
D) All of the above are correct.

Question 9

Which of the following shifts aggregate demand to the left?

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 10

If the Fed conducts open-market purchases, then which of the following quantities increase(s)?

Accepted Answer

A) interest rates and investment spending 
B) interest rates, but not investment spending 
C) investment spending, but not interest rates 
D) neither interest rates nor investment spending 
A) interest rates and investment spending 
B) interest rates, but not investment spending 
C) investment spending, but not interest rates 
D) neither interest rates nor investment spending

Question 11

Government purchases are said to have a

Accepted Answer

A) multiplier effect on aggregate supply. 
B) multiplier effect on aggregate demand. 
C) liquidity-enhancing effect on aggregate supply. 
D) liquidity-enhancing effect on aggregate demand. 
A) multiplier effect on aggregate supply. 
B) multiplier effect on aggregate demand. 
C) liquidity-enhancing effect on aggregate supply. 
D) liquidity-enhancing effect on aggregate demand.

Question 12

Keynes argued that aggregate demand is

Accepted Answer

A) stable, because the economy tends to return to its long-run equilibrium quickly after any disturbance to aggregate demand. 
B) stable, because changes in consumption are mostly offset by changes in investment and vice versa. 
C) unstable, because waves of pessimism and optimism create fluctuations in aggregate demand. 
D) unstable, because of long and variable policy lags that worsen economic fluctuations. 
A) stable, because the economy tends to return to its long-run equilibrium quickly after any disturbance to aggregate demand. 
B) stable, because changes in consumption are mostly offset by changes in investment and vice versa. 
C) unstable, because waves of pessimism and optimism create fluctuations in aggregate demand. 
D) unstable, because of long and variable policy lags that worsen economic fluctuations.

Question 13

Which of the following events would shift money demand to the left?

Accepted Answer

A) an increase in the price level 
B) a decrease in the price level 
C) an increase in the interest rate 
D) a decrease in the interest rate 
A) an increase in the price level 
B) a decrease in the price level 
C) an increase in the interest rate 
D) a decrease in the interest rate

Question 14

During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.

Accepted Answer

A) True 
 B)False

Question 15

Which U.S. president, when asked why he had proposed a tax cut, responded by saying "To stimulate the economy. Don't you remember your Economics 101?"

Accepted Answer

A) Dwight D. Eisenhower 
B) John F. Kennedy 
C) Ronald Reagan 
D) Bill Clinton 
A) Dwight D. Eisenhower 
B) John F. Kennedy 
C) Ronald Reagan 
D) Bill Clinton

Question 16

According to liquidity preference theory, an increase in the price level causes the interest rate to

Accepted Answer

A) increase, which increases the quantity of goods and services demanded. 
B) increase, which decreases the quantity of goods and services demanded. 
C) decrease, which increases the quantity of goods and services demanded. 
D) decrease, which decreases the quantity of goods and services demanded. 
A) increase, which increases the quantity of goods and services demanded. 
B) increase, which decreases the quantity of goods and services demanded. 
C) decrease, which increases the quantity of goods and services demanded. 
D) decrease, which decreases the quantity of goods and services demanded.

Question 17

In the short run, open-market sales

Accepted Answer

A) increase the price level and real GDP. 
B) decrease the price level and real GDP. 
C) increases the price level and decreases real GDP. 
D) decreases the price level and increases real GDP. 
A) increase the price level and real GDP. 
B) decrease the price level and real GDP. 
C) increases the price level and decreases real GDP. 
D) decreases the price level and increases real GDP.

Question 18

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. 
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.

Question 19

If the MPC is 3/4 then the multiplier is

Accepted Answer

A) 4, so a $100 increase in government spending increases aggregate demand by $400. 
B) 4, so a $100 increase in government spending increases output by $400. 
C) 4/3, so a $100 increase in government spending increases aggregate demand by $400/3. 
D) 4/3, so a $100 increase in government spending increases output by $400/3. 
A) 4, so a $100 increase in government spending increases aggregate demand by $400. 
B) 4, so a $100 increase in government spending increases output by $400. 
C) 4/3, so a $100 increase in government spending increases aggregate demand by $400/3. 
D) 4/3, so a $100 increase in government spending increases output by $400/3.

Question 20

The theory of liquidity preference is largely at odds with the basic ideas of supply and demand.

Accepted Answer

A) True 
 B)False

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

The positive feedback from aggregate demand to investment is called

How does a reduction in the money supply by the Fed make owning stocks less attractive?

An increase in the money supply decreases the equilibrium interest rate and shifts the aggregate-demand curve to the right.

As income rises

Which of the following illustrates how the investment accelerator works?

The multiplier is computed as MPC / (1 - MPC).

Figure 21-1 -Refer to Figure 21-1. Which of the following is correct?

The lag problem associated with fiscal policy is due mostly to

Which of the following shifts aggregate demand to the left?

If the Fed conducts open-market purchases, then which of the following quantities increase(s)?

Government purchases are said to have a

Keynes argued that aggregate demand is

Which of the following events would shift money demand to the left?

During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.

Which U.S. president, when asked why he had proposed a tax cut, responded by saying "To stimulate the economy. Don't you remember your Economics 101?"

According to liquidity preference theory, an increase in the price level causes the interest rate to

In the short run, open-market sales

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

If the MPC is 3/4 then the multiplier is

The theory of liquidity preference is largely at odds with the basic ideas of supply and demand.

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

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