Question 1

If the spending multiplier is 8, then the marginal propensity to consume must be 7/8.

Accepted Answer

A) True 
 B)False

Question 2

If the Federal Reserve decided to lower interest rates, it could

Accepted Answer

A) buy bonds to lower the money supply. 
B) buy bonds to raise the money supply. 
C) sell bonds to lower the money supply. 
D) sell bonds to raise the money supply. 
A) buy bonds to lower the money supply. 
B) buy bonds to raise the money supply. 
C) sell bonds to lower the money supply. 
D) sell bonds to raise the money supply.

Question 3

According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, then the interest rate will

Accepted Answer

A) increase and the quantity of money demanded will decrease. 
B) increase and the quantity of money demanded will increase. 
C) decrease and the quantity of money demanded will decrease. 
D) decrease and the quantity of money demanded will increase. 
A) increase and the quantity of money demanded will decrease. 
B) increase and the quantity of money demanded will increase. 
C) decrease and the quantity of money demanded will decrease. 
D) decrease and the quantity of money demanded will increase.

Question 4

Figure 21-1  
-Refer to Figure 21-1. If the current interest rate is 2 percent,

Accepted Answer

A) there is an excess supply of money. 
B) people will sell more bonds, which drives interest rates up. 
C) as the money market moves to equilibrium, people will buy more goods. 
D) All of the above are correct. 
A) there is an excess supply of money. 
B) people will sell more bonds, which drives interest rates up. 
C) as the money market moves to equilibrium, people will buy more goods. 
D) All of the above are correct.

Question 5

If the MPC is 0.75 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by

Accepted Answer

A) $80 billion. 
B) $125 billion. 
C) $400 billion. 
D) $500 billion. 
A) $80 billion. 
B) $125 billion. 
C) $400 billion. 
D) $500 billion.

Question 6

If the inflation rate is zero, then

Accepted Answer

A) both the nominal interest rate and the real interest rate can fall below zero. 
B) the nominal interest rate can fall below zero, but the real interest rate cannot fall below zero. 
C) the real interest rate can fall below zero, but the nominal interest rate cannot fall below zero. 
D) neither the nominal interest rate nor the real interest rate can fall below zero. 
A) both the nominal interest rate and the real interest rate can fall below zero. 
B) the nominal interest rate can fall below zero, but the real interest rate cannot fall below zero. 
C) the real interest rate can fall below zero, but the nominal interest rate cannot fall below zero. 
D) neither the nominal interest rate nor the real interest rate can fall below zero.

Question 7

A reduction in U.S net exports would shift U.S. aggregate demand

Accepted Answer

A) rightward. In an attempt to stabilize the economy, the government could raise taxes. 
B) rightward. In an attempt to stabilize the economy, the government could cut taxes. 
C) leftward. In an attempt to stabilize the economy, the government could raise taxes. 
D) leftward. In an attempt to stabilize the economy, the government could cut taxes. 
A) rightward. In an attempt to stabilize the economy, the government could raise taxes. 
B) rightward. In an attempt to stabilize the economy, the government could cut taxes. 
C) leftward. In an attempt to stabilize the economy, the government could raise taxes. 
D) leftward. In an attempt to stabilize the economy, the government could cut taxes.

Question 8

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

Accepted Answer

A) wealth effect, exchange-rate effect, interest-rate effect 
B) exchange-rate effect, interest-rate effect, wealth effect 
C) interest-rate effect, wealth effect, exchange-rate effect 
D) interest-rate effect, exchange-rate effect, wealth effect 
A) wealth effect, exchange-rate effect, interest-rate effect 
B) exchange-rate effect, interest-rate effect, wealth effect 
C) interest-rate effect, wealth effect, exchange-rate effect 
D) interest-rate effect, exchange-rate effect, wealth effect

Question 9

Which of the following statements is correct?

Accepted Answer

A) Both liquidity preference theory and classical theory assume the interest rate adjusts to bring the money market into equilibrium. 
B) Both liquidity preference theory and classical theory assume the price level adjusts to bring the money market into equilibrium. 
C) Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium; classical theory assumes the price level adjusts to bring the money market into equilibrium. 
D) Liquidity preference theory assumes the price level adjusts to bring the money market into equilibrium; classical theory assumes the interest rate adjusts to bring the money market into equilibrium. 
A) Both liquidity preference theory and classical theory assume the interest rate adjusts to bring the money market into equilibrium. 
B) Both liquidity preference theory and classical theory assume the price level adjusts to bring the money market into equilibrium. 
C) Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium; classical theory assumes the price level adjusts to bring the money market into equilibrium. 
D) Liquidity preference theory assumes the price level adjusts to bring the money market into equilibrium; classical theory assumes the interest rate adjusts to bring the money market into equilibrium.

Question 10

Assuming a multiplier effect, but no crowding-out or investment-accelerator effects, a $100 billion increase in government expenditures shifts aggregate

Accepted Answer

A) demand rightward by more than $100 billion. 
B) demand rightward by less than $100 billion. 
C) supply leftward by more than $100 billion. 
D) supply leftward by less than $100 billion. 
A) demand rightward by more than $100 billion. 
B) demand rightward by less than $100 billion. 
C) supply leftward by more than $100 billion. 
D) supply leftward by less than $100 billion.

Question 11

Figure 21-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.  
-Refer to Figure 21-2. Assume the money market is always in equilibrium. Under the assumptions of the model,

Accepted Answer

A) the quantity of goods and services demanded is higher at P2 than it is at P1. 
B) the quantity of money is higher at Y1 than it is at Y2. 
C) an increase in r from r1 to r2 is associated with a decrease in Y from Y1 to Y2. 
D) All of the above are correct. 
A) the quantity of goods and services demanded is higher at P2 than it is at P1. 
B) the quantity of money is higher at Y1 than it is at Y2. 
C) an increase in r from r1 to r2 is associated with a decrease in Y from Y1 to Y2. 
D) All of the above are correct.

Question 12

Critics of stabilization policy argue that

Accepted Answer

A) policy affects aggregate demand quickly, but the effects on aggregate demand are long-lived. 
B) policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived. 
C) policy affects aggregate demand with a lag, but the effects are short-lived. 
D) policy does not affect aggregate demand. 
A) policy affects aggregate demand quickly, but the effects on aggregate demand are long-lived. 
B) policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived. 
C) policy affects aggregate demand with a lag, but the effects are short-lived. 
D) policy does not affect aggregate demand.

Question 13

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. 
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.

Question 14

Keynes argued that

Accepted Answer

A) irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment. 
B) irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply. 
C) changes in business and consumer expectations generally stabilize the economy. 
D) All of the above are correct. 
A) irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment. 
B) irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply. 
C) changes in business and consumer expectations generally stabilize the economy. 
D) All of the above are correct.

Question 15

Figure 21-4. On the figure, MS represents money supply and MD represents money demand.  
-Refer to Figure 21-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?

Accepted Answer

A) The Federal Reserve increases the money supply. 
B) Money demand increases. 
C) The price level decreases. 
D) All of the above are correct. 
A) The Federal Reserve increases the money supply. 
B) Money demand increases. 
C) The price level decreases. 
D) All of the above are correct.

Question 16

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Accepted Answer

A) True 
 B)False

If the spending multiplier is 8, then the marginal propensity to consume must be 7/8.

If the Federal Reserve decided to lower interest rates, it could

According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, then the interest rate will

Figure 21-1 -Refer to Figure 21-1. If the current interest rate is 2 percent,

If the MPC is 0.75 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by

If the inflation rate is zero, then

A reduction in U.S net exports would shift U.S. aggregate demand

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

Which of the following statements is correct?

Assuming a multiplier effect, but no crowding-out or investment-accelerator effects, a $100 billion increase in government expenditures shifts aggregate

Critics of stabilization policy argue that

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

Keynes argued that

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₁. Which of the following events would cause the equilibrium interest rate to increase?

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

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

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

If the spending multiplier is 8, then the marginal propensity to consume must be 7/8.

If the Federal Reserve decided to lower interest rates, it could

According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, then the interest rate will

Figure 21-1 -Refer to Figure 21-1. If the current interest rate is 2 percent,

If the MPC is 0.75 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by

If the inflation rate is zero, then

A reduction in U.S net exports would shift U.S. aggregate demand

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

Which of the following statements is correct?

Assuming a multiplier effect, but no crowding-out or investment-accelerator effects, a $100 billion increase in government expenditures shifts aggregate

Critics of stabilization policy argue that

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

Keynes argued that

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

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

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Suppose the current equilibrium interest rate is r₁. Which of the following events would cause the equilibrium interest rate to increase?