Question 1

An increase in government spending initially and primarily shifts which curve in what direction?

Accepted Answer

A) aggregate demand right 
B) aggregate demand left 
C) aggregate supply right 
D) neither aggregate demand nor aggregate supply 
A) aggregate demand right 
B) aggregate demand left 
C) aggregate supply right 
D) neither aggregate demand nor aggregate supply

Question 2

In a small open economy with perfect capital mobility, if exchange rates are fixed, how could aggregate demand be increased?

Accepted Answer

A) by increasing government expenditures 
B) by increasing tax rates 
C) by increasing the money supply 
D) by decreasing the money supply 
A) by increasing government expenditures 
B) by increasing tax rates 
C) by increasing the money supply 
D) by decreasing the money supply

Question 3

For the following questions, consult the diagram below.
Figure 15-2  
-Refer to Figure 15-2. If the closed economy is at point b, which of the following is the best policy to restore full employment?

Accepted Answer

A) increasing the money supply 
B) decreasing government purchases 
C) increasing taxes 
D) selling Canadian dollars 
A) increasing the money supply 
B) decreasing government purchases 
C) increasing taxes 
D) selling Canadian dollars

Question 4

If the interest rate is above a central bank's target, what should the central bank do?

Accepted Answer

A) buy bonds to increase the money supply 
B) buy bonds to decrease the money supply 
C) sell bonds to increase the money supply 
D) sell bonds to decrease the money supply 
A) buy bonds to increase the money supply 
B) buy bonds to decrease the money supply 
C) sell bonds to increase the money supply 
D) sell bonds to decrease the money supply

Question 5

Which of the following properly describes the interest rate effect?

Accepted Answer

A) A higher price level leads to higher money demand, higher money demand leads to higher interest rates, and a higher interest rate increases the quantity of goods and services demanded. 
B) A higher price level leads to higher money demand, higher money demand leads to lower interest rates, and a higher interest rate reduces the quantity of goods and services demanded. 
C) A lower price level leads to lower money demand, lower money demand leads to lower interest rates, and a lower interest rate reduces the quantity of goods and services demanded. 
D) A lower price level leads to lower money demand, lower money demand leads to lower interest rates, and a lower interest rate increases the quantity of goods and services demanded. 
A) A higher price level leads to higher money demand, higher money demand leads to higher interest rates, and a higher interest rate increases the quantity of goods and services demanded. 
B) A higher price level leads to higher money demand, higher money demand leads to lower interest rates, and a higher interest rate reduces the quantity of goods and services demanded. 
C) A lower price level leads to lower money demand, lower money demand leads to lower interest rates, and a lower interest rate reduces the quantity of goods and services demanded. 
D) A lower price level leads to lower money demand, lower money demand leads to lower interest rates, and a lower interest rate increases the quantity of goods and services demanded.

Question 6

When the interest rate increases, how do the opportunity cost of holding money and the quantity of money demanded change?

Accepted Answer

A) The opportunity cost of holding money increases, so the quantity of money demanded increases. 
B) The opportunity cost of holding money increases, so the quantity of money demanded decreases. 
C) The opportunity cost of holding money decreases, so the quantity of money demanded increases. 
D) The opportunity cost of holding money decreases, so the quantity of money demanded decreases. 
A) The opportunity cost of holding money increases, so the quantity of money demanded increases. 
B) The opportunity cost of holding money increases, so the quantity of money demanded decreases. 
C) The opportunity cost of holding money decreases, so the quantity of money demanded increases. 
D) The opportunity cost of holding money decreases, so the quantity of money demanded decreases.

Question 7

Which of the following is the most important automatic stabilizer?

Accepted Answer

A) open-market transactions 
B) the tax system 
C) unemployment compensation 
D) welfare benefits 
A) open-market transactions 
B) the tax system 
C) unemployment compensation 
D) welfare benefits

Question 8

When the interest rate decreases, what happens to the opportunity cost of holding money and the quantity of money demanded?

Accepted Answer

A) The opportunity cost of holding money increases, so the quantity of money demanded increases. 
B) The opportunity cost of holding money increases, so the quantity of money demanded decreases. 
C) The opportunity cost of holding money decreases, so the quantity of money demanded increases. 
D) The opportunity cost of holding money decreases, so the quantity of money demanded decreases. 
A) The opportunity cost of holding money increases, so the quantity of money demanded increases. 
B) The opportunity cost of holding money increases, so the quantity of money demanded decreases. 
C) The opportunity cost of holding money decreases, so the quantity of money demanded increases. 
D) The opportunity cost of holding money decreases, so the quantity of money demanded decreases.

Question 9

Which of the following tends to make aggregate demand shift right farther than the amount government expenditures increase?

Accepted Answer

A) the crowding-out effect 
B) the multiplier effect 
C) the wealth effect 
D) the interest-rate effect 
A) the crowding-out effect 
B) the multiplier effect 
C) the wealth effect 
D) the interest-rate effect

Question 10

Which of the following is an effect of an increase in the interest rate?

Accepted Answer

A) People put more money in their savings accounts. 
B) Foreign citizens decide to buy fewer Canadian bonds. 
C) Firms decide to purchase new machinery. 
D) People decide to consume more. 
A) People put more money in their savings accounts. 
B) Foreign citizens decide to buy fewer Canadian bonds. 
C) Firms decide to purchase new machinery. 
D) People decide to consume more.

Question 11

How do permanent tax cuts shift the AD curve compared with temporary tax results?

Accepted Answer

A) Permanent tax cuts shift the AD curve farther to the right than temporary tax cuts do. 
B) Permanent tax cuts shift the AD curve less to the right than temporary tax cuts do. 
C) Permanent tax cuts shift the AD curve farther to the left than temporary tax cuts do. 
D) Permanent tax cuts shift the AD curve less to the left than temporary tax cuts do. 
A) Permanent tax cuts shift the AD curve farther to the right than temporary tax cuts do. 
B) Permanent tax cuts shift the AD curve less to the right than temporary tax cuts do. 
C) Permanent tax cuts shift the AD curve farther to the left than temporary tax cuts do. 
D) Permanent tax cuts shift the AD curve less to the left than temporary tax cuts do.

Question 12

Assume that the MPC is 0.80. What is the multiplier?

Accepted Answer

A) .20 
B) .25 
C) 5 
D) 8 
A) .20 
B) .25 
C) 5 
D) 8

Question 13

Suppose the economy is in long-run equilibrium. Parliament passes regulations that make it more costly to conduct business, so the long-run aggregate supply curve shifts $80 billion to the left. At the same time, government purchases increase by $60 billion. If the MPC equals 0.75 and the crowding-out effect is $70 billion, what would we expect to happen in the long run to real GDP and the price level?

Accepted Answer

A) Both real GDP and the price level would be higher. 
B) Both real GDP and the price level would be lower. 
C) Real GDP would be lower, but the price level would be higher. 
D) Real GDP would be lower, but the price level would be the same. 
A) Both real GDP and the price level would be higher. 
B) Both real GDP and the price level would be lower. 
C) Real GDP would be lower, but the price level would be higher. 
D) Real GDP would be lower, but the price level would be the same.

Question 14

In liquidity preference theory, an increase in the interest rate decreases the quantity of money demanded, but does not shift the money demand curve.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following do critics of stabilization policy argue?

Accepted Answer

A) There is a too short lag between the time policy is passed and policy has an impact on the economy. 
B) The impact of policy may not last enough such that the problem it was designed to offset is solved. 
C) Policy cannot cause economic fluctuations. 
D) Policy can be a source of, instead of a cure for, recessions. 
A) There is a too short lag between the time policy is passed and policy has an impact on the economy. 
B) The impact of policy may not last enough such that the problem it was designed to offset is solved. 
C) Policy cannot cause economic fluctuations. 
D) Policy can be a source of, instead of a cure for, recessions.

Question 16

Which of the following is NOT an automatic stabilizer?

Accepted Answer

A) the minimum wage 
B) the unemployment compensation system 
C) the federal income tax 
D) the welfare system 
A) the minimum wage 
B) the unemployment compensation system 
C) the federal income tax 
D) the welfare system

Question 17

Suppose the closed economy is in long-run equilibrium. Pessimism on the part of investors then shifts the aggregate demand curve $50 billion to the left. The government wants to increase spending in order to avoid a recession. If the crowding-out effect is always half as strong as the multiplier effect, and if the MPC equals 0.8, by how much do government purchases have to rise?

Accepted Answer

A) $10 billion 
B) $20 billion 
C) $50 billion 
D) $100 billion 
A) $10 billion 
B) $20 billion 
C) $50 billion 
D) $100 billion

Question 18

Hoe do the multiplier effect and the crowding-out effect change the consequences of an increase in government spending?

Accepted Answer

A) They both amplify the consequences. 
B) They both diminish the consequences. 
C) The multiplier effect diminishes the consequences, while the crowding-out effect amplifies the consequences. 
D) The multiplier effect amplifies the consequences, while the crowding-out effect diminishes the consequences. 
A) They both amplify the consequences. 
B) They both diminish the consequences. 
C) The multiplier effect diminishes the consequences, while the crowding-out effect amplifies the consequences. 
D) The multiplier effect amplifies the consequences, while the crowding-out effect diminishes the consequences.

Question 19

Which of the following is an effect of an increase in the interest rate?

Accepted Answer

A) It induces firms to invest more. 
B) It induces households to increase consumption. 
C) It shifts money demand to the right. 
D) It leads to the appreciation of the exchange rate. 
A) It induces firms to invest more. 
B) It induces households to increase consumption. 
C) It shifts money demand to the right. 
D) It leads to the appreciation of the exchange rate.

Question 20

For the following questions, consult the diagram below.
Figure 15-2  
-Refer to Figure 15-2. In a closed economy, which of the following could have caused the economy to move from a to b?

Accepted Answer

A) a wave of optimism 
B) a decrease in price 
C) either fiscal or monetary contraction 
D) an increase in the price of oil 
A) a wave of optimism 
B) a decrease in price 
C) either fiscal or monetary contraction 
D) an increase in the price of oil

An increase in government spending initially and primarily shifts which curve in what direction?

In a small open economy with perfect capital mobility, if exchange rates are fixed, how could aggregate demand be increased?

For the following questions, consult the diagram below. Figure 15-2 -Refer to Figure 15-2. If the closed economy is at point b, which of the following is the best policy to restore full employment?

If the interest rate is above a central bank's target, what should the central bank do?

Which of the following properly describes the interest rate effect?

When the interest rate increases, how do the opportunity cost of holding money and the quantity of money demanded change?

Which of the following is the most important automatic stabilizer?

When the interest rate decreases, what happens to the opportunity cost of holding money and the quantity of money demanded?

Which of the following tends to make aggregate demand shift right farther than the amount government expenditures increase?

Which of the following is an effect of an increase in the interest rate?

How do permanent tax cuts shift the AD curve compared with temporary tax results?

Assume that the MPC is 0.80. What is the multiplier?

In liquidity preference theory, an increase in the interest rate decreases the quantity of money demanded, but does not shift the money demand curve.

Which of the following do critics of stabilization policy argue?

Which of the following is NOT an automatic stabilizer?

Hoe do the multiplier effect and the crowding-out effect change the consequences of an increase in government spending?

Which of the following is an effect of an increase in the interest rate?

For the following questions, consult the diagram below. Figure 15-2 -Refer to Figure 15-2. In a closed economy, which of the following could have caused the economy to move from a to b?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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Exam 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand

An increase in government spending initially and primarily shifts which curve in what direction?

In a small open economy with perfect capital mobility, if exchange rates are fixed, how could aggregate demand be increased?

For the following questions, consult the diagram below. Figure 15-2 -Refer to Figure 15-2. If the closed economy is at point b, which of the following is the best policy to restore full employment?

If the interest rate is above a central bank's target, what should the central bank do?

Which of the following properly describes the interest rate effect?

When the interest rate increases, how do the opportunity cost of holding money and the quantity of money demanded change?

Which of the following is the most important automatic stabilizer?

When the interest rate decreases, what happens to the opportunity cost of holding money and the quantity of money demanded?

Which of the following tends to make aggregate demand shift right farther than the amount government expenditures increase?

Which of the following is an effect of an increase in the interest rate?

How do permanent tax cuts shift the AD curve compared with temporary tax results?

Assume that the MPC is 0.80. What is the multiplier?

In liquidity preference theory, an increase in the interest rate decreases the quantity of money demanded, but does not shift the money demand curve.

Which of the following do critics of stabilization policy argue?

Which of the following is NOT an automatic stabilizer?

Hoe do the multiplier effect and the crowding-out effect change the consequences of an increase in government spending?

Which of the following is an effect of an increase in the interest rate?

For the following questions, consult the diagram below. Figure 15-2 -Refer to Figure 15-2. In a closed economy, which of the following could have caused the economy to move from a to b?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

Filters