Question 1

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

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 2

Which of the following sequences best represents the crowding-out effect?

Accepted Answer

A)  government purchases ↑ ⇒ GDP ↑ ⇒ supply of money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ 
B)  government purchases ↓ ⇒ GDP ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↓ 
C)  government purchases ↑ ⇒ GDP ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ 
D)  taxes ↑ ⇒ GDP ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ 
A)  government purchases ↑ ⇒ GDP ↑ ⇒ supply of money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ 
B)  government purchases ↓ ⇒ GDP ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↓ 
C)  government purchases ↑ ⇒ GDP ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ 
D)  taxes ↑ ⇒ GDP ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓

Question 3

The change in aggregate demand that results from fiscal expansion changing the interest rate is called the

Accepted Answer

A)  multiplier effect. 
B)  crowding-out effect. 
C)  accelerator effect. 
D)  Ricardian equivalence effect. 
A)  multiplier effect. 
B)  crowding-out effect. 
C)  accelerator effect. 
D)  Ricardian equivalence effect.

Question 4

Suppose investment spending falls. To offset the change in output the Federal Reserve could

Accepted Answer

A)  increase the money supply. This increase would also move the price level closer to its value before the decline in investment spending. 
B)  increase the money supply. However, this increase would move the price level farther from its value before the decline in investment spending. 
C)  decrease the money supply. This decrease would also move the price level closer to its value before the decline in investment spending. 
D)  decrease the money supply. However, this increase would move the price level farther from its value before the decline in investment spending. 
A)  increase the money supply. This increase would also move the price level closer to its value before the decline in investment spending. 
B)  increase the money supply. However, this increase would move the price level farther from its value before the decline in investment spending. 
C)  decrease the money supply. This decrease would also move the price level closer to its value before the decline in investment spending. 
D)  decrease the money supply. However, this increase would move the price level farther from its value before the decline in investment spending.

Question 5

Scenario 34-2. The following facts apply to a small, imaginary economy.
• Consumption spending is $6,720 when income is $8,000.
• Consumption spending is $7,040 when income is $8,500.
-Refer to Scenario 34-2. The multiplier for this economy is

Accepted Answer

A)  1.31. 
B)  6.25. 
C)  2.78. 
D)  2.27. 
A)  1.31. 
B)  6.25. 
C)  2.78. 
D)  2.27.

Question 6

If the Fed increases the money supply,

Accepted Answer

A)  the interest rate increases, which tends to raise stock prices. 
B)  the interest rate increases, which tends to reduce stock prices. 
C)  the interest rate decreases, which tends to raise stock prices. 
D)  the interest rate decreases, which tends to reduce stock prices. 
A)  the interest rate increases, which tends to raise stock prices. 
B)  the interest rate increases, which tends to reduce stock prices. 
C)  the interest rate decreases, which tends to raise stock prices. 
D)  the interest rate decreases, which tends to reduce stock prices.

Question 7

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 8

A European recession that reduces U.S. net exports by $50 billion may ultimately lead to a $_____ billion reduction in aggregate demand if the MPC is 0.75.

Accepted Answer

The answer of A European recession that reduces U.S. net...

Question 9

When the Fed decreases the money supply, we expect

Accepted Answer

A)  interest rates and stock prices to rise. 
B)  interest rates and stock prices to fall. 
C)  interest rates to rise and stock prices to fall. 
D)  interest rates to fall and stock prices to rise. 
A)  interest rates and stock prices to rise. 
B)  interest rates and stock prices to fall. 
C)  interest rates to rise and stock prices to fall. 
D)  interest rates to fall and stock prices to rise.

Question 10

According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

Accepted Answer

A)  rises and the aggregate quantity of goods demanded rises. 
B)  rises and the aggregate quantity of goods demanded falls. 
C)  falls and the aggregate quantity of goods demanded rises. 
D)  falls and the aggregate quantity of goods demanded falls. 
A)  rises and the aggregate quantity of goods demanded rises. 
B)  rises and the aggregate quantity of goods demanded falls. 
C)  falls and the aggregate quantity of goods demanded rises. 
D)  falls and the aggregate quantity of goods demanded falls.

Question 11

During recessions, unemployment insurance payments tend to rise.

Accepted Answer

A) True 
 B)False

Question 12

In recent years, the Fed has chosen to target interest rates rather than the money supply because

Accepted Answer

A)  Congress passed a law requiring them to do so. 
B)  the President requested them to do so. 
C)  the money supply is hard to measure with sufficient precision. 
D)  changes in the interest rate change aggregate demand, but changes in the money supply do not. 
A)  Congress passed a law requiring them to do so. 
B)  the President requested them to do so. 
C)  the money supply is hard to measure with sufficient precision. 
D)  changes in the interest rate change aggregate demand, but changes in the money supply do not.

Question 13

Which particular interest rates) do we attempt to explain using the theory of liquidity preference?

Accepted Answer

A)  only the nominal interest rate 
B)  both the nominal interest rate and the real interest rate 
C)  only the interest rate on long-term bonds 
D)  only the interest rate on short-term government bonds 
A)  only the nominal interest rate 
B)  both the nominal interest rate and the real interest rate 
C)  only the interest rate on long-term bonds 
D)  only the interest rate on short-term government bonds

Question 14

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

Accepted Answer

A)  right by more than $100 billion. 
B)  right by $100 billion. 
C)  left by more than $100 billion. 
D)  left by $100 billion. 
A)  right by more than $100 billion. 
B)  right by $100 billion. 
C)  left by more than $100 billion. 
D)  left by $100 billion.

Question 15

Suppose that consumers become pessimistic about the future health of the economy. What will happen to aggregate demand and to output? What might the president and Congress have to do to keep output stable?

Accepted Answer

As consumers become pessimistic about th

Question 16

Which of the following illustrates how the investment accelerator works?

Accepted Answer

A)  An increase in government expenditures increases aggregate spending so that SnoozeBargain Co. decides to modernize its motels. 
B)  An increase in government expenditures increases the interest rate so that SnoozeBargain Co. decides to modernize its motels. 
C)  An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by SnoozeBargain Co. rises. 
D)  An increase in government expenditures decreases the interest rate so that SnoozeBargain Co. decides to modernize its motels. 
A)  An increase in government expenditures increases aggregate spending so that SnoozeBargain Co. decides to modernize its motels. 
B)  An increase in government expenditures increases the interest rate so that SnoozeBargain Co. decides to modernize its motels. 
C)  An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by SnoozeBargain Co. rises. 
D)  An increase in government expenditures decreases the interest rate so that SnoozeBargain Co. decides to modernize its motels.

Question 17

The idea that expansionary fiscal policy has a positive affect on investment is known as

Accepted Answer

A)  monetary policy. 
B)  crowding out. 
C)  the investment accelerator. 
D)  the multiplier. 
A)  monetary policy. 
B)  crowding out. 
C)  the investment accelerator. 
D)  the multiplier.

Question 18

Assume the following. • The MPC has a value of 0.8.
• The relationship between the interest rate, r, and investment, I, is given by the equation,
I = 20,000 - br,
Where b is a positive constant.
• Government purchases, G, are increased by $1,000.
In which of the following cases would there be no crowding out?

Accepted Answer

A)  b = 0 
B)  b = 0.2 
C)  b = 0.8 
D)  b = 1 
A)  b = 0 
B)  b = 0.2 
C)  b = 0.8 
D)  b = 1

Question 19

If the stock market booms, then

Accepted Answer

A)  aggregate demand increases, which the Fed could offset by purchasing bonds. 
B)  aggregate supply increases, which the Fed could offset by selling bonds. 
C)  aggregate demand increases, which the Fed could offset by selling bonds. 
D)  aggregate supply increases, which the Fed could offset by purchasing the money supply. 
A)  aggregate demand increases, which the Fed could offset by purchasing bonds. 
B)  aggregate supply increases, which the Fed could offset by selling bonds. 
C)  aggregate demand increases, which the Fed could offset by selling bonds. 
D)  aggregate supply increases, which the Fed could offset by purchasing the money supply.

Question 20

The interest-rate effect

Accepted Answer

A)  depends on the idea that increases in interest rates increase the quantity of money demanded. 
B)  depends on the idea that increases in interest rates increase the quantity of money supplied. 
C)  is the most important reason, in the case of the United States, for the downward slope of the aggregate- demand curve. 
D)  is the least important reason, in the case of the United States, for the downward slope of the aggregate- demand curve. 
A)  depends on the idea that increases in interest rates increase the quantity of money demanded. 
B)  depends on the idea that increases in interest rates increase the quantity of money supplied. 
C)  is the most important reason, in the case of the United States, for the downward slope of the aggregate- demand curve. 
D)  is the least important reason, in the case of the United States, for the downward slope of the aggregate- demand curve.

Exam 24: The Influence of Monetary and Fiscal Policy on Aggregate Demand

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

Which of the following sequences best represents the crowding-out effect?

The change in aggregate demand that results from fiscal expansion changing the interest rate is called the

Suppose investment spending falls. To offset the change in output the Federal Reserve could

Scenario 34-2. The following facts apply to a small, imaginary economy. • Consumption spending is $6,720 when income is $8,000. • Consumption spending is $7,040 when income is $8,500. -Refer to Scenario 34-2. The multiplier for this economy is

If the Fed increases the money supply,

In the short run,

A European recession that reduces U.S. net exports by $50 billion may ultimately lead to a $_____ billion reduction in aggregate demand if the MPC is 0.75.

When the Fed decreases the money supply, we expect

According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

During recessions, unemployment insurance payments tend to rise.

In recent years, the Fed has chosen to target interest rates rather than the money supply because

Which particular interest rates) do we attempt to explain using the theory of liquidity preference?

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

Suppose that consumers become pessimistic about the future health of the economy. What will happen to aggregate demand and to output? What might the president and Congress have to do to keep output stable?

Which of the following illustrates how the investment accelerator works?

The idea that expansionary fiscal policy has a positive affect on investment is known as

If the stock market booms, then

The interest-rate effect

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

Externalities

Public Goods and Common Resources

The Costs of Production

Firms in Competitive Markets

Monopoly

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

Aggregate Demand and Aggregate Supply

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