Question 1

The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?

Accepted Answer

A)  increase government expenditures or increase the money supply 
B)  increase government expenditures or decrease the money supply 
C)  decrease government expenditures or increase the money supply 
D)  decrease government expenditures or decrease the money supply 
A)  increase government expenditures or increase the money supply 
B)  increase government expenditures or decrease the money supply 
C)  decrease government expenditures or increase the money supply 
D)  decrease government expenditures or decrease the money supply

Question 2

Figure 34-5. On the figure, MS represents money supply and MD represents money demand.  
-Refer to Figure 34-5. A shift of the money-demand curve from MD1 to MD2 could be a result of

Accepted Answer

A)  a decrease in taxes. 
B)  an increase in government spending. 
C)  an increase in the price level. 
D)  All of the above are correct. 
A)  a decrease in taxes. 
B)  an increase in government spending. 
C)  an increase in the price level. 
D)  All of the above are correct.

Question 3

Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion. Suppose that the MPC is .80 and that there are no crowding out or accelerator effects. What is the combined effect of these changes? Why is the combined change not equal to zero?

Accepted Answer

The multiplier is 1/1-MPC) = 1/1-.8) = 1

Question 4

Figure 34-3  
-Refer to Figure 34-3. What quantity is represented by the downward-sloping line on the left-hand graph?

Accepted Answer

A)  the supply of money 
B)  the demand for money 
C)  the rate of inflation 
D)  Aggregate Demand. 
A)  the supply of money 
B)  the demand for money 
C)  the rate of inflation 
D)  Aggregate Demand.

Question 5

Which of the following shifts aggregate demand to the right?

Accepted Answer

A)  The price level rises. 
B)  The price level falls. 
C)  The money supply falls. 
D)  None of the above is correct. 
A)  The price level rises. 
B)  The price level falls. 
C)  The money supply falls. 
D)  None of the above is correct.

Question 6

Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is your answer affected by the presence of the multiplier, crowding-out, taxes, and investment-accelerator effects?

Accepted Answer

The increase in expenditures means that

Question 7

Permanent tax changes have a effect on aggregate demand compared to temporary tax changes.

Accepted Answer

The answer of Permanent tax changes have a effect on...

Question 8

Figure 34-4. On the figure, MS represents money supply and MD represents money demand.  
-Refer to Figure 34-4. 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 9

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 10

Which of the following is an example of crowding out?

Accepted Answer

A)  An increase in government spending increases interest rates, causing investment to fall. 
B)  A decrease in private savings increases interest rates, causing investment to fall. 
C)  A decrease in the money supply increases interest rates, causing investment to fall. 
D)  An increase in taxes increases interest rates, causing investment to fall. 
A)  An increase in government spending increases interest rates, causing investment to fall. 
B)  A decrease in private savings increases interest rates, causing investment to fall. 
C)  A decrease in the money supply increases interest rates, causing investment to fall. 
D)  An increase in taxes increases interest rates, causing investment to fall.

Question 11

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

Accepted Answer

The nominal interest rate on currency is

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

A decrease in the domestic _____ causes domestic goods to become less expensive relative to foreign goods and increases net exports. The increase in net exports causes an) _____ in the quantity of domestic aggregate goods and services demanded and is known as the _____ effect.

Accepted Answer

price leve

Question 14

If expected inflation is constant and the nominal interest rate decreases by 2 percentage points, then the real interest rate

Accepted Answer

A)  increases by 2 percentage points. 
B)  increases, but by less than 2 percentage points. 
C)  decreases, but by less than 2 percentage points. 
D)  decreases by 2 percentage points. 
A)  increases by 2 percentage points. 
B)  increases, but by less than 2 percentage points. 
C)  decreases, but by less than 2 percentage points. 
D)  decreases by 2 percentage points.

Question 15

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is

Accepted Answer

A)  $60.25. 
B)  $60.75. 
C)  $61.33. 
D)  $64.00. 
A)  $60.25. 
B)  $60.75. 
C)  $61.33. 
D)  $64.00.

Question 16

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

Accepted Answer

A) True 
 B)False

Question 17

When the Fed announces a target for the federal funds rate, it essentially accommodates the day-to-day fluctuations in money demand by adjusting the money supply accordingly.

Accepted Answer

A) True 
 B)False

Question 18

Suppose that there are no crowding-out effects and the MPC is .9. By how much must the government increase expenditures to shift the aggregate demand curve right by $10 billion?

Accepted Answer

An MPC of .9 means the multiplier = 1/1

Question 19

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

Accepted Answer

A)  increase taxes 
B)  increase government expenditures 
C)  increase the money supply 
D)  All of the above are correct. 
A)  increase taxes 
B)  increase government expenditures 
C)  increase the money supply 
D)  All of the above are correct.

Question 20

Suppose a wave of optimism causes firms to increase investment. To stabilize output and employment, the Federal Reserve will .

Accepted Answer

decrease t

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

The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?

Figure 34-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-5. A shift of the money-demand curve from MD1 to MD2 could be a result of

Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion. Suppose that the MPC is .80 and that there are no crowding out or accelerator effects. What is the combined effect of these changes? Why is the combined change not equal to zero?

Figure 34-3 -Refer to Figure 34-3. What quantity is represented by the downward-sloping line on the left-hand graph?

Which of the following shifts aggregate demand to the right?

Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is your answer affected by the presence of the multiplier, crowding-out, taxes, and investment-accelerator effects?

Permanent tax changes have a effect on aggregate demand compared to temporary tax changes.

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?

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

Which of the following is an example of crowding out?

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

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

A decrease in the domestic _____ causes domestic goods to become less expensive relative to foreign goods and increases net exports. The increase in net exports causes an) _____ in the quantity of domestic aggregate goods and services demanded and is known as the _____ effect.

If expected inflation is constant and the nominal interest rate decreases by 2 percentage points, then the real interest rate

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

When the Fed announces a target for the federal funds rate, it essentially accommodates the day-to-day fluctuations in money demand by adjusting the money supply accordingly.

Suppose that there are no crowding-out effects and the MPC is .9. By how much must the government increase expenditures to shift the aggregate demand curve right by $10 billion?

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

Suppose a wave of optimism causes firms to increase investment. To stabilize output and employment, the Federal Reserve will .

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 Macroeconomics: Basic Concepts

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

A decrease in the domestic ___ causes domestic goods to become less expensive relative to foreign goods and increases net exports. The increase in net exports causes an) _ in the quantity of domestic aggregate goods and services demanded and is known as the ___ effect.