Question 1

Figure 34-2. 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 34-2. Assume the money market is always in equilibrium, and suppose r1 = 0.08; r2 = 0.12; Y1 = 13,000; Y2 = 10,000; P1 = 1.0; and P2 = 1.2. Which of the following statements is correct?

Accepted Answer

A)   When r = r2, nominal output is higher than it is when r = r1.
B)   When r = r2, real output is higher than it is when r = r1.
C)   When r = r2, the expected rate of inflation is higher than it is when r = r1.
D)   If the velocity of money is 4 when r = r2, then the quantity of money is $3,000.E) None of the above
F) All of the above

Question 2

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.E) A) and B)
F) A) and C)

Question 3

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 effectE) None of the above
F) B) and C)

Question 4

A tax increase has

Accepted Answer

A)   a multiplier effect but not a crowding out effect
B)   a crowding out effect but not a multiplier effect
C)   both a crowding out and multiplier effect
D)   neither a multiplier or crowding out effectE) B) and C)
F) A) and B)

Question 5

If, at some interest rate, the quantity of money demanded is less than the quantity of money supplied, people will desire to

Accepted Answer

A)   sell interest-bearing assets, causing the interest rate to decrease.
B)   sell interest-bearing assets, causing the interest rate to increase.
C)   buy interest-bearing assets, causing the interest rate to decrease.
D)   buy interest-bearing assets, causing the interest rate to increase.E) All of the above
F) A) and B)

Question 6

A surplus or shortage in the money market is eliminated by adjustments in the price level according to

Accepted Answer

A)   both liquidity preference theory and classical theory.
B)   neither liquidity preference theory nor classical theory.
C)   liquidity preference theory, but not classical theory.
D)   classical theory, but not liquidity preference theory.E) None of the above
F) B) and C)

Question 7

To decrease the interest rate the Federal Reserve could

Accepted Answer

A)   buy bonds. The fall in the interest rate would increase investment spending.
B)   buy bonds. The fall in the interest rate would decrease investment spending.
C)   sell bonds. The fall in the interest rate would increase investment spending
D)   sell bonds. The fall in the interest rate would decrease investment spending.E) A) and C)
F) B) and D)

Question 8

The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following Fed actions would both decrease the money supply?

Accepted Answer

A)   buy bonds and raise the reserve requirement
B)   buy bonds and lower the reserve requirement
C)   sell bonds and raise the reserve requirement
D)   sell bonds and lower the reserve requirementE) None of the above
F) A) and B)

Question 10

If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then

Accepted Answer

A)   aggregate demand falls by 2 x $40 billion.
B)   aggregate demand falls by 11/2 x $40 billion.
C)   aggregate demand falls by 11/9 x $40 billion.
D)   aggregate demand falls by 9/11 x $40 billion.E) A) and B)
F) None of the above

Question 11

The multiplier effect is exemplified by the multiplied impact on

Accepted Answer

A)   the money supply of a given increase in government purchases.
B)   tax revenues of a given increase in government purchases.
C)   investment of a given increase in interest rates.
D)   aggregate demand of a given increase in government purchases.E) B) and D)
F) A) and D)

Question 12

When the government reduces taxes, which of the following decreases?

Accepted Answer

A)   consumption
B)   take-home pay
C)   household saving
D)   None of the above is correct.E) A) and B)
F) None of the above

Question 13

When government expenditures increase, the interest rate

Accepted Answer

A)   increases, making the change in aggregate demand larger.
B)   increases, making the change in aggregate demand smaller
C)   decreases, making the change in aggregate demand larger.
D)   decreases, making the change in aggregate demand smaller.E) B) and C)
F) All of the above

Question 14

Other things the same, a decrease in the U.S. interest rate

Accepted Answer

A)   induces firms to invest more.
B)   shifts money demand to the left.
C)   makes the U.S. dollar appreciate.
D)   increases the opportunity cost of holding dollars.E) B) and C)
F) None of the above

Question 15

The crowding-out effect occurs because an increase in government spending _____ interest rates, causing _____ to fall.

Accepted Answer

increases,...

Question 16

An increase in government spending initially and primarily shifts

Accepted Answer

A)   aggregate demand to the right.
B)   aggregate demand to the left.
C)   aggregate supply to the right.
D)   neither aggregate demand nor aggregate supply in either direction.E) A) and B)
F) B) and D)

Question 17

The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it

Accepted Answer

A)   reduces investment and thereby increases consumer spending.
B)   increases the money supply and thereby reduces interest rates.
C)   increases income and thereby increases consumer spending.
D)   decreases income and thereby increases consumer spending.E) None of the above
F) A) and B)

Question 18

If the Federal Reserve decided to raise 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.E) C) and D)
F) A) and B)

Question 19

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

Accepted Answer

A)   interest rates, prices, and investment spending
B)   interest rates and prices, but not investment spending
C)   interest rates and investment, but not prices
D)   interest rates, but not investment or pricesE) A) and D)
F) A) and C)

Question 20

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

Accepted Answer

A)   increased interest rates, and the economy avoided a recession.
B)   increased interest rates, but the economy was unable to avoid a recession.
C)   decreased interest rates, and the economy avoided a recession.
D)   decreased interest rates, but the economy was unable to avoid a recession.E) C) and D)
F) None of the above

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

When government expenditures increase, the interest rate

Correct Answer
verified

The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it

Correct Answer
verified

Which of the following illustrates how the investment accelerator works?

Correct Answer
verified

Which of the following Fed actions would both decrease the money supply?

Correct Answer
verified

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

Correct Answer
verified

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

Correct Answer
verified

To decrease the interest rate the Federal Reserve could

Correct Answer
verified

The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.

Correct Answer
verified

If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then

Correct Answer
verified

A tax increase has

Correct Answer
verified

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?

Correct Answer
verified

Other things the same, a decrease in the U.S. interest rate

Correct Answer
verified

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

Correct Answer
verified

The multiplier effect is exemplified by the multiplied impact on

Correct Answer
verified

When the government reduces taxes, which of the following decreases?

Correct Answer
verified

A surplus or shortage in the money market is eliminated by adjustments in the price level according to

Correct Answer
verified

The crowding-out effect occurs because an increase in government spending _ interest rates, causing _ to fall.

Correct Answer
verified
increases,...
View Answer

If, at some interest rate, the quantity of money demanded is less than the quantity of money supplied, people will desire to

Correct Answer
verified

Correct Answer
verified

An increase in government spending initially and primarily shifts

Correct Answer
verified

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

When government expenditures increase, the interest rate

Correct AnswerverifiedShow Answer

The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it

Correct AnswerverifiedShow Answer

Which of the following illustrates how the investment accelerator works?

Correct AnswerverifiedShow Answer

Which of the following Fed actions would both decrease the money supply?

Correct AnswerverifiedShow Answer

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

To decrease the interest rate the Federal Reserve could

Correct AnswerverifiedShow Answer

The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.

Correct AnswerverifiedShow Answer

If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then

Correct AnswerverifiedShow Answer

A tax increase has

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Other things the same, a decrease in the U.S. interest rate

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The multiplier effect is exemplified by the multiplied impact on

Correct AnswerverifiedShow Answer

When the government reduces taxes, which of the following decreases?

Correct AnswerverifiedShow Answer

A surplus or shortage in the money market is eliminated by adjustments in the price level according to

Correct AnswerverifiedShow Answer

The crowding-out effect occurs because an increase in government spending _____ interest rates, causing _____ to fall.

Correct Answerverifiedincreases,...View AnswerShow Answer

If, at some interest rate, the quantity of money demanded is less than the quantity of money supplied, people will desire to

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An increase in government spending initially and primarily shifts

Correct AnswerverifiedShow Answer

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The crowding-out effect occurs because an increase in government spending _ interest rates, causing _ to fall.

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increases,...
View Answer

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