Question 1

Suppose an increase in interest rates causes rising unemployment and falling output. To counter this, the Federal Reserve would

Accepted Answer

A)   increase government spending.
B)   increase the money supply.
C)   decrease government spending.
D)   decrease the money supply.E) All of the above
F) A) and B)

Question 2

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

Question 3

If the multiplier is 3, then the MPC is

Accepted Answer

A)   1/3.
B)   3/4.
C)   4/3.
D)   2/3.E) C) and D)
F) A) and B)

Question 4

The effect states that a lower price level reduces the amount of money people wish to hold. When they lend out their excess savings, the falls causing investment spending to rise and increases the quantity of goods and services demanded.

Accepted Answer

interest-r...

Question 5

During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.

Accepted Answer

A) True 
 B)False

Question 6

If the interest rate is above the Fed's target, the Fed should

Accepted Answer

A)   buy bonds to increase bank reserves.
B)   buy bonds to decrease bank reserves.
C)   sell bonds to increase bank reserves.
D)   sell bonds to decrease bank reserves.E) B) and C)
F) A) and B)

Question 7

If the MPC is 3/5 then the multiplier is

Accepted Answer

A)   4, so a $100 increase in government spending increases aggregate demand by $400.
B)   1.5, so a $100 increase in government spending increases output by $150.
C)   2.5, so a $100 increase in government spending increases aggregate demand by $250.
D)   1.67, so a $100 increase in government spending increases output by $166.67.E) C) and D)
F) B) and C)

Question 8

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

Accepted Answer

A)   assumption that increases in government purchases have no effect on consumer spending.
B)   assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred.
C)   empirical evidence that points to a value of about 3/4 for the MPC.
D)   fact that the multiplier effect is represented by an infinite geometric series.E) None of the above
F) A) and C)

Question 9

When there is an excess demand for money, households will interest-bearing bonds, causing interest rates to _____.

Accepted Answer

The answer of When there is an excess demand for...

Question 10

Fiscal policy refers to the idea that aggregate demand is affected by changes in

Accepted Answer

A)   the money supply.
B)   government spending and taxes.
C)   trade policy.
D)   All of the above are correct.E) All of the above
F) A) and C)

Question 11

When the Fed increases 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.E) C) and D)
F) None of the above

Question 12

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

Accepted Answer

A)   the crowding-out effect
B)   the multiplier effect
C)   the exchange-rate effect
D)   the interest-rate effectE) A) and C)
F) B) and C)

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

A decrease in taxes will shift aggregate demand to the _____, cause consumption to _____, and cause output to _____. Due to the crowding-out effect, investment will _____.

Accepted Answer

right, inc...

Question 15

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.E) A) and B)
F) B) and D)

Question 16

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

Accepted Answer

A)   the equilibrium interest rate increases.
B)   the aggregate-demand curve shifts to the right.
C)   the quantity of goods and services demanded is unchanged for a given price level.
D)   the short-run aggregate-supply curve shifts to the left.E) None of the above
F) B) and C)

Question 17

During recessions, taxes tend to

Accepted Answer

A)   rise and thereby increase aggregate demand.
B)   rise and thereby decrease aggregate demand.
C)   fall and thereby increase aggregate demand.
D)   fall and thereby decrease aggregate demand.E) All of the above
F) A) and B)

Question 18

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is

Accepted Answer

A)   relatively important in the United States because expenditures on consumer durables is very responsive to changes in wealth.
B)   relatively important in the United States because consumption spending is a large part of GDP.
C)   relatively unimportant in the United States because money holdings are a small part of consumer wealth.
D)   relatively unimportant because it takes a large change in wealth to cause a significant change in interest rates.E) None of the above
F) B) and C)

Question 19

Permanent tax cuts shift the AD curve

Accepted Answer

A)   farther to the right than do temporary tax cuts.
B)   not as far to the right as do temporary tax cuts.
C)   farther to the left than do temporary tax cuts.
D)   not as far to the left as do temporary tax cuts.E) A) and C)
F) None of the above

Question 20

When the Federal Funds rate is above the Federal Reserve's target, it will ____ bonds to _____ the money supply.

Accepted Answer

The answer of When the Federal Funds rate is above...

Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

If the interest rate is above the Fed's target, the Fed should

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Fiscal policy refers to the idea that aggregate demand is affected by changes in

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

Correct AnswerverifiedShow Answer

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is

Correct AnswerverifiedShow Answer

When there is an excess demand for money, households will interest-bearing bonds, causing interest rates to _____.

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When the Federal Funds rate is above the Federal Reserve's target, it will ____ bonds to _____ the money supply.

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If the MPC is 3/5 then the multiplier is

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A decrease in taxes will shift aggregate demand to the _____, cause consumption to _____, and cause output to _____. Due to the crowding-out effect, investment will _____.

Correct Answerverifiedright, inc...View AnswerShow Answer

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

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When the Fed increases the money supply, we expect

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Suppose an increase in interest rates causes rising unemployment and falling output. To counter this, the Federal Reserve would

Correct AnswerverifiedShow Answer

If the multiplier is 3, then the MPC is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following illustrates how the investment accelerator works?

Correct AnswerverifiedShow Answer

During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.

Correct AnswerverifiedShow Answer

The effect states that a lower price level reduces the amount of money people wish to hold. When they lend out their excess savings, the falls causing investment spending to rise and increases the quantity of goods and services demanded.

Correct Answerverifiedinterest-r...View AnswerShow Answer

Permanent tax cuts shift the AD curve

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Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

Correct AnswerverifiedShow Answer

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

Correct AnswerverifiedShow Answer

During recessions, taxes tend to

Correct AnswerverifiedShow Answer

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When the Federal Funds rate is above the Federal Reserve's target, it will bonds to _ the money supply.

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A decrease in taxes will shift aggregate demand to the ___, cause consumption to _, and cause output to _. Due to the crowding-out effect, investment will ___.

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