Question 1

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 2

According to liquidity preference theory,equilibrium in the money market is achieved by adjustments in

Accepted Answer

A)   the price level.
B)   the interest rate.
C)   the exchange rate.
D)   real wealth.E) B) and D)
F) A) and B)

Question 3

Opponents of active stabilization policy

Accepted Answer

A)   generally don't believe,even in theory,that fiscal policy can stabilize the economy.
B)   generally agree that fiscal policy has no impact in the long run.
C)   believe some effects of monetary policy may be long-lived.
D)   think the Fed should simply try to fine tune the economy.E) All of the above
F) A) and B)

Question 4

The Employment Act of 1946

Accepted Answer

A)   implies that the government should avoid being a cause of economic fluctuations.
B)   implies that the government should respond to changes in the private economy to stabilize aggregate demand.
C)   reflected the ideas promoted in Keynes's influential book,The General Theory of Employment,Interest,and Money.
D)   All of the above are correctE) All of the above
F) A) and B)

Question 5

Assume the MPC is 0.625.Assuming only the multiplier effect matters,a decrease in government purchases of $10 billion will shift the aggregate demand curve to the

Accepted Answer

A)   left by about $13.3 billion.
B)   left by about $26.7 billion.
C)   right by about $36.7 billion.
D)   None of the above is correct.E) All of the above
F) C) and D)

Question 6

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 7

The primary argument against active monetary and fiscal policy is that

Accepted Answer

A)   attempts to stabilize the economy do not constitute a proper role for government in a democratic society.
B)   these policies affect the economy with a long lag.
C)   these policies affect the economy too quickly and with too much impact.
D)   history demonstrates that interest rates respond unpredictably to active policies,leading to unpredictable effects on income.E) All of the above
F) A) and B)

Question 8

People are likely to want to hold more money if the interest rate

Accepted Answer

A)   increases,making the opportunity cost of holding money rise.
B)   increases,making the opportunity cost of holding money fall.
C)   decreases,making the opportunity cost of holding money rise.
D)   decreases,making the opportunity cost of holding money fall.E) A) and B)
F) All of the above

Question 9

An aide to a U.S.Congressman computes the effect on aggregate demand of a $20 billion tax cut.The actual increase in aggregate demand is less than the aide expected.Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand?

Accepted Answer

A)   The actual MPC was larger than the MPC the aide used to compute the multiplier.
B)   The aide thought the tax cut would be permanent,but the actual tax cut was temporary.
C)   The increase in income shifted money demand less than the aide had anticipated.
D)   The increase in income resulted in investment rising more than the aide had anticipated.E) B) and D)
F) All of the above

Question 10

If households view a tax cut as temporary,then the tax cut

Accepted Answer

A)   has no affect on aggregate demand.
B)   has more of an affect on aggregate demand than if households view it as permanent.
C)   has the same affect as when households view the cut as permanent.
D)   has less of an affect on aggregate demand than if households view it as permanent.E) A) and C)
F) None of the above

Question 11

Suppose households attempt to increase money holdings.To stabilize output and employment,the Federal Reserve will _____.

Accepted Answer

increase t...

Question 12

Which of the following is likely more important for explaining the slope of the aggregate-demand curve of a small economy than it is for the United States?

Accepted Answer

A)   the wealth effect
B)   the interest-rate effect
C)   the exchange-rate effect
D)   the real-wage effectE) A) and D)
F) B) and C)

Question 13

How does a reduction in the money supply by the Fed make owning stocks less attractive?

Accepted Answer

The reduction in the money supply raises...

Question 14

Unemployment insurance and welfare programs work as automatic stabilizers.

Accepted Answer

A) True 
 B)False

Question 15

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.E) B) and D)
F) None of the above

Question 16

A decrease in government spending

Accepted Answer

A)   increases the interest rate and so investment spending increases.
B)   increases the interest rate and so decreases investment spending decreases.
C)   decreases the interest rate and so investment spending increases.
D)   decreases the interest rate and so investment spending decreases.E) B) and D)
F) A) and C)

Question 17

The most important automatic stabilizer is

Accepted Answer

A)   open-market operations.
B)   the tax system.
C)   unemployment compensation.
D)   welfare benefits.E) A) and D)
F) C) and D)

Question 18

In the early 1960s,the Kennedy administration made considerable use of

Accepted Answer

A)   fiscal policy to stimulate the economy.
B)   fiscal policy to slow down the economy.
C)   monetary policy to stimulate the economy.
D)   monetary policy to slow down the economy.E) A) and D)
F) A) and C)

Question 19

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) None of the above
F) A) and B)

Question 20

If,at some interest rate,the quantity of money demanded is greater 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) A) and B)
F) A) and C)

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

Unemployment insurance and welfare programs work as automatic stabilizers.

Correct AnswerverifiedShow Answer

If households view a tax cut as temporary,then the tax cut

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A decrease in government spending

Correct AnswerverifiedShow Answer

The most important automatic stabilizer is

Correct AnswerverifiedShow Answer

Suppose households attempt to increase money holdings.To stabilize output and employment,the Federal Reserve will _____.

Correct Answerverifiedincrease t...View AnswerShow Answer

An increase in government spending initially and primarily shifts

Correct AnswerverifiedShow Answer

According to liquidity preference theory,equilibrium in the money market is achieved by adjustments in

Correct AnswerverifiedShow Answer

Opponents of active stabilization policy

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Assume the MPC is 0.625.Assuming only the multiplier effect matters,a decrease in government purchases of $10 billion will shift the aggregate demand curve to the

Correct AnswerverifiedShow Answer

The primary argument against active monetary and fiscal policy is that

Correct AnswerverifiedShow Answer

The Employment Act of 1946

Correct AnswerverifiedShow Answer

In the early 1960s,the Kennedy administration made considerable use of

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

An aide to a U.S.Congressman computes the effect on aggregate demand of a $20 billion tax cut.The actual increase in aggregate demand is less than the aide expected.Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand?

Correct AnswerverifiedShow Answer

How does a reduction in the money supply by the Fed make owning stocks less attractive?

Correct AnswerverifiedThe reduction in the money supply raises...View AnswerShow Answer

People are likely to want to hold more money if the interest rate

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following is likely more important for explaining the slope of the aggregate-demand curve of a small economy than it is for the United States?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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increase t...
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The reduction in the money supply raises...
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