Question 1

A 2009 article in The Economist noted that

Accepted Answer

A)  recent research has allowed economists to estimate the values of fiscal multipliers with a great deal of precision.
B)  research on multipliers indicates that multipliers for permanent tax cuts tend to be smaller than multipliers for temporary tax cuts.
C)  most of the evidence on multipliers for government spending is based on changes in military expenditures.
D)  All of the above are correct.E) B) and C)
F) A) and B)

Question 2

Opponents of active stabilization policy

Accepted Answer

A)  advocate a monetary policy designed to offset changes in the unemployment rate.
B)  argue that fiscal policy is unable to change aggregate demand or aggregate supply.
C)  believe that the political process creates lags in the implementation of fiscal policy.
D)  None of the above is correct.E) C) and D)
F) None of the above

Question 3

Other things the same, an increase in taxes shifts aggregate demand to the left. In the short run this makes output fall which makes the interest rate rise.

Accepted Answer

A) True 
 B)False

Question 4

Other things the same, an increase in the price level causes the real value of the dollar to fall in the market for foreign-currency exchange.

Accepted Answer

A) True 
 B)False

Question 5

If expected inflation is constant, then when the nominal interest rate falls, the real interest rate

Accepted Answer

A)  falls by more than the change in the nominal interest rate.
B)  falls by the change in the nominal interest rate.
C)  rises by the change in the nominal interest rate.
D)  rises by more than the change in the nominal interest rate.E) B) and C)
F) All of the above

Question 6

An increase in the money supply decreases the interest rate in the short run.

Accepted Answer

A) True 
 B)False

Question 7

According to the liquidity preference theory, an increase in the overall price level of 10 percent

Accepted Answer

A)  increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded.
B)  decreases the equilibrium interest rate, which in turn increases the quantity of goods and services demanded.
C)  increases the quantity of money supplied by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged.
D)  decreases the quantity of money demanded by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged.E) A) and B)
F) A) and C)

Question 8

Keynes used the term "animal spirits" to refer to

Accepted Answer

A)  policy makers harming the economy in the pursuit of self interest.
B)  arbitrary changes in attitudes of household and firms.
C)  mean-spirited economists who believed in the classical dichotomy.
D)  firms' relentless efforts to maximize profits.E) B) and C)
F) A) and B)

Question 9

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

Question 10

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

Question 11

Keynes argued that aggregate demand is

Accepted Answer

A)  stable, because the economy tends to return to its long-run equilibrium quickly after any disturbance to aggregate demand.
B)  stable, because changes in consumption are mostly offset by changes in investment and vice versa.
C)  unstable, because waves of pessimism and optimism create fluctuations in aggregate demand.
D)  unstable, because of long and variable policy lags that worsen economic fluctuations.E) A) and D)
F) B) and C)

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

One of President Obama's first policy initiatives was a stimulus bill that included large increases in government spending.

Accepted Answer

A) True 
 B)False

Question 14

To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could

Accepted Answer

A)  increase the money supply by buying bonds.
B)  increase the money supply by selling bonds.
C)  decrease the money supply by buying bonds.
D)  Increase the money supply by selling bonds.E) All of the above
F) A) and D)

Question 15

There is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct?

Accepted Answer

A)  By themselves, both the change in output and the change in the interest rate increase desired investment.
B)  By themselves, both the change in output and the change in the interest rate decrease desired investment.
C)  By itself, the change in output increases desired investment spending and by itself the change in the interest rate decreases desired investment spending.
D)  By itself, the change in output decreases desired investment spending and by itself the change in the interest rate increases desired investment spending.E) B) and D)
F) None of the above

Question 16

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

Accepted Answer

A)  a decrease in the money supply
B)  an increase in tax rates
C)  an increase in government purchases
D)  an increase in interest rates.E) All of the above
F) A) and C)

Question 17

An increase in government spending shifts aggregate demand

Accepted Answer

A)  to the right. The larger the multiplier is, the farther it shifts.
B)  to the right. The larger the multiplier is, the less it shifts.
C)  to the left. The larger the multiplier is, the farther it shifts.
D)  to the left. The larger the multiplier is, the less it shifts.E) A) and B)
F) A) and C)

Question 18

The interest rate falls if

Accepted Answer

A)  either money demand or money supply shifts right.
B)  money demand shifts right or money supply shifts left.
C)  either money demand or money supply shifts left.
D)  money demand shifts left or money supply shifts right.E) A) and B)
F) All of the above

Question 19

According to the interest-rate effect, an increase in the price level will

Accepted Answer

A)  increase money demand and interest rates. Investment declines.
B)  increase money demand and interest rates. Investment increases.
C)  increase money demand, reduce interest rates, and investment increases.
D)  decrease money demand and interest rates. Investment declines.E) A) and B)
F) A) and C)

Question 20

An open-market purchase by the Federal Reserve creates an excess _____ of money. This causes interest rates to _____ and investment to _____. The change in investment causes aggregate demand to shift to the _____.

Accepted Answer

supply, fa...

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

The interest rate falls if

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Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

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There is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct?

Correct AnswerverifiedShow Answer

An increase in government spending shifts aggregate demand

Correct AnswerverifiedShow Answer

If expected inflation is constant, then when the nominal interest rate falls, the real interest rate

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could

Correct AnswerverifiedShow Answer

Other things the same, an increase in taxes shifts aggregate demand to the left. In the short run this makes output fall which makes the interest rate rise.

Correct AnswerverifiedShow Answer

According to the liquidity preference theory, an increase in the overall price level of 10 percent

Correct AnswerverifiedShow Answer

An increase in the money supply decreases the interest rate in the short run.

Correct AnswerverifiedShow Answer

Other things the same, an increase in the price level causes the real value of the dollar to fall in the market for foreign-currency exchange.

Correct AnswerverifiedShow Answer

A 2009 article in The Economist noted that

Correct AnswerverifiedShow Answer

One of President Obama's first policy initiatives was a stimulus bill that included large increases in government spending.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Opponents of active stabilization policy

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Keynes used the term "animal spirits" to refer to

Correct AnswerverifiedShow Answer

Keynes argued that aggregate demand is

Correct AnswerverifiedShow Answer

An open-market purchase by the Federal Reserve creates an excess _____ of money. This causes interest rates to _____ and investment to _____. The change in investment causes aggregate demand to shift to the _____.

Correct Answerverifiedsupply, fa...View AnswerShow Answer

According to the interest-rate effect, an increase in the price level will

Correct AnswerverifiedShow Answer

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An open-market purchase by the Federal Reserve creates an excess ___ of money. This causes interest rates to _ and investment to _. The change in investment causes aggregate demand to shift to the ___.

Correct Answer
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supply, fa...
View Answer

Correct Answer
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