Question 1

The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates

Accepted Answer

A)  the multiplier effect.
B)  the crowding-out effect.
C)  the Fisher effect.
D)  the wealth effect.E) A) and D)
F) A) and C)

Question 2

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) A) and B)
F) B) and C)

Question 3

If the Fed conducts open-market sales, the money supply

Accepted Answer

A)  decreases and aggregate demand shifts left.
B)  decreases and aggregate demand shifts right.
C)  increases and aggregate demand shifts left.
D)  increases and aggregate demand shifts right.E) B) and C)
F) B) and D)

Question 4

If the Federal Reserve's goal is to stabilize aggregate demand, then it will _____ the money supply in response to a stock market boom. This causes interest rates to _____.

Accepted Answer

The answer of If the Federal Reserve's goal is to...

Question 5

Figure 34-2
(a)  The Money Market
(b)  The Aggregate Demand Curve  
-Refer to Figure 34-2. If the money-supply curve MS on the left-hand graph were to shift to the left, this would

Accepted Answer

A)  not represent an action taken by the Federal Reserve.
B)  shift the AD curve to the right.
C)  create, until the interest rate adjusted, an excess supply of money at the interest rate that equilibrated the money market before the shift.
D)  shift the AD curve to the left.E) A) and B)
F) A) and C)

Question 6

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Accepted Answer

A) True 
 B)False

Question 7

The wealth effect along an aggregate-demand curve stems from the idea that a higher price level

Accepted Answer

A)  increases the real value of households' money holdings.
B)  decreases the real value of households' money holdings.
C)  increases the real value of the domestic currency in foreign-exchange markets.
D)  decreases the real value of the domestic currency in foreign-exchange markets.E) C) and D)
F) A) and B)

Question 8

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 9

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 10

Figure 34-4 1 to MD2? A) An increase in the price level B) An increase in the cost of borrowing C) A decrease in the price level D) A decrease in the cost of borrowing" class="answers-bank-image d-inline" rel="preload" > ​
​
-Refer to Figure 34-4. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

Accepted Answer

A)  An increase in the price level
B)  An increase in the cost of borrowing
C)  A decrease in the price level
D)  A decrease in the cost of borrowingE) A) and B)
F) A) and C)

Question 11

Use the money market to explain the interest-rate effect and its relation to the slope of the aggregate demand curve.

Accepted Answer

When the price level falls, people need ...

Question 12

If the stock market booms, then

Accepted Answer

A)  aggregate demand increases, which the Fed could offset by purchasing bonds.
B)  aggregate supply increases, which the Fed could offset by selling bonds.
C)  aggregate demand increases, which the Fed could offset by selling bonds.
D)  aggregate supply increases, which the Fed could offset by purchasing bonds.E) None of the above
F) A) and B)

Question 13

Figure 34-7
(a)  The Money Market
(b)  The Aggregate Demand Curve 1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. The extent of crowding out, for any particular level of the price level, is A) $75 billion. B) $40 billion. C) $30 billion. D) $20 billion." class="answers-bank-image d-inline" rel="preload" > 1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. The extent of crowding out, for any particular level of the price level, is A) $75 billion. B) $40 billion. C) $30 billion. D) $20 billion." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 34-7. Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. The extent of crowding out, for any particular level of the price level, is

Accepted Answer

A)  $75 billion.
B)  $40 billion.
C)  $30 billion.
D)  $20 billion.E) C) and D)
F) All of the above

Question 14

It is likely that a constitutional amendment that required the government always to run a balanced budget would

Accepted Answer

A)  contribute to a more stable level of output.
B)  mitigate the crowding-out effect.
C)  eliminate the economy's automatic stabilizers.
D)  result in zero percent inflation.E) A) and D)
F) B) and D)

Question 15

An increase in the price level shifts the money demand curve to the left, causing interest rates to increase.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following correctly explains the crowding-out effect?

Accepted Answer

A)  An increase in government expenditures decreases the interest rate and so increases investment spending.
B)  An increase in government expenditures increases the interest rate and so reduces investment spending.
C)  A decrease in government expenditures increases the interest rate and so increases investment spending.
D)  A decrease in government expenditures decreases the interest rate and so reduces investment spending.E) A) and B)
F) A) and D)

Question 17

Economists who are skeptical about the relevance of "liquidity traps" argue that

Accepted Answer

A)  a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero.
B)  a central bank continues to have the option of committing itself to future monetary contraction, even after its interest rate target hits its lower bound of zero.
C)  a central bank can greatly reduce the likelihood of a liquidity trap by setting the target rate of inflation at zero.
D)  while the concept of a liquidity trap is theoretically possible, nothing resembling a liquidity trap ever has been observed in the real world.E) B) and D)
F) All of the above

Question 18

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 19

A significant lag for monetary policy is the time it takes to for a change in the money supply to change the economy. A significant lag for fiscal policy is the time it takes to pass legislation authorizing it.

Accepted Answer

A) True 
 B)False

Question 20

The process of the investment accelerator involves

Accepted Answer

A)  positive feedback from aggregate demand to investment.
B)  negative feedback from aggregate demand to investment.
C)  positive feedback from aggregate supply to investment.
D)  negative feedback from aggregate supply to investment.E) C) and D)
F) A) and C)

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

Economists who are skeptical about the relevance of "liquidity traps" argue that

Correct Answer
verified

It is likely that a constitutional amendment that required the government always to run a balanced budget would

Correct Answer
verified

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

Correct Answer
verified

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 Answer
verified

Correct Answer
verified

The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates

Correct Answer
verified

If the Fed conducts open-market sales, the money supply

Correct Answer
verified

An increase in the price level shifts the money demand curve to the left, causing interest rates to increase.

Correct Answer
verified

If the Federal Reserve's goal is to stabilize aggregate demand, then it will _ the money supply in response to a stock market boom. This causes interest rates to _.

Correct Answer
verified

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Correct Answer
verified

Which of the following correctly explains the crowding-out effect?

Correct Answer
verified

The wealth effect along an aggregate-demand curve stems from the idea that a higher price level

Correct Answer
verified

Figure 34-2 (a) The Money Market (b) The Aggregate Demand Curve -Refer to Figure 34-2. If the money-supply curve MS on the left-hand graph were to shift to the left, this would

Correct Answer
verified

A significant lag for monetary policy is the time it takes to for a change in the money supply to change the economy. A significant lag for fiscal policy is the time it takes to pass legislation authorizing it.

Correct Answer
verified

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

Correct Answer
verified
The nominal interest rate on currency is...
View Answer

The process of the investment accelerator involves

Correct Answer
verified

If the stock market booms, then

Correct Answer
verified

Figure 34-4 -Refer to Figure 34-4. Which of the following events could explain a shift of the money-demand curve from MD₁ to MD₂?

Correct Answer
verified

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 Answer
verified
right, inc...
View Answer

Use the money market to explain the interest-rate effect and its relation to the slope of the aggregate demand curve.

Correct Answer
verified
When the price level falls, people need ...
View Answer

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

Economists who are skeptical about the relevance of "liquidity traps" argue that

Correct AnswerverifiedShow Answer

It is likely that a constitutional amendment that required the government always to run a balanced budget would

Correct AnswerverifiedShow Answer

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

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

Correct AnswerverifiedShow Answer

The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates

Correct AnswerverifiedShow Answer

If the Fed conducts open-market sales, the money supply

Correct AnswerverifiedShow Answer

An increase in the price level shifts the money demand curve to the left, causing interest rates to increase.

Correct AnswerverifiedShow Answer

If the Federal Reserve's goal is to stabilize aggregate demand, then it will _____ the money supply in response to a stock market boom. This causes interest rates to _____.

Correct AnswerverifiedShow Answer

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Correct AnswerverifiedShow Answer

Which of the following correctly explains the crowding-out effect?

Correct AnswerverifiedShow Answer

The wealth effect along an aggregate-demand curve stems from the idea that a higher price level

Correct AnswerverifiedShow Answer

Figure 34-2 (a) The Money Market (b) The Aggregate Demand Curve -Refer to Figure 34-2. If the money-supply curve MS on the left-hand graph were to shift to the left, this would

Correct AnswerverifiedShow Answer

A significant lag for monetary policy is the time it takes to for a change in the money supply to change the economy. A significant lag for fiscal policy is the time it takes to pass legislation authorizing it.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedThe nominal interest rate on currency is...View AnswerShow Answer

The process of the investment accelerator involves

Correct AnswerverifiedShow Answer

If the stock market booms, then

Correct AnswerverifiedShow Answer

Figure 34-4 ​ ​ -Refer to Figure 34-4. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

Correct AnswerverifiedShow Answer

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

Use the money market to explain the interest-rate effect and its relation to the slope of the aggregate demand curve.

Correct AnswerverifiedWhen the price level falls, people need ...View AnswerShow Answer

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If the Federal Reserve's goal is to stabilize aggregate demand, then it will _ the money supply in response to a stock market boom. This causes interest rates to _.

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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The nominal interest rate on currency is...
View Answer

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Figure 34-4 -Refer to Figure 34-4. Which of the following events could explain a shift of the money-demand curve from MD₁ to MD₂?

Correct Answer
verified

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 Answer
verified
right, inc...
View Answer

Correct Answer
verified
When the price level falls, people need ...
View Answer