Question 1

Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400.
-Refer to Scenario 21-2. The marginal propensity to consume for this economy is

Accepted Answer

A)  0.650.
B)  0.659.
C)  0.650 or 0.659, depending on whether income is $8,000 or $8,400.
D)  0.840.E) All of the above
F) A) and D)

Question 2

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

Accepted Answer

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

Question 3

According to liquidity preference theory, if the price level decreases, then

Accepted Answer

A)  the interest rate falls because money demand shifts right.
B)  the interest rate falls because money demand shifts left.
C)  the interest rate rises because money supply shifts right.
D)  the interest rate rises because money supply shifts left.E) B) and C)
F) A) and C)

Question 4

Suppose that consumers become pessimistic about the future health of the economy. What will happen to aggregate demand and to output? What might the president and Congress have to do to keep output stable?

Accepted Answer

As consumers become pessimistic about th...

Question 5

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax cut smaller than it otherwise would be?

Accepted Answer

A)  the multiplier effect
B)  the crowding-out effect
C)  the accelerator effect
D)  None of the above is correct.E) B) and C)
F) A) and D)

Question 6

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 C)
F) A) and B)

Question 7

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

Question 8

Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400.
-Refer to Scenario 21-2. For this economy, an initial increase of $500 in government purchases translates into a

Accepted Answer

A)  $1,428.57 increase in aggregate demand in the absence of the crowding-out effect.
B)  $3,125.00 increase in aggregate demand in the absence of the crowding-out effect.
C)  $1,428.57 increase in aggregate demand when the crowding-out effect is taken into account.
D)  $3,125.00 increase in aggregate demand when the crowding-out effect is taken into account.E) B) and C)
F) A) and B)

Question 9

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) A) and B)

Question 10

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) All of the above
F) B) and C)

Question 11

The theory of liquidity preference was developed by Irving Fisher.

Accepted Answer

A) True 
 B)False

Question 12

If the Federal Reserve increases the money supply, then initially people want to

Accepted Answer

A)  sell bonds so the interest rate rises.
B)  sell bonds so the interest rate falls.
C)  buy bonds so the interest rate rises.
D)  buy bonds so the interest rate falls.E) B) and C)
F) A) and D)

Question 13

If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by

Accepted Answer

A)  increasing the money supply, which raises interest rates.
B)  increasing the money supply, which lowers interest rates.
C)  decreasing the money supply, which raises interest rates.
D)  decreasing the money supply, which lowers interest rates.E) C) and D)
F) All of the above

Question 14

The short-run effects on the interest rate are

Accepted Answer

A)  shown equally well using either liquidity preference theory or classical theory.
B)  best shown using classical theory.
C)  best shown using liquidity preference theory.
D)  not shown well by either liquidity preference theory or classical theory.E) None of the above
F) A) and D)

Question 15

The interest rate falls if

Accepted Answer

A)  the price level falls or the money supply falls.
B)  the price level falls or the money supply rises.
C)  the price level rises or the money supply falls.
D)  the price level rises or the money supply rises.E) B) and C)
F) A) and D)

Question 16

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

Accepted Answer

A)  shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate.
B)  the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an interest rate.
C)  changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate.
D)  the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate.E) All of the above
F) A) and B)

Question 17

Stock prices often rise when the Fed raises interest rates.

Accepted Answer

A) True 
 B)False

Question 18

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 19

For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

Accepted Answer

A) True 
 B)False

Question 20

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) All of the above

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

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

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If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by

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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

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Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400. -Refer to Scenario 21-2. For this economy, an initial increase of $500 in government purchases translates into a

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The interest rate falls if

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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?

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The theory of liquidity preference was developed by Irving Fisher.

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If the Federal Reserve increases the money supply, then initially people want to

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"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

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For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

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Scenario 21-2. The following facts apply to a small, imaginary economy.• Consumption spending is $5,200 when income is $8,000.• Consumption spending is $5,536 when income is $8,400. -Refer to Scenario 21-2. The marginal propensity to consume for this economy is

Correct AnswerverifiedShow Answer

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax cut smaller than it otherwise would be?

Correct AnswerverifiedShow Answer

A decrease in government spending

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According to liquidity preference theory, if the price level decreases, then

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

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Stock prices often rise when the Fed raises interest rates.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The short-run effects on the interest rate are

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Suppose that consumers become pessimistic about the future health of the economy. What will happen to aggregate demand and to output? What might the president and Congress have to do to keep output stable?

Correct AnswerverifiedAs consumers become pessimistic about th...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

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As consumers become pessimistic about th...
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