Question 1

Which of the following shifts aggregate demand to the right?

Accepted Answer

A)   The price level rises.
B)   The price level falls.
C)   The Fed purchases government bonds on the open market.
D)   None of the above is correct.E) C) and D)
F) None of the above

Question 2

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 3

The theory of liquidity preference illustrates the principle that

Accepted Answer

A)   monetary policy can be described either in terms of the money supply or in terms of the interest rate.
B)   monetary policy can be described either in terms of the exchange rate or the interest rate.
C)   monetary policy must be described in terms of the money supply.
D)   monetary policy must be described in terms of the interest rate.E) B) and C)
F) None of the above

Question 4

Which of the following Fed actions would both increase the money supply?

Accepted Answer

A)   buy bonds and raise the reserve requirement
B)   buy bonds and lower the reserve requirement
C)   sell bonds and raise the reserve requirement
D)   sell bonds and lower the reserve requirementE) A) and B)
F) None of the above

Question 5

Which among the following assets is the most liquid?

Accepted Answer

A)   capital goods
B)   stocks and bonds with a low risk
C)   real estate
D)   funds in a checking accountE) All of the above
F) B) and C)

Question 6

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 7

According to classical macroeconomic theory,

Accepted Answer

A)   the price level is sticky in the short run and it plays only a minor role in the short-run adjustment process.
B)   for any given level of output, the interest rate adjusts to balance the supply of, and demand for, money.
C)   output is determined by the supplies of capital and labor and the available production technology.
D)   All of the above are correct.E) A) and D)
F) All of the above

Question 8

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

Accepted Answer

A)   increased the money supply and increased interest rates.
B)   increased the money supply and decreased interest rates.
C)   decreased the money supply and increased interest rates.
D)   decreased the money supply and decreased interest rates.E) B) and C)
F) A) and C)

Question 9

Suppose that there are no crowding-out effects and the MPC is .9. By how much must the government increase expenditures to shift the aggregate demand curve right by $10 billion?

Accepted Answer

An MPC of .9 means the multiplier = 1/(1...

Question 10

Other things the same, during recessions taxes tend to

Accepted Answer

A)   rise. The rise in taxes stimulates aggregate demand.
B)   rise. The rise in taxes contracts aggregate demand.
C)   fall. The fall in taxes stimulates aggregate demand.
D)   fall. The fall in taxes contracts aggregate demand.E) A) and B)
F) A) and C)

Question 11

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

Question 12

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

Question 13

A surplus or shortage in the money market is eliminated by adjustments in the price level according to

Accepted Answer

A)   both liquidity preference theory and classical theory.
B)   neither liquidity preference theory nor classical theory.
C)   liquidity preference theory, but not classical theory.
D)   classical theory, but not liquidity preference theory.E) None of the above
F) B) and C)

Question 14

A tax cut shifts aggregate demand

Accepted Answer

A)   by more than the amount of the tax cut.
B)   by the same amount as the tax cut.
C)   by less than the tax cut.
D)   None of the above is necessarily correct.E) A) and B)
F) A) and C)

Question 15

Scenario 16-2. 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 16-2. In response to which of the following events could aggregate demand increase by $1,500?

Accepted Answer

A)   A stock-market boom increases households' wealth by $300, and there is an operative crowding-out effect.
B)   A stock-market boom increases households' wealth by $275, and there is an operative crowding-out effect.
C)   An economic boom overseas increases the demand for U.S. net exports by $240, and there is no crowding-out effect.
D)   Aggregate demand could increase by $1,500 in response to any of these events.E) B) and D)
F) B) and C)

Question 16

Scenario 16-2. 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 16-2. 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) B) and D)

Question 17

When the Fed buys government bonds, the reserves of the banking system

Accepted Answer

A)   increase, so the money supply increases.
B)   increase, so the money supply decreases.
C)   decrease, so the money supply increases.
D)   decrease, so the money supply decreases.E) A) and C)
F) All of the above

Question 18

Which of the following statements is correct for the long run?

Accepted Answer

A)   Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for money; the price level adjusts to balance the supply and demand for loanable funds.
B)   Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.
C)   Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level is relatively slow to adjust.
D)   Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.E) A) and D)
F) A) and C)

Question 19

Keynes argued that

Accepted Answer

A)   irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment.
B)   irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply.
C)   changes in business and consumer expectations generally stabilize the economy.
D)   All of the above are correct.E) B) and D)
F) All of the above

Question 20

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well. Most economists would say that Marcus's opinion is

Accepted Answer

A)   Keynesian in nature, and that his view is more valid for the long run than for the short run.
B)   classical in nature, and that his view is more valid for the long run than for the short run.
C)   Keynesian in nature, and that his view is more valid for the short run than for the long run.
D)   classical in nature, and that his view is more valid for the short run than for the long run.E) None of the above
F) B) and D)

Exam 16: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Keynes argued that

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According to classical macroeconomic theory,

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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

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

Correct AnswerverifiedShow Answer

Suppose that there are no crowding-out effects and the MPC is .9. By how much must the government increase expenditures to shift the aggregate demand curve right by $10 billion?

Correct AnswerverifiedAn MPC of .9 means the multiplier = 1/(1...View AnswerShow 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

Which of the following Fed actions would both increase the money supply?

Correct AnswerverifiedShow Answer

Other things the same, during recessions taxes tend to

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Which among the following assets is the most liquid?

Correct AnswerverifiedShow Answer

A surplus or shortage in the money market is eliminated by adjustments in the price level according to

Correct AnswerverifiedShow Answer

When the Fed buys government bonds, the reserves of the banking system

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

Which of the following shifts aggregate demand to the right?

Correct AnswerverifiedShow Answer

The theory of liquidity preference illustrates the principle that

Correct AnswerverifiedShow Answer

Scenario 16-2. 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 16-2. The marginal propensity to consume for this economy is

Correct AnswerverifiedShow Answer

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well. Most economists would say that Marcus's opinion is

Correct AnswerverifiedShow Answer

A tax cut shifts aggregate demand

Correct AnswerverifiedShow Answer

In response to the sharp decline in stock prices in October 1987, the Federal Reserve

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Which of the following statements is correct for the long run?

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As consumers become pessimistic about th...
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An MPC of .9 means the multiplier = 1/(1...
View Answer

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