Question 1

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Which of the following illustrates how the investment accelerator works?

Accepted Answer

A)   An increase in government expenditures increases the interest rate so that the Burgerville chain of restaurants decides to build fewer new restaurants.
B)   An increase in government expenditures increases aggregate spending so that Burgerville finds it profitable to build more new restaurants.
C)   An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by Burgerville increases.
D)   An increase in government expenditures decreases the interest rate so that Burgerville decides to build more new restaurants.E) C) and D)
F) A) and B)

Question 4

Figure 16-4. On the figure, MS represents money supply and MD represents money demand.
 3 to r1? A)  a decrease in the price level B)  a decrease in the number of firms building new factories and buying new equipment C)  an increase in the price level D)  an increase in the number of firms building new factories and buying new equipment " class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 16-4. Which of the following events could explain a decrease in the equilibrium interest rate from r3 to r1?

Accepted Answer

A)   a decrease in the price level
B)   a decrease in the number of firms building new factories and buying new equipment
C)   an increase in the price level
D)   an increase in the number of firms building new factories and buying new equipmentE) All of the above
F) None of the above

Question 5

Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-demand curve?

Accepted Answer

A)   As the money supply increases, the interest rate falls, so spending rises.
B)   As the money supply increases, the interest rate rises, so spending falls.
C)   As the price level increases, the interest rate falls, so spending rises.
D)   As the price level increases, the interest rate rises, so spending falls.E) A) and C)
F) A) and B)

Question 6

The most important automatic stabilizer is

Accepted Answer

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

Question 7

The Kennedy tax cut of 1964 was

Accepted Answer

A)   successful in stimulating the economy.
B)   designed to shift the aggregate demand curve to the right.
C)   designed to shift the aggregate supply curve to the right.
D)   All of the above are correct.E) A) and B)
F) All of the above

Question 8

A decrease 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.E) A) and D)
F) A) and C)

Question 9

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

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

Accepted Answer

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

Question 12

If the government cuts the tax rate, workers get to keep

Accepted Answer

A)   less of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
B)   less of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.
C)   more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
D)   more of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.E) A) and D)
F) B) and D)

Question 13

The positive feedback from aggregate demand to investment is called

Accepted Answer

A)   the investment multiplier.
B)   the stock-market effect.
C)   the investment accelerator.
D)   the crowding-in multiplier.E) C) and D)
F) A) and D)

Question 14

Monetary policy affects the economy with a long lag, in part because

Accepted Answer

A)   proposals to change monetary policy must go through both the House and Senate before being sent to the president.
B)   monetary policy works through changes in interest rates, and the Fed does not have the ability to change interest rates quickly.
C)   changes in interest rates primarily influence consumption spending, and households make consumption plans far in advance.
D)   changes in interest rates primarily influence investment spending, and firms make investment plans far in advance.E) All of the above
F) A) and B)

Question 15

Liquidity refers to

Accepted Answer

A)   the relation between the price and interest rate of an asset.
B)   the risk of an asset relative to its selling price.
C)   the ease with which an asset is converted into a medium of exchange.
D)   the sensitivity of investment spending to changes in the interest rate.E) A) and B)
F) B) and C)

Question 16

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Accepted Answer

If the interest rate is above equilibriu...

Question 17

Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion. Suppose that the MPC is .80 and that there are no crowding out or accelerator effects. What is the combined effects of these changes? Why is the combined change not equal to zero?

Accepted Answer

The multiplier is 1/(1-MPC) = 1/(1-.8) =...

Question 18

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

Question 19

An increase in the money supply shifts the aggregate-supply curve to the right.

Accepted Answer

A) True 
 B)False

Question 20

The interest-rate effect

Accepted Answer

A)   depends on the idea that increases in interest rates increase the quantity of money demanded.
B)   depends on the idea that increases in interest rates increase the quantity of money supplied.
C)   is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.
D)   is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.E) B) and C)
F) B) and D)

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

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

Correct AnswerverifiedShow Answer

Monetary policy affects the economy with a long lag, in part because

Correct AnswerverifiedShow Answer

Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion. Suppose that the MPC is .80 and that there are no crowding out or accelerator effects. What is the combined effects of these changes? Why is the combined change not equal to zero?

Correct AnswerverifiedThe multiplier is 1/(1-MPC) = 1/(1-.8) =...View AnswerShow Answer

An increase in the money supply shifts the aggregate-supply curve to the right.

Correct AnswerverifiedShow Answer

Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Which of the following events could explain a decrease in the equilibrium interest rate from r3 to r1?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

Correct AnswerverifiedShow Answer

The positive feedback from aggregate demand to investment is called

Correct AnswerverifiedShow Answer

If the government cuts the tax rate, workers get to keep

Correct AnswerverifiedShow Answer

The interest-rate effect

Correct AnswerverifiedShow Answer

The Kennedy tax cut of 1964 was

Correct AnswerverifiedShow Answer

The most important automatic stabilizer is

Correct AnswerverifiedShow Answer

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following illustrates how the investment accelerator works?

Correct AnswerverifiedShow Answer

Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-demand curve?

Correct AnswerverifiedShow Answer

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Correct AnswerverifiedIf the interest rate is above equilibriu...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

A decrease in government spending initially and primarily shifts

Correct AnswerverifiedShow Answer

Liquidity refers to

Correct AnswerverifiedShow Answer

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The multiplier is 1/(1-MPC) = 1/(1-.8) =...
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Figure 16-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 16-4. Which of the following events could explain a decrease in the equilibrium interest rate from r₃ to r₁?

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If the interest rate is above equilibriu...
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