Question 1

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output?

Accepted Answer

A)   increase taxes
B)   increase the money supply
C)   increase government expenditures
D)   All of the above are correct.E) A) and B)
F) A) and C)

Question 2

A reduction in personal income taxes increases Aggregate Demand through

Accepted Answer

A)   an increase in investment spending.
B)   an increase in national savings.
C)   an increase in private savings.
D)   an increase in personal consumption.E) B) and C)
F) A) and D)

Question 3

Scenario 34-2. The following facts apply to a small, imaginary economy.
• Consumption spending is $6,720 when income is $8,000.
• Consumption spending is $7,040 when income is $8,500.
-Refer to Scenario 34-2. The multiplier for this economy is

Accepted Answer

A)   1.31.
B)   6.25.
C)   2.78.
D)   2.27.E) A) and D)
F) A) and C)

Question 4

In the short run, open-market sales

Accepted Answer

A)   increase the price level and real GDP.
B)   decrease the price level and real GDP.
C)   increases the price level and decreases real GDP.
D)   decreases the price level and increases real GDP.E) B) and D)
F) A) and C)

Question 5

Figure 34-14 
-Refer to Figure 34-14. Households' desired money holdings are given by MD1. If the current rate of interest is r3, then there is excess _____. Households will _____ interest-earning assets, which causes the interest rate to _____.

Accepted Answer

Question 6

Which U.S. president, when asked why he had proposed a tax cut, responded by saying "To stimulate the economy. Don't you remember your Economics 101?"

Accepted Answer

A)   Dwight D. Eisenhower
B)   John F. Kennedy
C)   Ronald Reagan
D)   Bill ClintonE) B) and C)
F) A) and C)

Question 7

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

Accepted Answer

A)   increases by more than the change in the nominal interest rate.
B)   increases by the change in the nominal interest rate.
C)   decreases by the change in the nominal interest rate.
D)   decreases by more than the change in the nominal interest rate.E) A) and B)
F) A) and C)

Question 8

An increase 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 in either direction.E) A) and B)
F) All of the above

Question 9

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

Accepted Answer

A)   wealth effect, exchange-rate effect, interest-rate effect
B)   exchange-rate effect, interest-rate effect, wealth effect
C)   interest-rate effect, wealth effect, exchange-rate effect
D)   interest-rate effect, exchange-rate effect, wealth effectE) A) and C)
F) All of the above

Question 10

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

Question 11

As the interest rate falls,

Accepted Answer

A)   the quantity of money demanded falls, which would reduce a shortage.
B)   the quantity of money demanded falls, which would reduce a surplus.
C)   the quantity of money demanded rises, which would reduce a shortage.
D)   the quantity of money demanded rises, which would reduce a surplus.E) None of the above
F) A) and C)

Question 12

If the Federal Reserve increases the money supply, then initially there is a

Accepted Answer

A)   shortage in the money market, so people will want to sell bonds.
B)   shortage in the money market, so people will want to buy bonds.
C)   surplus in the money market, so people will want to sell bonds.
D)   surplus in the money market, so people will want to buy bonds.E) B) and D)
F) A) and B)

Question 13

According to the theory of liquidity preference, an increase in the price level causes the

Accepted Answer

A)   interest rate and investment to rise.
B)   interest rate and investment to fall.
C)   interest rate to rise and investment to fall.
D)   interest rate to fall and investment to rise.E) B) and D)
F) B) and C)

Question 14

Changes in the interest rate bring the money market into equilibrium 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) C) and D)
F) A) and D)

Question 15

Stock prices often rise when the Fed raises interest rates.

Accepted Answer

A) True 
 B)False

Question 16

Supply-side economists believe that a reduction in the tax rate

Accepted Answer

A)   always decrease government tax revenue.
B)   shifts the aggregate supply curve to the right.
C)   provides no incentive for people to work more.
D)   would decrease consumption.E) A) and B)
F) C) and D)

Question 17

Other things equal, the higher the price level, the higher is the real wealth of households.

Accepted Answer

A) True 
 B)False

Question 18

Suppose households attempt to increase their money holdings. To stabilize output by countering this increase in money demand, the Federal Reserve would

Accepted Answer

A)   increase government spending.
B)   increase the money supply.
C)   decrease government spending.
D)   decrease the money supply.E) B) and C)
F) A) and C)

Question 19

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

Question 20

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

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

According to the theory of liquidity preference, an increase in the price level causes the

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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.

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Which U.S. president, when asked why he had proposed a tax cut, responded by saying "To stimulate the economy. Don't you remember your Economics 101?"

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

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Which of the following shifts aggregate demand to the right?

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Stock prices often rise when the Fed raises interest rates.

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A reduction in personal income taxes increases Aggregate Demand through

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An increase in government spending initially and primarily shifts

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

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Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output?

Correct AnswerverifiedShow Answer

Other things equal, the higher the price level, the higher is the real wealth of households.

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With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

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As the interest rate falls,

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If the Federal Reserve increases the money supply, then initially there is a

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Changes in the interest rate bring the money market into equilibrium according to

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Figure 34-14 -Refer to Figure 34-14. Households' desired money holdings are given by MD1. If the current rate of interest is r3, then there is excess _____. Households will _____ interest-earning assets, which causes the interest rate to _____.

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Scenario 34-2. The following facts apply to a small, imaginary economy. • Consumption spending is $6,720 when income is $8,000. • Consumption spending is $7,040 when income is $8,500. -Refer to Scenario 34-2. The multiplier for this economy is

Correct AnswerverifiedShow Answer

Supply-side economists believe that a reduction in the tax rate

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In the short run, open-market sales

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Suppose households attempt to increase their money holdings. To stabilize output by countering this increase in money demand, the Federal Reserve would

Correct AnswerverifiedShow Answer

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Figure 34-14 -Refer to Figure 34-14. Households' desired money holdings are given by MD₁. If the current rate of interest is r₃, then there is excess ___. Households will _ interest-earning assets, which causes the interest rate to ___.

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