Question 1

When the Fed increases the money supply, we expect

Accepted Answer

A)   interest rates and stock prices to rise.
B)   interest rates and stock prices to fall.
C)   interest rates to rise and stock prices to fall.
D)   interest rates to fall and stock prices to rise.E) A) and B)
F) A) and C)

Question 2

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 3

The theory of liquidity preference is largely at odds with the basic ideas of supply and demand.

Accepted Answer

A) True 
 B)False

Question 4

The theory of _____ states that the _____ adjusts to bring money supply and money demand into balance.

Accepted Answer

liquidity ...

Question 5

Critics of stabilization policy argue that

Accepted Answer

A)   there is a lag between the time policy is passed and the time policy has an impact on the economy.
B)   the impact of policy may last longer than the problem it was designed to offset.
C)   policy can be a source of, instead of a cure for, economic fluctuations.
D)   All of the above are correct.E) C) and D)
F) B) and D)

Question 6

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

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

Question 7

When the interest rate increases, the opportunity cost of holding money

Accepted Answer

A)   increases, so the quantity of money demanded increases.
B)   increases, so the quantity of money demanded decreases.
C)   decreases, so the quantity of money demanded increases.
D)   decreases, so the quantity of money demanded decreases.E) A) and D)
F) A) and B)

Question 8

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

Question 9

Government expenditures on capital goods such as roads could increase aggregate supply. Such effects on aggregate supply are likely to matter more in the short run than in the long run.

Accepted Answer

A) True 
 B)False

Question 10

Critics of stabilization policy argue that

Accepted Answer

A)   policy affects aggregate demand quickly, but the effects on aggregate demand are long-lived.
B)   policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived.
C)   policy affects aggregate demand with a lag, but the effects are short-lived.
D)   policy does not affect aggregate demand.E) B) and C)
F) A) and B)

Question 11

An essential piece of the liquidity preference theory is the demand for money.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following reduces the interest rate?

Accepted Answer

A)   an increase in government expenditures and an increase in the money supply
B)   an increase in government expenditures and a decrease in the money supply
C)   a decrease in government expenditures and an increase in the money supply
D)   a decrease in government expenditures and a decrease in the money supplyE) B) and C)
F) None of the above

Question 13

According to John Maynard Keynes,

Accepted Answer

A)   the demand for money in a country is determined entirely by that nation's central bank.
B)   the supply of money in a country is determined by the overall wealth of the citizens of that country.
C)   the interest rate adjusts to balance the supply of, and demand for, money.
D)   the interest rate adjusts to balance the supply of, and demand for, goods and services.E) A) and D)
F) A) and C)

Question 14

An increase in government spending

Accepted Answer

A)   increases the interest rate and so investment spending increases.
B)   increases the interest rate and so investment spending decreases.
C)   decreases the interest rate and so increases investment spending increases.
D)   decreases the interest rate and so investment spending decreases.E) None of the above
F) A) and C)

Question 15

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

Question 16

Most economists believe that a cut in tax rates

Accepted Answer

A)   would generally increase government tax revenue.
B)   would have no effect on aggregate demand.
C)   has a relatively small effect on the aggregate-supply curve.
D)   All of the above are correct.E) A) and C)
F) B) and C)

Question 17

To stabilize interest rates, the Federal Reserve will respond to an increase in money demand by

Accepted Answer

A)   buying government bonds, which decreases the supply of money.
B)   selling government bonds, which increases the supply of money.
C)   buying government bonds, which increases the supply of money.
D)   selling government bonds, which decreases the supply of money.E) A) and B)
F) A) and C)

Question 18

Which of the following tends to make the size of a shift in aggregate demand resulting from an increase in government purchases smaller than it otherwise would be?

Accepted Answer

A)   the multiplier effect
B)   the crowding-out effect
C)   the accelerator effect
D)   All of the above are correct.E) A) and B)
F) A) and C)

Question 19

Suppose there were a large decline in net exports. If the Fed wanted to stabilize output, it could

Accepted Answer

A)   buy bonds to raise interest rates.
B)   buy bonds to lower interest rates.
C)   sell bonds to raise interest rates.
D)   sell bonds to lower interest rates.E) A) and B)
F) A) and C)

Question 20

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are

Accepted Answer

A)   smaller in closed economies than in open economies.
B)   larger in closed economies than in open economies.
C)   smaller in capitalist economies than in socialist economies.
D)   larger in capitalist economies than in socialist economies.E) B) and C)
F) A) and D)

Exam 24: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Most economists believe that a cut in tax rates

Correct AnswerverifiedShow Answer

Critics of stabilization policy argue that

Correct AnswerverifiedShow Answer

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to John Maynard Keynes,

Correct AnswerverifiedShow Answer

An increase in government spending

Correct AnswerverifiedShow Answer

To stabilize interest rates, the Federal Reserve will respond to an increase in money demand by

Correct AnswerverifiedShow Answer

The process of the investment accelerator involves

Correct AnswerverifiedShow Answer

Suppose there were a large decline in net exports. If the Fed wanted to stabilize output, it could

Correct AnswerverifiedShow Answer

Which of the following reduces the interest rate?

Correct AnswerverifiedShow Answer

The theory of _____ states that the _____ adjusts to bring money supply and money demand into balance.

Correct Answerverifiedliquidity ...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following tends to make the size of a shift in aggregate demand resulting from an increase in government purchases smaller than it otherwise would be?

Correct AnswerverifiedShow Answer

The theory of liquidity preference is largely at odds with the basic ideas of supply and demand.

Correct AnswerverifiedShow Answer

Critics of stabilization policy argue that

Correct AnswerverifiedShow Answer

When the Fed increases the money supply, we expect

Correct AnswerverifiedShow Answer

An essential piece of the liquidity preference theory is the demand for money.

Correct AnswerverifiedShow Answer

Government expenditures on capital goods such as roads could increase aggregate supply. Such effects on aggregate supply are likely to matter more in the short run than in the long run.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

When the interest rate increases, the opportunity cost of holding money

Correct AnswerverifiedShow Answer

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The theory of _ states that the _ adjusts to bring money supply and money demand into balance.

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liquidity ...
View Answer

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