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

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Question 171

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Which of the following is an example of crowding out?

A) An increase in government spending increases interest rates, causing investment to fall.
B) A decrease in private savings increases interest rates, causing investment to fall.
C) A decrease in the money supply increases interest rates, causing investment to fall.
D) An increase in taxes increases interest rates, causing investment to fall.

E) None of the above
F) C) and D)

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Question 172

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Which of the following shifts aggregate demand to the right?

A) The price level rises.
B) The price level falls.
C) The money supply falls.
D) None of the above is correct.

E) A) and B)
F) A) and C)

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Question 173

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The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

Suppose a wave of optimism causes firms to increase investment. To stabilize output and employment, the Federal Reserve will .

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

If the Fed conducts open-market purchases, then which of the following quantities increases) ?

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

When the Fed announces a target for the federal funds rate, it essentially accommodates the day-to-day fluctuations in money demand by adjusting the money supply accordingly.

Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is your answer affected by the presence of the multiplier, crowding-out, taxes, and investment-accelerator effects?

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 effect of these changes? Why is the combined change not equal to zero?

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

A decrease in the domestic _____ causes domestic goods to become less expensive relative to foreign goods and increases net exports. The increase in net exports causes an) _____ in the quantity of domestic aggregate goods and services demanded and is known as the _____ effect.

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?

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?

Permanent tax changes have a effect on aggregate demand compared to temporary tax changes.

Figure 34-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-5. A shift of the money-demand curve from MD1 to MD2 could be a result of

Figure 34-3 -Refer to Figure 34-3. What quantity is represented by the downward-sloping line on the left-hand graph?

If expected inflation is constant and the nominal interest rate decreases by 2 percentage points, then the real interest rate