Question 1

Stock prices often rise when the Fed raises interest rates.

Accepted Answer

A) True 
 B)False

Question 2

While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1.25 percent," a more precise account of the Fed's action would be as follows:

Accepted Answer

A)   "Today the Fed told its bond traders to conduct open­market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent."
B)   "Today the Fed raised the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to rise by the same amount."
C)   "Today the Fed took steps to increase the money supply by an amount that is sufficient to increase the federal funds rate to 1.25 percent."
D)   "Today the Fed took a step toward expanding aggregate demand, and this was done by raising the federal funds rate to 1.25 percent."E) A) and C)
F) A) and B)

Question 3

Consider the following sequence of events: price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑
⇒ quantity of goods and services demanded ↓
Τhis sequence explains why the

Accepted Answer

A)   money-supply curve is vertical.
B)   aggregate-demand curve shifts leftward in response to a monetary injection.
C)   aggregate-demand curve shifts rightward in response to a monetary injection.
D)   aggregate-demand curve slopes downward.E) B) and C)
F) A) and D)

Question 4

The exchange-rate effect is based, in part, on the idea that

Accepted Answer

A)   a decrease in the price level reduces the interest rate.
B)   an increase in the price level causes investors to move some of their funds overseas.
C)   an increase in the price level causes domestic goods to become less expensive relative to foreign goods.
D)   a decrease in the price level reduces spending on net exports.E) C) and D)
F) All of the above

Question 5

If the stock market crashes, then

Accepted Answer

A)   aggregate demand decreases, which the Fed could offset by purchasing bonds.
B)   aggregate demand decreases, which the Fed could offset by selling bonds.
C)   aggregate demand increases, which the Fed could offset by selling bonds.
D)   aggregate demand increases, which the Fed could offset by purchasing the money supply.E) A) and D)
F) B) and D)

Question 6

A decrease in taxes will shift aggregate demand to the _____, cause consumption to _____, and cause output to _____. Due to the crowding-out effect, investment will _____.

Accepted Answer

right, inc...

Question 7

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 B)
F) A) and C)

Question 8

According to a 2009 article in The Economist, the multiplier effect and crowding-out effect would exactly offset each other when the economy is

Accepted Answer

A)   operating at full capacity.
B)   in recession.
C)   experiencing zero inflation.
D)   experiencing high rates of inflation.E) A) and C)
F) A) and B)

Question 9

If the interest rate is above the Fed's target, the Fed should

Accepted Answer

A)   buy bonds to increase bank reserves.
B)   buy bonds to decrease bank reserves.
C)   sell bonds to increase bank reserves.
D)   sell bonds to decrease bank reserves.E) None of the above
F) C) and D)

Question 10

Which of the following events would shift money demand to the right?

Accepted Answer

A)   an increase in the price level
B)   a decrease in the price level
C)   an increase in the interest rate
D)   a decrease in the interest rateE) None of the above
F) A) and C)

Question 11

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

Accepted Answer

A)   price level ↑ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
B)   price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↓
C)   price level ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↑
D)   price level ↓ ⇒ equilibrium interest rate ↓ ⇒ demand for money ↑ ⇒ quantity of goods and services demanded ↑E) None of the above
F) C) and D)

Question 12

When the Federal Funds rate is above the Federal Reserve's target, it will ____ bonds to _____ the money supply.

Accepted Answer

The answer of When the Federal Funds rate is above...

Question 13

Suppose investment spending falls. To offset the change in output the Federal Reserve could

Accepted Answer

A)   increase the money supply. This increase would also move the price level closer to its value before the decline in investment spending.
B)   increase the money supply. However, this increase would move the price level farther from its value before the decline in investment spending.
C)   decrease the money supply. This decrease would also move the price level closer to its value before the decline in investment spending.
D)   decrease the money supply. However, this increase would move the price level farther from its value before the decline in investment spending.E) B) and C)
F) A) and D)

Question 14

An increase in the money supply will

Accepted Answer

A)   increase interest rates, decreasing investment and aggregate demand.
B)   reduce interest rates, increasing investment and aggregate demand.
C)   reduce interest rates, decreasing investment and increasing aggregate demand.
D)   increase interest rates, increasing investment and aggregate demand.E) B) and C)
F) A) and B)

Question 15

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

Accepted Answer

A)   interest rate
B)   money supply
C)   quantity of output
D)   price levelE) C) and D)
F) A) and D)

Question 16

To reduce aggregate demand, the government may reduce or increase .

Accepted Answer

government...

Question 17

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

Question 18

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

Question 19

When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right.

Accepted Answer

A) True 
 B)False

Question 20

Other things equal, in the short run a lower price level leads households to

Accepted Answer

A)   increase consumption and firms to buy more capital goods.
B)   increase consumption and firms to buy fewer capital goods.
C)   decrease consumption and firms to buy more capital goods.
D)   decrease consumption and firms to buy fewer capital goods.E) B) and C)
F) B) and D)

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

If the stock market crashes, then

Correct AnswerverifiedShow Answer

While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1.25 percent," a more precise account of the Fed's action would be as follows:

Correct AnswerverifiedShow Answer

When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to a 2009 article in The Economist, the multiplier effect and crowding-out effect would exactly offset each other when the economy is

Correct AnswerverifiedShow Answer

To reduce aggregate demand, the government may reduce or increase .

Correct Answerverifiedgovernment...View AnswerShow Answer

An increase in the money supply will

Correct AnswerverifiedShow Answer

Suppose investment spending falls. To offset the change in output the Federal Reserve could

Correct AnswerverifiedShow Answer

A decrease in taxes will shift aggregate demand to the _____, cause consumption to _____, and cause output to _____. Due to the crowding-out effect, investment will _____.

Correct Answerverifiedright, inc...View AnswerShow Answer

Stock prices often rise when the Fed raises interest rates.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Other things equal, in the short run a lower price level leads households to

Correct AnswerverifiedShow Answer

When the Federal Funds rate is above the Federal Reserve's target, it will ____ bonds to _____ the money supply.

Correct AnswerverifiedShow Answer

If the interest rate is above the Fed's target, the Fed should

Correct AnswerverifiedShow Answer

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

Correct AnswerverifiedShow Answer

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

Correct AnswerverifiedShow Answer

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

Which of the following events would shift money demand to the right?

Correct AnswerverifiedShow Answer

The exchange-rate effect is based, in part, on the idea that

Correct AnswerverifiedShow Answer

Consider the following sequence of events: price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ Τhis sequence explains why the

Correct AnswerverifiedShow Answer

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A decrease in taxes will shift aggregate demand to the ___, cause consumption to _, and cause output to _. Due to the crowding-out effect, investment will ___.

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right, inc...
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When the Federal Funds rate is above the Federal Reserve's target, it will bonds to _ the money supply.

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