Question 1

Figure 34-3
(a)  The Money Market
(b)  The Aggregate Demand Curve  
-Refer to Figure 34-3. Which of the following sequences (numbered arrows)  shows the logic of the interest-rate effect on the slope of aggregate demand?

Accepted Answer

A)  1, 2, 3, 4
B)  1, 4, 3, 2
C)  3, 4, 2, 1
D)  3, 2, 1, 4E) A) and B)
F) B) and C)

Question 2

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

Accepted Answer

A)  the equilibrium interest rate increases.
B)  the aggregate-demand curve shifts to the right.
C)  the quantity of goods and services demanded is unchanged for a given price level.
D)  the short-run aggregate-supply curve shifts to the left.E) None of the above
F) B) and D)

Question 3

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

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

When the interest rate is above equilibrium, there is excess _____ of money. Households will _____ interest-earning assets, which _____ the interest rate.

Accepted Answer

supply, pu...

Question 6

Fiscal policy refers to the idea that aggregate demand is affected by changes in

Accepted Answer

A)  the money supply.
B)  government spending and taxes.
C)  trade policy.
D)  interest rates.E) A) and B)
F) All of the above

Question 7

For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

Accepted Answer

A) True 
 B)False

Question 8

According to the theory of liquidity preference,

Accepted Answer

A)  an increase in the interest rate reduces the quantity of money demanded.This is shown as a movement along the money-demand curve.An increase in the price level shifts money demand to the right.
B)  an increase in the interest rate increases the quantity of money demanded.This is shown as a movement along the money-demand curve.An increase in the price level shifts money demand leftward.
C)  an increase in the price level reduces the quantity of money demanded.This is shown as a movement along the money-demand curve.An increase in the interest rate shifts money demand rightward.
D)  an increase in the price level increases the quantity of money demanded.This is shown as a movement along the money-demand curve.An increase in the interest rate shifts money demand leftward.E) A) and B)
F) All of the above

Question 9

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 C)
F) A) and B)

Question 10

If the Federal Reserve's goal is to stabilize aggregate demand, then in response to an increase in money demand, the Federal Reserve will _____ the money supply.

Accepted Answer

The answer of If the Federal Reserve's goal is to...

Question 11

An example of an automatic stabilizer is

Accepted Answer

A)  unemployment benefits.
B)  a lowering of interest rates by the Fed.
C)  a decrease in money demand.
D)  a decrease in tax rates in response to a recession.E) C) and D)
F) None of the above

Question 12

In which of the following cases would the quantity of money demanded be smallest?

Accepted Answer

A)  r = 0.06, P = 1.2
B)  r = 0.05, P = 1.0
C)  r = 0.04, P = 1.2
D)  r = 0.06, P = 1.0E) None of the above
F) B) and C)

Question 13

Suppose that consumers become pessimistic about the future health of the economy. What will happen to aggregate demand and to output? What might the president and Congress have to do to keep output stable?

Accepted Answer

As consumers become pessimistic about th...

Question 14

During recessions, taxes tend to

Accepted Answer

A)  rise and thereby increase aggregate demand.
B)  rise and thereby decrease aggregate demand.
C)  fall and thereby increase aggregate demand.
D)  fall and thereby decrease aggregate demand.E) A) and B)
F) None of the above

Question 15

To offset increased pessimism by households, the government may _____ government spending and/or _____ taxes.

Accepted Answer

The answer of To offset increased pessimism by households, the...

Question 16

Figure 34-12  ​
-Refer to Figure 34-12. The economy is currently at point A. Given the current situation, the Federal Reserve will _____ bonds, which causes interest rates to _____.

Accepted Answer

The answer of Figure 34-12  ​
-Refer to Figure 34-12....

Question 17

Figure 34-9  ​
-Refer to Figure 34-9. Suppose the multiplier is 2 and there is no crowding-out, but there is an accelerator effect. If the economy is currently at point A, then an increase in government purchases of $10 will likely increase aggregate demand to point _____ where output is $_____.

Accepted Answer

The answer of Figure 34-9  ​
-Refer to Figure 34-9....

Question 18

The _____ is the most important automatic stabilizer.

Accepted Answer

The answer of The _____ is the most important automatic...

Question 19

A severe problem that many economists have with the active use of monetary policy and fiscal policy to stabilize the economy is that, while those policies obviously work well in practice, they are not well understood on a theoretical level.

Accepted Answer

A) True 
 B)False

Question 20

During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.

Accepted Answer

A) True 
 B)False

Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.

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An example of an automatic stabilizer is

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The _____ is the most important automatic stabilizer.

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To offset increased pessimism by households, the government may _____ government spending and/or _____ taxes.

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Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

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Fiscal policy refers to the idea that aggregate demand is affected by changes in

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In which of the following cases would the quantity of money demanded be smallest?

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Figure 34-12 ​ -Refer to Figure 34-12. The economy is currently at point A. Given the current situation, the Federal Reserve will _____ bonds, which causes interest rates to _____.

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Figure 34-9 ​ -Refer to Figure 34-9. Suppose the multiplier is 2 and there is no crowding-out, but there is an accelerator effect. If the economy is currently at point A, then an increase in government purchases of $10 will likely increase aggregate demand to point _____ where output is $_____.

Correct AnswerverifiedShow Answer

For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

Correct AnswerverifiedShow Answer

If the Federal Reserve's goal is to stabilize aggregate demand, then in response to an increase in money demand, the Federal Reserve will _____ the money supply.

Correct AnswerverifiedShow Answer

When the interest rate is above equilibrium, there is excess _____ of money. Households will _____ interest-earning assets, which _____ the interest rate.

Correct Answerverifiedsupply, pu...View AnswerShow Answer

Critics of stabilization policy argue that

Correct AnswerverifiedShow Answer

Suppose that consumers become pessimistic about the future health of the economy. What will happen to aggregate demand and to output? What might the president and Congress have to do to keep output stable?

Correct AnswerverifiedAs consumers become pessimistic about th...View AnswerShow Answer

When the Fed increases the money supply, we expect

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During recessions, taxes tend to

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According to the theory of liquidity preference,

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

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A severe problem that many economists have with the active use of monetary policy and fiscal policy to stabilize the economy is that, while those policies obviously work well in practice, they are not well understood on a theoretical level.

Correct AnswerverifiedShow Answer

Figure 34-3 (a) The Money Market (b) The Aggregate Demand Curve -Refer to Figure 34-3. Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect on the slope of aggregate demand?

Correct AnswerverifiedShow Answer

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To offset increased pessimism by households, the government may _ government spending and/or _ taxes.

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Figure 34-12 -Refer to Figure 34-12. The economy is currently at point A. Given the current situation, the Federal Reserve will _ bonds, which causes interest rates to _.

Correct Answer
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Figure 34-9 -Refer to Figure 34-9. Suppose the multiplier is 2 and there is no crowding-out, but there is an accelerator effect. If the economy is currently at point A, then an increase in government purchases of $10 will likely increase aggregate demand to point _ where output is $_.

Correct Answer
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Correct Answer
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Correct Answer
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When the interest rate is above equilibrium, there is excess ___ of money. Households will _ interest-earning assets, which ___ the interest rate.

Correct Answer
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supply, pu...
View Answer

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Correct Answer
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As consumers become pessimistic about th...
View Answer

Correct Answer
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