Question 1

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $40 billion to the left. The government wants to change its spending to offset this decrease in demand. The MPC is 0.60. Suppose the effect on aggregate demand from a change in taxes is 3/5 the size of the change from government expenditures. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in real GDP?

Accepted Answer

A)   Raise both taxes and expenditures by $40 billion dollars.
B)   Raise both taxes and expenditures by $40 billion dollars
C)   Reduce both taxes and expenditures by $10 billion dollars.
D)   Reduce both taxes and expenditures by $10 billion dollarsE) A) and B)
F) C) and D)

Question 2

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

Question 3

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

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

Question 4

According to liquidity preference theory, a decrease in the price level shifts the

Accepted Answer

A)   money demand curve rightward, so the interest rate increases.
B)   money demand curve rightward, so the interest rate decreases.
C)   money demand curve leftward, so the interest rate decreases.
D)   money demand curve leftward, so the interest rate increases.E) A) and C)
F) C) and D)

Question 5

If the Fed increases the money supply,

Accepted Answer

A)   the interest rate increases, which tends to raise stock prices.
B)   the interest rate increases, which tends to reduce stock prices.
C)   the interest rate decreases, which tends to raise stock prices.
D)   the interest rate decreases, which tends to reduce stock prices.E) C) and D)
F) None of the above

Question 6

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 B)

Question 7

Figure 16-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.
 1, A)  the price level is held fixed at P1. B)  the interest rate is held fixed at r1. C)  the money supply is changing so as to keep the money market in equilibrium. D)  the expected inflation rate is changing so as to keep the real interest rate constant. " class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 16-2. As we move from one point to another along the money-demand curve MD1,

Accepted Answer

A)   the price level is held fixed at P1.
B)   the interest rate is held fixed at r1.
C)   the money supply is changing so as to keep the money market in equilibrium.
D)   the expected inflation rate is changing so as to keep the real interest rate constant.E) C) and D)
F) None of the above

Question 8

If the inflation rate is zero, then

Accepted Answer

A)   both the nominal interest rate and the real interest rate can fall below zero.
B)   the nominal interest rate can fall below zero, but the real interest rate cannot fall below zero.
C)   the real interest rate can fall below zero, but the nominal interest rate cannot fall below zero.
D)   neither the nominal interest rate nor the real interest rate can fall below zero.E) B) and D)
F) None of the above

Question 9

Which of the following raises 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) All of the above
F) B) and D)

Question 10

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?

Accepted Answer

A)   decrease taxes
B)   increase government expenditures
C)   increase the money supply
D)   None of the above is correct.E) A) and C)
F) None of the above D

Question 11

If there is excess money supply, people will

Accepted Answer

A)   deposit more into interest-bearing accounts, and the interest rate will fall.
B)   deposit more into interest-bearing accounts, and the interest rate will rise.
C)   withdraw money from interest-bearing accounts, and the interest rate will fall.
D)   withdraw money from interest-bearing accounts, and the interest rate will rise.E) C) and D)
F) B) and C)

Question 12

During recessions, automatic stabilizers tend to make the government's budget

Accepted Answer

A)   move toward deficit.
B)   move toward surplus.
C)   move toward balance.
D)   not necessarily move the budget in any particular direction.E) C) and D)
F) A) and D) A

Question 13

The lag problem associated with fiscal policy is due mostly to

Accepted Answer

A)   the fact that business firms make investment plans far in advance.
B)   the political system of checks and balances that slows down the process of implementing fiscal policy.
C)   the time it takes for changes in government spending or taxes to affect the interest rate.
D)   All of the above are correct.E) B) and D)
F) A) and B) B

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

Keynes used the term "animal spirits" to refer to

Accepted Answer

A)   policy makers harming the economy in the pursuit of self interest.
B)   arbitrary changes in attitudes of household and firms.
C)   mean-spirited economists who believed in the classical dichotomy.
D)   firms' relentless efforts to maximize profits.E) C) and D)
F) A) and C)

Question 16

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

Accepted Answer

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

Question 17

Stock prices often rise when the Fed raises interest rates.

Accepted Answer

A) True 
 B)False

Question 18

If the multiplier is 6.25, then the MPC is

Accepted Answer

A)   0.2.
B)   0.6.
C)   0.75.
D)   0.84.E) C) and D)
F) A) and B)

Question 19

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

Accepted Answer

A)   buy bonds to increase the money supply.
B)   buy bonds to decrease the money supply.
C)   sell bonds to increase the money supply.
D)   sell bonds to decrease the money supply.E) A) and D)
F) All of the above

Question 20

Keynes argued that aggregate demand is

Accepted Answer

A)   stable, because the economy tends to return to its long-run equilibrium quickly after any disturbance to aggregate demand.
B)   stable, because changes in consumption are mostly offset by changes in investment and vice versa.
C)   unstable, because waves of pessimism and optimism create fluctuations in aggregate demand.
D)   unstable, because of long and variable policy lags that worsen economic fluctuations.E) None of the above
F) A) and B)

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

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

According to liquidity preference theory, a decrease in the price level shifts the

Correct Answer
verified

If the Fed increases the money supply,

Correct Answer
verified

As the interest rate falls,

Correct Answer
verified

Correct Answer
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If the inflation rate is zero, then

Correct Answer
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Which of the following raises the interest rate?

Correct Answer
verified

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?

Correct Answer
verified
D

If there is excess money supply, people will

Correct Answer
verified

During recessions, automatic stabilizers tend to make the government's budget

Correct Answer
verified
A

The lag problem associated with fiscal policy is due mostly to

Correct Answer
verified
B

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.

Correct Answer
verified

Keynes used the term "animal spirits" to refer to

Correct Answer
verified

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

Correct Answer
verified

Stock prices often rise when the Fed raises interest rates.

Correct Answer
verified

If the multiplier is 6.25, then the MPC is

Correct Answer
verified

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

Correct Answer
verified

Keynes argued that aggregate demand is

Correct Answer
verified

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to liquidity preference theory, a decrease in the price level shifts the

Correct AnswerverifiedShow Answer

If the Fed increases the money supply,

Correct AnswerverifiedShow Answer

As the interest rate falls,

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the inflation rate is zero, then

Correct AnswerverifiedShow Answer

Which of the following raises the interest rate?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedD

If there is excess money supply, people will

Correct AnswerverifiedShow Answer

During recessions, automatic stabilizers tend to make the government's budget

Correct AnswerverifiedA

The lag problem associated with fiscal policy is due mostly to

Correct AnswerverifiedB

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.

Correct AnswerverifiedShow Answer

Keynes used the term "animal spirits" to refer to

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Stock prices often rise when the Fed raises interest rates.

Correct AnswerverifiedShow Answer

If the multiplier is 6.25, then the MPC is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Keynes argued that aggregate demand is

Correct AnswerverifiedShow Answer

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D

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A

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B

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