Question 1

If the stock market booms, then

Accepted Answer

A)  aggregate demand increases, which the Fed could offset by increasing the money supply.
B)  aggregate supply increases, which the Fed could offset by increasing the money supply.
C)  aggregate demand increases, which the Fed could offset by decreasing the money supply.
D)  aggregate supply increases, which the Fed could offset by decreasing the money supply.E) B) and C)
F) A) and B)

Question 2

If the Federal Reserve increases the money supply, then initially there is a

Accepted Answer

A)  shortage in the money market, so people will want to sell bonds.
B)  shortage in the money market, so people will want to buy bonds.
C)  surplus in the money market, so people will want to sell bonds.
D)  surplus in the money market, so people will want to buy bonds.E) B) and D)
F) None of the above

Question 3

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

Question 4

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

Question 5

If the multiplier is 6 and if there is no crowding-out effect, then a $60 billion increase in government expenditures causes aggregate demand to

Accepted Answer

A)  increase by $250 billion.
B)  increase by $333 billion.
C)  increase by $360 billion.
D)  None of the above are correct.E) A) and C)
F) A) and D)

Question 6

The logic of the multiplier effect applies

Accepted Answer

A)  only to changes in government spending.
B)  to any change in spending on any component of GDP.
C)  only to changes in the money supply.
D)  only when the crowding-out effect is sufficiently strong.E) A) and B)
F) A) and C)

Question 7

People are likely to want to hold more money if the interest rate

Accepted Answer

A)  increases, making the opportunity cost of holding money rise.
B)  increases, making the opportunity cost of holding money fall.
C)  decreases, making the opportunity cost of holding money rise.
D)  decreases, making the opportunity cost of holding money fall.E) A) and D)
F) None of the above

Question 8

The Kennedy tax cut of 1964 included an investment tax credit that was designed to

Accepted Answer

A)  increase aggregate demand in the short run and aggregate supply in the long run.
B)  increase aggregate supply in the short run and aggregate demand in the long run.
C)  only increase aggregate supply in the long run.
D)  only increase aggregate demand in the short run.E) B) and C)
F) A) and D)

Question 9

To decrease the interest rate the Federal Reserve could

Accepted Answer

A)  buy bonds. The fall in the interest rate would increase investment spending.
B)  buy bonds. The fall in the interest rate would decrease investment spending.
C)  sell bonds. The fall in the interest rate would increase investment spending
D)  sell bonds. The fall in the interest rate would decrease investment spending.E) A) and C)
F) None of the above

Question 10

Which of the following statements is correct for the long run?

Accepted Answer

A)  Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for money; the price level adjusts to balance the supply and demand for loanable funds.
B)  Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.
C)  Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level is relatively slow to adjust.
D)  Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.E) A) and B)
F) A) and D)

Question 11

Figure 21-4. On the figure, MS represents money supply and MD represents money demand. 3 to r1? A) a decrease in the price level B) a decrease in the number of firms building new factories and buying new equipment C) an increase in the price level D) an increase in the number of firms building new factories and buying new equipment" class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 21-4. Which of the following events could explain a decrease in the equilibrium interest rate from r3 to r1?

Accepted Answer

A)  a decrease in the price level
B)  a decrease in the number of firms building new factories and buying new equipment
C)  an increase in the price level
D)  an increase in the number of firms building new factories and buying new equipmentE) A) and B)
F) A) and C)

Question 12

Automatic stabilizers

Accepted Answer

A)  increase the problems that lags cause in using fiscal policy as a stabilization tool.
B)  are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.
C)  are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession.
D)  All of the above are correct.E) A) and C)
F) All of the above

Question 13

Assume the MPC is 0.75. Assume there is a multiplier effect and that the total crowding-out effect is $6 billion. An increase in government purchases of $10 billion will shift aggregate demand to the

Accepted Answer

A)  left by $24 billion.
B)  left by $36 billion.
C)  right by $34 billion.
D)  right by $36 billion.E) B) and C)
F) A) and B)

Question 14

According to the theory of liquidity preference, the interest rate adjusts to balance the supply of, and demand for, loanable funds.

Accepted Answer

A) True 
 B)False

Question 15

Monetary policy affects the economy with a long lag, in part because

Accepted Answer

A)  proposals to change monetary policy must go through both the House and Senate before being sent to the president.
B)  monetary policy works through changes in interest rates, and the Fed does not have the ability to change interest rates quickly.
C)  changes in interest rates primarily influence consumption spending, and households make consumption plans far in advance.
D)  changes in interest rates primarily influence investment spending, and firms make investment plans far in advance.E) None of the above
F) A) and B)

Question 16

Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more,

Accepted Answer

A)  the smaller the MPC and the stronger the influence of income on money demand.
B)  the smaller the MPC and the weaker the influence of income on money demand.
C)  the larger the MPC and the stronger the influence of income on money demand.
D)  the larger the MPC and the weaker the influence of income on money demand.E) A) and B)
F) None of the above

Question 17

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

Question 18

The primary argument against active monetary and fiscal policy is that

Accepted Answer

A)  attempts to stabilize the economy do not constitute a proper role for government in a democratic society.
B)  these policies affect the economy with a long lag.
C)  these policies affect the economy too quickly and with too much impact.
D)  history demonstrates that interest rates respond unpredictably to active policies, leading to unpredictable effects on income.E) B) and D)
F) A) and C)

Question 19

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

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

Question 20

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

Accepted Answer

A)  r = 0.03, P = 1.2
B)  r = 0.03, P = 1.3
C)  r = 0.04, P = 1.2
D)  r = 0.05, P = 0.9E) C) and D)
F) B) and C)

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

If the multiplier is 6 and if there is no crowding-out effect, then a $60 billion increase in government expenditures causes aggregate demand to

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The primary argument against active monetary and fiscal policy is that

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Critics of stabilization policy argue that

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Which of the following statements is correct for the long run?

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If the stock market booms, then

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If the Federal Reserve increases the money supply, then initially there is a

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Automatic stabilizers

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Monetary policy affects the economy with a long lag, in part because

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The Kennedy tax cut of 1964 included an investment tax credit that was designed to

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

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The logic of the multiplier effect applies

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

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

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

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Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Which of the following events could explain a decrease in the equilibrium interest rate from r3 to r1?

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Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more,

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People are likely to want to hold more money if the interest rate

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Assume the MPC is 0.75. Assume there is a multiplier effect and that the total crowding-out effect is $6 billion. An increase in government purchases of $10 billion will shift aggregate demand to the

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According to the theory of liquidity preference, the interest rate adjusts to balance the supply of, and demand for, loanable funds.

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To decrease the interest rate the Federal Reserve could

Correct AnswerverifiedShow Answer

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Figure 21-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-4. Which of the following events could explain a decrease in the equilibrium interest rate from r₃ to r₁?

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