Question 1

The term crowding-out effect refers to

Accepted Answer

A)  the reduction in aggregate supply that results when a monetary expansion causes the interest rate to decrease.
B)  the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease.
C)  the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase.
D)  the reduction in aggregate demand that results when a decrease in government spending or an increase in taxes causes the interest rate to increase.E) B) and D)
F) A) and D)

Question 2

Depending on the size of the multiplier and crowding-out effects,the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Accepted Answer

A) True 
 B)False

Question 3

In order to simplify the equation for the multiplier to its familiar,relatively simple form,we make use of the

Accepted Answer

A)  assumption that increases in government purchases have no effect on consumer spending.
B)  assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred.
C)  empirical evidence that points to a value of about  3/43 / 43/4  for the MPC.
D)  fact that the multiplier effect is represented by an infinite geometric series. E) B) and C)
F) B) and D)

Question 4

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) B) and C)

Question 5

Liquidity preference theory is most relevant to the

Accepted Answer

A)  short run and supposes that the price level adjusts to bring money supply and money demand into balance.
B)  short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.
C)  long run and supposes that the price level adjusts to bring money supply and money demand into balance.
D)  long run and supposes that the interest rate adjusts to bring money supply and money demand into balance.E) None of the above
F) A) and B)

Question 6

An increase in the MPC

Accepted Answer

A)  increases the multiplier,so that changes in government expenditures have a larger effect on aggregate demand.
B)  increases the multiplier,so that changes in government expenditures have a smaller effect on aggregate demand.
C)  decreases the multiplier,so that changes in government expenditures have a larger effect on aggregate demand.
D)  decreases the multiplier,so that changes in government expenditures have a smaller effect on aggregate demand.E) A) and D)
F) None of the above

Question 7

Monetary policy and fiscal policy are the only factors that influence aggregate demand.

Accepted Answer

A) True 
 B)False

Question 8

If the marginal propensity to consume is 6/7,then the multiplier is 7.

Accepted Answer

A) True 
 B)False

Question 9

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

Accepted Answer

A) True 
 B)False

Question 10

A decrease in government spending initially and primarily shifts

Accepted Answer

A)  aggregate demand to the right.
B)  aggregate demand to the left.
C)  aggregate supply to the right.
D)  neither aggregate demand nor aggregate supply.E) None of the above
F) A) and B)

Question 11

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Accepted Answer

A) True 
 B)False

Question 12

In the short run,a decrease in the money supply causes interest rates to

Accepted Answer

A)  increase,and aggregate demand to shift right.
B)  increase,and aggregate demand to shift left.
C)  decrease,and aggregate demand to shift right.
D)  decrease,and aggregate demand to shift left.E) C) and D)
F) B) and D)

Question 13

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Accepted Answer

If the interest rate is above equilibriu...

Question 14

According to liquidity preference theory,

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 C)
F) B) and D)

Question 15

A tax cut shifts the aggregate demand curve the farthest if

Accepted Answer

A)  the MPC is large and if the tax cut is permanent.
B)  the MPC is large and if the tax cut is temporary.
C)  the MPC is small and if the tax cut is permanent.
D)  the MPC is small and if the tax cut is temporary.E) All of the above
F) None of the above

Question 16

What is the difference between monetary policy and fiscal policy?

Accepted Answer

Monetary policy consists of po...

Question 17

Which of the following shifts aggregate demand to the left?

Accepted Answer

A)  an increase in the price level
B)  an increase in the money supply
C)  a decrease in the price level
D)  a decrease in the money supplyE) A) and B)
F) B) and D)

Question 18

Consider the following sequence of events:
Price level  ↑⇒\uarr\Rightarrow↑⇒ demand for money  ↑⇒\uarr\Rightarrow↑⇒ equilibrium interest rate  ↑⇒\uarr\Rightarrow↑⇒ quantity of goods and services demanded  ↓\downarrow↓ 
This 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) All of the above
F) B) and D)

Question 19

If the MPC is 4/5,the multiplier is 5/4.

Accepted Answer

A) True 
 B)False

Question 20

A decrease in the interest rate could have been caused by the money-demand curve shifting

Accepted Answer

A)  leftward because the price level fell.
B)  leftward because the price level rose
C)  rightward because the price level fell.
D)  rightward because the price level rose.E) None of the above
F) C) and D)

Exam 35: The Influence of Monetary and Fiscal Policy on Aggregate Demand

If the MPC is 4/5,the multiplier is 5/4.

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According to liquidity preference theory,

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Consider the following sequence of events: Price level ↑⇒\uarr\Rightarrow↑⇒ demand for money ↑⇒\uarr\Rightarrow↑⇒ equilibrium interest rate ↑⇒\uarr\Rightarrow↑⇒ quantity of goods and services demanded ↓\downarrow↓ This sequence explains why the

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Depending on the size of the multiplier and crowding-out effects,the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

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A decrease in government spending initially and primarily shifts

Correct AnswerverifiedShow Answer

A tax cut shifts the aggregate demand curve the farthest if

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Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Correct AnswerverifiedShow Answer

In the short run,a decrease in the money supply causes interest rates to

Correct AnswerverifiedShow Answer

The primary argument against active monetary and fiscal policy is that

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If the marginal propensity to consume is 6/7,then the multiplier is 7.

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Which of the following shifts aggregate demand to the left?

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An increase in the MPC

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What is the difference between monetary policy and fiscal policy?

Correct AnswerverifiedMonetary policy consists of po...View AnswerShow Answer

In order to simplify the equation for the multiplier to its familiar,relatively simple form,we make use of the

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Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

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Monetary policy and fiscal policy are the only factors that influence aggregate demand.

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A decrease in the interest rate could have been caused by the money-demand curve shifting

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Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Correct AnswerverifiedIf the interest rate is above equilibriu...View AnswerShow Answer

The term crowding-out effect refers to

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Liquidity preference theory is most relevant to the

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Consider the following sequence of events: Price level $\uarr\Rightarrow$ demand for money $\uarr\Rightarrow$ equilibrium interest rate $\uarr\Rightarrow$ quantity of goods and services demanded $\downarrow$ This sequence explains why the

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Monetary policy consists of po...
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If the interest rate is above equilibriu...
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