Question 1

If Congress increases taxes to balance the federal budget, then to prevent unemployment and a recession the Fed will

Accepted Answer

A)   reduce interest rates by increasing the money supply.
B)   increase interest rates by decreasing the money supply.
C)   increase interest rates by increasing the money supply.
D)   reduce interest rates by decreasing the money supply.E) None of the above
F) C) and D)

Question 2

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

Accepted Answer

A)   MPC = 1/2, and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures.
B)   MPC = 2/3, and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures
C)   MPC = 3/4, and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures
D)   All of the above are correct.E) C) and D)
F) B) and C)

Question 3

An decrease in taxes shifts aggregate demand

Accepted Answer

A)   to the right. The larger the multiplier is, the farther it shifts.
B)   to the right. The larger the multiplier is, the less it shifts.
C)   to the left. The larger the multiplier is, the farther it shifts.
D)   to the left. The larger the multiplier is, the less it shifts.E) A) and B)
F) A) and D)

Question 4

Assume the money market is initially in equilibrium. If the price level decreases, then according to liquidity preference theory there is an excess

Accepted Answer

A)   supply of money until the interest rate increases.
B)   supply of money until the interest rate decreases.
C)   demand for money until the interest rate increases.
D)   demand for money until the interest rate decreases.E) B) and C)
F) A) and D)

Question 5

During recessions, the government tends to run a budget deficit.

Accepted Answer

A) True 
 B)False

Question 6

If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, 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) A) and B)
F) C) and D)

Question 7

If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by

Accepted Answer

A)   $60 billion, but the effect would be larger if there were an investment accelerator.
B)   $60 billion, but the effect would be smaller if there were an investment accelerator.
C)   $45 billion, but the effect would be larger if there were an investment accelerator.
D)   $45 billion, but the effect would be smaller if there were an investment accelerator.E) A) and C)
F) B) and C)

Question 8

If the multiplier is 5.25, then the MPC is

Accepted Answer

A)   0.19.
B)   0.68.
C)   0.81.
D)   0.84.E) A) and B)
F) A) and C)

Question 9

Critics of stabilization policy argue that

Accepted Answer

A)   "animal spirits" must be offset by active monetary policy.
B)   active monetary policy is necessary for steady economic growth.
C)   the lag problem ends up being a cause of economic fluctuations.
D)   active fiscal policy is required for steady economic growth.E) A) and D)
F) B) and C)

Question 10

When the Federal Reserve decreases the Federal Funds target rate, the lower rate is achieved through

Accepted Answer

A)   sales of government bonds, which reduces interest rates and causes people to hold less money.
B)   purchases of government bonds, which reduces interest rates and causes people to hold less money.
C)   purchases of government bonds, which reduces interest rates and causes people to hold more money.
D)   sales of government bonds, which reduces interest rates and causes people to hold more money.E) B) and D)
F) B) and C)

Question 11

A 2009 article in The Economist noted that

Accepted Answer

A)   recent research has allowed economists to estimate the values of fiscal multipliers with a great deal of precision.
B)   research on multipliers indicates that multipliers for permanent tax cuts tend to be smaller than multipliers for temporary tax cuts.
C)   most of the evidence on multipliers for government spending is based on changes in military expenditures.
D)   All of the above are correct.E) A) and C)
F) A) and B)

Question 12

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 13

When government expenditures increase, the interest rate

Accepted Answer

A)   increases, making the change in aggregate demand larger.
B)   increases, making the change in aggregate demand smaller
C)   decreases, making the change in aggregate demand larger.
D)   decreases, making the change in aggregate demand smaller.E) None of the above
F) A) and B)

Question 14

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) All of the above
F) B) and D)

Question 15

Figure 34-7 
-Refer to Figure 34-7. Which of the following is correct?

Accepted Answer

A)   A wave of optimism could move the economy from point a to point b. 
B)   If aggregate demand moves from AD1 to AD2, the economy will stay at point b in both the short run and long run.
C)   It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2.
D)   All of the above are correct.E) None of the above
F) All of the above

Question 16

The interest-rate effect

Accepted Answer

A)   depends on the idea that decreases in interest rates increase the quantity of goods and services demanded.
B)   depends on the idea that decreases in interest rates decrease the quantity of goods and services demanded.
C)   is responsible for the downward slope of the money-demand curve.
D)   is the least important reason, in the case of the United States, for the downward slope of the aggregate- demand curve.E) A) and C)
F) None of the above

Question 17

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $50 billion to the left. The government wants to change its spending to offset this decrease in demand. The MPC is 0.80. Suppose the effect on aggregate demand from a change in taxes is 4/5 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 aggregate demand?

Accepted Answer

A)   Raise both taxes and expenditures by $5.56 billion dollars.
B)   Raise taxes by $40 billion dollars and increase expenditures by $50 billion dollars.
C)   Reduce taxes by $10 billion dollars and increase expenditures by $10 billion dollars.
D)   Reduce taxes by $5.56 billion dollars and increase expenditures by $5.56 billion dollars.E) C) and D)
F) All of the above

Question 18

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

Accepted Answer

A)   liquidity preference.
B)   liquidity trap.
C)   open-market trap.
D)   interest-rate contraction.E) B) and D)
F) All of the above

Question 19

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Accepted Answer

A) True 
 B)False

Question 20

If the interest rate is below 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) C) and D)
F) A) and B)

Exam 24: The Influence of Monetary and Fiscal Policy on Aggregate Demand

When government expenditures increase, the interest rate

Correct Answer
verified

If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, it could

Correct Answer
verified

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

Correct Answer
verified

If Congress increases taxes to balance the federal budget, then to prevent unemployment and a recession the Fed will

Correct Answer
verified

Critics of stabilization policy argue that

Correct Answer
verified

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

Correct Answer
verified

Keynes used the term "animal spirits" to refer to

Correct Answer
verified

An decrease in taxes shifts aggregate demand

Correct Answer
verified

Correct Answer
verified

The interest-rate effect

Correct Answer
verified

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

Correct Answer
verified

During recessions, the government tends to run a budget deficit.

Correct Answer
verified

Figure 34-7 -Refer to Figure 34-7. Which of the following is correct?

Correct Answer
verified

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Correct Answer
verified

If the multiplier is 5.25, then the MPC is

Correct Answer
verified

If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by

Correct Answer
verified

When the Federal Reserve decreases the Federal Funds target rate, the lower rate is achieved through

Correct Answer
verified

A 2009 article in The Economist noted that

Correct Answer
verified

Assume the money market is initially in equilibrium. If the price level decreases, then according to liquidity preference theory there is an excess

Correct Answer
verified

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

Correct Answer
verified

Exam 24: The Influence of Monetary and Fiscal Policy on Aggregate Demand

When government expenditures increase, the interest rate

Correct AnswerverifiedShow Answer

If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, it could

Correct AnswerverifiedShow Answer

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

Correct AnswerverifiedShow Answer

If Congress increases taxes to balance the federal budget, then to prevent unemployment and a recession the Fed will

Correct AnswerverifiedShow Answer

Critics of stabilization policy argue that

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Keynes used the term "animal spirits" to refer to

Correct AnswerverifiedShow Answer

An decrease in taxes shifts aggregate demand

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The interest-rate effect

Correct AnswerverifiedShow Answer

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

Correct AnswerverifiedShow Answer

During recessions, the government tends to run a budget deficit.

Correct AnswerverifiedShow Answer

Figure 34-7 -Refer to Figure 34-7. Which of the following is correct?

Correct AnswerverifiedShow Answer

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.

Correct AnswerverifiedShow Answer

If the multiplier is 5.25, then the MPC is

Correct AnswerverifiedShow Answer

If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by

Correct AnswerverifiedShow Answer

When the Federal Reserve decreases the Federal Funds target rate, the lower rate is achieved through

Correct AnswerverifiedShow Answer

A 2009 article in The Economist noted that

Correct AnswerverifiedShow Answer

Assume the money market is initially in equilibrium. If the price level decreases, then according to liquidity preference theory there is an excess

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct Answer
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