Question 1

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

Question 2

Most economists believe that a cut in tax rates

Accepted Answer

A)   would generally increase government tax revenue.
B)   would have no effect on aggregate demand.
C)   has a relatively small effect on the aggregate-supply curve.
D)   All of the above are correct.E) None of the above
F) All of the above

Question 3

Which of the following correctly explains the crowding-out effect?

Accepted Answer

A)   An increase in government expenditures decreases the interest rate and so increases investment spending.
B)   An increase in government expenditures increases the interest rate and so reduces investment spending.
C)   A decrease in government expenditures increases the interest rate and so increases investment spending.
D)   A decrease in government expenditures decreases the interest rate and so reduces investment spending.E) A) and D)
F) B) and C)

Question 4

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) None of the above
F) All of the above

Question 5

An aide to a U.S.Congressman computes the effect on aggregate demand of a $20 billion tax cut.The actual increase in aggregate demand is less than the aide expected.Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand?

Accepted Answer

A)   The actual MPC was larger than the MPC the aide used to compute the multiplier.
B)   The aide thought the tax cut would be permanent,but the actual tax cut was temporary.
C)   The increase in income shifted money demand less than the aide had anticipated.
D)   The increase in income resulted in investment rising more than the aide had anticipated.E) C) and D)
F) A) and B)

Question 6

Who asserted that "the Federal Reserve's job is to take away the punch bowl just as the party gets going?"

Accepted Answer

A)   president George W.Bush
B)   president John F.Kennedy
C)   economist John Maynard Keynes
D)   former chairman of the Federal Reserve System William McChesney MartinE) A) and D)
F) A) and C)

Question 7

In the early 1960s,the Kennedy administration made considerable use of

Accepted Answer

A)   fiscal policy to stimulate the economy.
B)   fiscal policy to slow down the economy.
C)   monetary policy to stimulate the economy.
D)   monetary policy to slow down the economy.E) B) and D)
F) B) and C)

Question 8

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) None of the above
F) All of the above

Question 9

Scenario 24-2.The following facts apply to a small,imaginary economy.
• Consumption spending is $5,200 when income is $8,000.
• Consumption spending is $5,536 when income is $8,400.
-Refer to Scenario 24-2.In response to which of the following events could aggregate demand increase by $1,500?

Accepted Answer

A)   A stock-market boom increases households' wealth by $300,and there is an operative crowding-out effect.
B)   A stock-market boom increases households' wealth by $275,and there is an operative crowding-out effect.
C)   An economic boom overseas increases the demand for U.S.net exports by $240,and there is no crowding-out effect.
D)   Aggregate demand could increase by $1,500 in response to any of these events.E) A) and B)
F) C) and D)

Question 10

Economists who are skeptical about the relevance of "liquidity traps" argue that

Accepted Answer

A)   a central bank continues to have tools to stimulate the economy,even after its interest rate target hits its lower bound of zero.
B)   a central bank continues to have the option of committing itself to future monetary contraction,even after its interest rate target hits its lower bound of zero.
C)   a central bank can greatly reduce the likelihood of a liquidity trap by setting the target rate of inflation at zero.
D)   while the concept of a liquidity trap is theoretically possible,nothing resembling a liquidity trap ever has been observed in the real world.E) All of the above
F) A) and B)

Question 11

Suppose there are both multiplier and crowding out effects but without any accelerator effects.An increase in government expenditures would definitely

Accepted Answer

A)   shift aggregate demand right by a larger amount than the increase in government expenditures.
B)   shift aggregate demand right by the same amount as an the increase in government expenditures.
C)   shift aggregate demand right by a smaller amount than the increase in government expenditures.
D)   Any of the above outcomes are possible.E) None of the above
F) A) and B)

Question 12

Figure 24-1 
-Refer to Figure 24-1.If the current interest rate is 2 percent,

Accepted Answer

A)   there is an excess supply of money.
B)   people will sell more bonds,which drives interest rates up.
C)   as the money market moves to equilibrium,people will buy more goods.
D)   All of the above are correct.E) B) and D)
F) All of the above

Question 13

Scenario 24-2.The following facts apply to a small,imaginary economy.
• Consumption spending is $5,200 when income is $8,000.
• Consumption spending is $5,536 when income is $8,400.
-Refer to Scenario 24-2.The marginal propensity to consume for this economy is

Accepted Answer

A)   0.650.
B)   0.659.
C)   0.650 or 0.659,depending on whether income is $8,000 or $8,400.
D)   0.840.E) A) and D)
F) None of the above

Question 14

Figure 24-4.On the figure,MS represents money supply and MD represents money demand. 2.If the current interest rate is r2,then A)  in response,the money-demand curve will shift downward from its current position to establish equilibrium in the money market. B)  people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. C)  bond issuers and banks will respond by lowering the interest rates they offer. D)  there is a surplus of money." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 24-4.Suppose the money-demand curve is currently MD2.If the current interest rate is r2,then

Accepted Answer

A)   in response,the money-demand curve will shift downward from its current position to establish equilibrium in the money market.
B)   people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts.
C)   bond issuers and banks will respond by lowering the interest rates they offer.
D)   there is a surplus of money.E) All of the above
F) C) and D)

Question 15

According to liquidity preference theory,an increase in the price level causes the interest rate to

Accepted Answer

A)   increase,which increases the quantity of goods and services demanded.
B)   increase,which decreases the quantity of goods and services demanded.
C)   decrease,which increases the quantity of goods and services demanded.
D)   decrease,which decreases the quantity of goods and services demanded.E) B) and D)
F) B) and C)

Question 16

In response to the sharp decline in stock prices in October 1987,the Federal Reserve

Accepted Answer

A)   increased interest rates,and the economy avoided a recession.
B)   increased interest rates,but the economy was unable to avoid a recession.
C)   decreased interest rates,and the economy avoided a recession.
D)   decreased interest rates,but the economy was unable to avoid a recession.E) B) and C)
F) All of the above

Question 17

Which U.S.president,when asked why he had proposed a tax cut,responded by saying "To stimulate the economy.Don't you remember your Economics 101?"

Accepted Answer

A)   Dwight D.Eisenhower
B)   John F.Kennedy
C)   Ronald Reagan
D)   Bill ClintonE) B) and C)
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 C)
F) A) and B)

Question 19

One of President Obama's first policy initiatives was a stimulus bill that included large increases in government spending.

Accepted Answer

A) True 
 B)False

Question 20

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

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) C) and D)

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

Which of the following correctly explains the crowding-out effect?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Suppose there are both multiplier and crowding out effects but without any accelerator effects.An increase in government expenditures would definitely

Correct AnswerverifiedShow Answer

In the early 1960s,the Kennedy administration made considerable use of

Correct AnswerverifiedShow Answer

According to liquidity preference theory,an increase in the price level causes the interest rate to

Correct AnswerverifiedShow Answer

Economists who are skeptical about the relevance of "liquidity traps" argue that

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

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

Correct AnswerverifiedShow Answer

Which U.S.president,when asked why he had proposed a tax cut,responded by saying "To stimulate the economy.Don't you remember your Economics 101?"

Correct AnswerverifiedShow Answer

Who asserted that "the Federal Reserve's job is to take away the punch bowl just as the party gets going?"

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

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Scenario 24-2.The following facts apply to a small,imaginary economy. • Consumption spending is $5,200 when income is $8,000. • Consumption spending is $5,536 when income is $8,400. -Refer to Scenario 24-2.The marginal propensity to consume for this economy is

Correct AnswerverifiedShow Answer

Scenario 24-2.The following facts apply to a small,imaginary economy. • Consumption spending is $5,200 when income is $8,000. • Consumption spending is $5,536 when income is $8,400. -Refer to Scenario 24-2.In response to which of the following events could aggregate demand increase by $1,500?

Correct AnswerverifiedShow Answer

Figure 24-1 -Refer to Figure 24-1.If the current interest rate is 2 percent,

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Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Suppose the money-demand curve is currently MD2.If the current interest rate is r2,then

Correct AnswerverifiedShow Answer

A decrease in government spending initially and primarily shifts

Correct AnswerverifiedShow Answer

In response to the sharp decline in stock prices in October 1987,the Federal Reserve

Correct AnswerverifiedShow Answer

An aide to a U.S.Congressman computes the effect on aggregate demand of a $20 billion tax cut.The actual increase in aggregate demand is less than the aide expected.Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand?

Correct AnswerverifiedShow Answer

Most economists believe that a cut in tax rates

Correct AnswerverifiedShow Answer

One of President Obama's first policy initiatives was a stimulus bill that included large increases in government spending.

Correct AnswerverifiedShow Answer

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Figure 24-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 24-4.Suppose the money-demand curve is currently MD₂.If the current interest rate is r₂,then

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