Question 1

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

Accepted Answer

A)   wealth effect, exchange-rate effect, interest-rate effect
B)   exchange-rate effect, interest-rate effect, wealth effect
C)   interest-rate effect, wealth effect, exchange-rate effect
D)   interest-rate effect, exchange-rate effect, wealth effectE) B) and C)
F) A) and D)

Question 2

According to the theory of liquidity preference, if output decreases

Accepted Answer

A)   people want to hold more money. This response is shown as a movement along the money demand curve.
B)   people want to hold more money. This response is shown as a shift of the money demand curve.
C)   people want to hold less money. This response is shown as a movement along the money demand curve.
D)   people want to hold less money. This response is shown as a shift of the money demand curve.E) A) and B)
F) B) and C)

Question 3

Policymakers use _____ policy and _____ policy to stabilize _____ and _____ in the short run.

Accepted Answer

monetary, ...

Question 4

Which of the following shifts aggregate demand to the right?

Accepted Answer

A)   The price level rises.
B)   The price level falls.
C)   The Fed purchases government bonds on the open market.
D)   None of the above is correct.E) B) and D)
F) B) and C)

Question 5

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 6

An increase 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 in either direction.E) A) and D)
F) A) and C)

Question 7

For the following questions, use the diagram below:
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) A) and C)
F) B) and C)

Question 8

How does a reduction in the money supply by the Fed make owning stocks less attractive?

Accepted Answer

The reduction in the money supply raises...

Question 9

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) All of the above

Question 10

Sometimes, changes in monetary policy and/or fiscal policy are intended to offset changes to aggregate demand over which policymakers have little or no control.

Accepted Answer

A) True 
 B)False

Question 11

According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

Accepted Answer

A)   rises and the aggregate quantity of goods demanded rises.
B)   rises and the aggregate quantity of goods demanded falls.
C)   falls and the aggregate quantity of goods demanded rises.
D)   falls and the aggregate quantity of goods demanded falls.E) C) and D)
F) B) and D)

Question 12

To stabilize interest rates, the Federal Reserve will respond to an increase in money demand by

Accepted Answer

A)   buying government bonds, which decreases the supply of money.
B)   selling government bonds, which increases the supply of money.
C)   buying government bonds, which increases the supply of money.
D)   selling government bonds, which decreases the supply of money.E) B) and D)
F) A) and C)

Question 13

When taxes 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) A) and B)
F) A) and C)

Question 14

The Fed is concerned about stock market booms because the booms

Accepted Answer

A)   increase consumption spending.
B)   increase investment spending.
C)   increase both consumption and investment spending.
D)   None of the above is correct.E) A) and C)
F) C) and D)

Question 15

Figure 34-8 
-Refer to Figure 34-8. An increase in taxes will

Accepted Answer

A)   shift aggregate demand from AD1 to AD2.
B)   shift aggregate demand from AD1 to AD3.
C)   cause movement from point A to point B along AD1.
D)   have no effect on aggregate demand.E) B) and C)
F) A) and B)

Question 16

According to liquidity preference theory, the money-supply curve would shift if the Fed

Accepted Answer

A)   engaged in open-market operations.
B)   increased money demand.
C)   increase the real income.
D)   did any of the above.E) B) and C)
F) None of the above

Question 17

In a certain economy, when income is $400, consumer spending is $325. The value of the multiplier for this economy is 3.33. It follows that, when income is $450, consumer spending is

Accepted Answer

A)   $360. For this economy, an initial increase of $50 in consumer spending translates into a $266.67 increase in aggregate demand.
B)   $360. For this economy, an initial increase of $50 in consumer spending translates into a $166.50 increase in aggregate demand.
C)   $341.67. For this economy, an initial increase of $50 in consumer spending translates into a $266.67 increase in aggregate demand.
D)   $341.67. For this economy, an initial increase of $50 in consumer spending translates into a $166.25 increase in aggregate demand.E) A) and B)
F) A) and C)

Question 18

Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could

Accepted Answer

A)   increase the money supply. This increase would also move the price level closer to its value before the rise in stock prices.
B)   increase the money supply. However, this increase would move the price level farther from its value before the rise in stock prices.
C)   decrease the money supply. This decrease would also move the price level closer to its value before the rise in stock prices.
D)   decrease the money supply. However, this decrease would move the price level farther from its value before the rise in stock prices.E) None of the above
F) A) and B)

Question 19

If the price level rises, then

Accepted Answer

A)   the interest rate falls and spending on goods and services falls.
B)   the interest rate falls and spending on goods and services rises.
C)   the interest rate rises and spending on goods and services falls.
D)   the interest rate rises and spending on goods and services rises.E) C) and D)
F) B) and C)

Question 20

The multiplier is computed as MPC / (1 - MPC).

Accepted Answer

A) True 
 B)False

Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

When taxes increase, the interest rate

Correct AnswerverifiedShow Answer

According to the theory of liquidity preference, if output decreases

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Sometimes, changes in monetary policy and/or fiscal policy are intended to offset changes to aggregate demand over which policymakers have little or no control.

Correct AnswerverifiedShow Answer

In a certain economy, when income is $400, consumer spending is $325. The value of the multiplier for this economy is 3.33. It follows that, when income is $450, consumer spending is

Correct AnswerverifiedShow Answer

Policymakers use _____ policy and _____ policy to stabilize _____ and _____ in the short run.

Correct Answerverifiedmonetary, ...View AnswerShow Answer

Which of the following shifts aggregate demand to the right?

Correct AnswerverifiedShow Answer

An increase in government spending initially and primarily shifts

Correct AnswerverifiedShow Answer

The Fed is concerned about stock market booms because the booms

Correct AnswerverifiedShow Answer

Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could

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

For the following questions, use the diagram below: Figure 34-7 -Refer to Figure 34-7. Which of the following is correct?

Correct AnswerverifiedShow Answer

How does a reduction in the money supply by the Fed make owning stocks less attractive?

Correct AnswerverifiedThe reduction in the money supply raises...View AnswerShow Answer

The multiplier is computed as MPC / (1 - MPC).

Correct AnswerverifiedShow Answer

According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

Correct AnswerverifiedShow Answer

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

Correct AnswerverifiedShow Answer

If the price level rises, then

Correct AnswerverifiedShow Answer

According to liquidity preference theory, the money-supply curve would shift if the Fed

Correct AnswerverifiedShow Answer

To stabilize interest rates, the Federal Reserve will respond to an increase in money demand by

Correct AnswerverifiedShow Answer

Figure 34-8 -Refer to Figure 34-8. An increase in taxes will

Correct AnswerverifiedShow Answer

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Policymakers use ___ policy and _ policy to stabilize _ and ___ in the short run.

Correct Answer
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monetary, ...
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The reduction in the money supply raises...
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