Question 1

Keynes argued that aggregate demand is

Accepted Answer

A)  stable, because the economy tends to return to its long-run equilibrium quickly after any disturbance to aggregate demand.
B)  stable, because changes in consumption are mostly offset by changes in investment and vice versa.
C)  unstable, because waves of pessimism and optimism create fluctuations in aggregate demand.
D)  unstable, because of long and variable policy lags that worsen economic fluctuations.E) A) and C)
F) None of the above

Question 2

In the short run, open-market sales

Accepted Answer

A)  increase the price level and real GDP.
B)  decrease the price level and real GDP.
C)  increases the price level and decreases real GDP.
D)  decreases the price level and increases real GDP.E) C) and D)
F) All of the above

Question 3

Figure 21-1 
-Refer to Figure 21-1. Which of the following is correct?

Accepted Answer

A)  If the interest rate is 4 percent, there is excess money demand, and the interest rate will fall.
B)  If the interest rate is 3 percent, there is excess money supply, and the interest rate will rise.
C)  Starting with an interest rate of 4 percent, the demand for goods and services will increase until the money market reaches a new equilibrium.
D)  None of the above is correct.E) A) and C)
F) A) and D)

Question 4

Which of the following illustrates how the investment accelerator works?

Accepted Answer

A)  An increase in government expenditures increases the interest rate so that the Burgerville chain of restaurants decides to build fewer new restaurants.
B)  An increase in government expenditures increases aggregate spending so that Burgerville finds it profitable to build more new restaurants.
C)  An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by Burgerville increases.
D)  An increase in government expenditures decreases the interest rate so that Burgerville decides to build more new restaurants.E) B) and C)
F) None of the above

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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) C) and D)
F) None of the above

Question 7

An increase in the money supply decreases the equilibrium interest rate and shifts the aggregate-demand curve to the right.

Accepted Answer

A) True 
 B)False

Question 8

The lag problem associated with fiscal policy is due mostly to

Accepted Answer

A)  the fact that business firms make investment plans far in advance.
B)  the political system of checks and balances that slows down the process of implementing fiscal policy.
C)  the time it takes for changes in government spending or taxes to affect the interest rate.
D)  All of the above are correct.E) B) and D)
F) B) and C)

Question 9

The theory of liquidity preference is largely at odds with the basic ideas of supply and demand.

Accepted Answer

A) True 
 B)False

Question 10

The positive feedback from aggregate demand to investment is called

Accepted Answer

A)  the investment multiplier.
B)  the stock-market effect.
C)  the investment accelerator.
D)  the crowding-in multiplier.E) C) and D)
F) A) and C)

Question 11

As income rises

Accepted Answer

A)  money demand rises, so the interest rate rises.
B)  money demand rises, so the interest rate falls
C)  money demand falls, so the interest rate rises.
D)  money demand falls, so the interest rate falls.E) B) and D)
F) C) and D)

Question 12

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

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 D)
F) C) and D)

Question 13

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 14

During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.

Accepted Answer

A) True 
 B)False

Question 15

Government purchases are said to have a

Accepted Answer

A)  multiplier effect on aggregate supply.
B)  multiplier effect on aggregate demand.
C)  liquidity-enhancing effect on aggregate supply.
D)  liquidity-enhancing effect on aggregate demand.E) None of the above
F) A) and B)

Question 16

If the MPC is 3/4 then the multiplier is

Accepted Answer

A)  4, so a $100 increase in government spending increases aggregate demand by $400.
B)  4, so a $100 increase in government spending increases output by $400.
C)  4/3, so a $100 increase in government spending increases aggregate demand by $400/3.
D)  4/3, so a $100 increase in government spending increases output by $400/3.E) All of the above
F) A) and C)

Question 17

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

Question 18

When the Fed buys government bonds, the reserves of the banking system

Accepted Answer

A)  increase, so the money supply increases.
B)  increase, so the money supply decreases.
C)  decrease, so the money supply increases.
D)  decrease, so the money supply decreases.E) A) and B)
F) None of the above

Question 19

If the Fed conducts open-market purchases, then which of the following quantities increase(s) ?

Accepted Answer

A)  interest rates and investment spending
B)  interest rates, but not investment spending
C)  investment spending, but not interest rates
D)  neither interest rates nor investment spendingE) C) and D)
F) None of the above

Question 20

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

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

An increase in the money supply decreases the equilibrium interest rate and shifts the aggregate-demand curve to the right.

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Government purchases are said to have a

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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 lag problem associated with fiscal policy is due mostly to

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Figure 21-1 -Refer to Figure 21-1. Which of the following is correct?

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

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Which of the following shifts aggregate demand to the left?

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If the Fed conducts open-market purchases, then which of the following quantities increase(s) ?

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

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The theory of liquidity preference is largely at odds with the basic ideas of supply and demand.

Correct AnswerverifiedShow Answer

The positive feedback from aggregate demand to investment is called

Correct AnswerverifiedShow Answer

Keynes argued that aggregate demand is

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

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During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.

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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?"

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When the Fed buys government bonds, the reserves of the banking system

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Which of the following illustrates how the investment accelerator works?

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In the short run, open-market sales

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As income rises

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If the MPC is 3/4 then the multiplier is

Correct AnswerverifiedShow Answer

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The reduction in the money supply raises...
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