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

Question 1

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

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.

Answer 1

B

Question 2

The exchange-rate effect is based,in part,on the idea that

A)a decrease in the price level reduces the interest rate.
B)an increase in the price level causes investors to move some of their funds overseas.
C)an increase in the price level causes domestic goods to become less expensive relative to foreign goods.
D)a decrease in the price level reduces spending on net exports.

Answer 2

A

Question 3

The most important reason for the slope of the aggregate-demand curve is that as the price level

A)increases,interest rates increase,and investment decreases.
B)increases,interest rates decrease,and investment increases.
C)decreases,interest rates increase,and investment increases.
D)decreases,interest rates decrease,and investment decreases.

Answer 3

A

Question 4

Fiscal policy affects the economy

A)only in the short run.
B)only in the long run.
C)in both the short and long run.
D)in neither the short nor the long run.

Question 5

Figure 35-4.On the figure,MS represents money supply and MD represents money demand.
Refer to Figure 35-4.Which of the following events could explain a decrease in the equilibrium interest rate from r₃ to r₁?

A)a decrease in the price level
B)a decrease in the number of firms building new factories and buying new equipment
C)an increase in the price level
D)an increase in the number of firms building new factories and buying new equipment

Question 6

According to liquidity preference theory,

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.

Question 7

The wealth effect stems from the idea that a higher price level

A)increases the real value of households' money holdings.
B)decreases the real value of households' money holdings.
C)increases the real value of the domestic currency in foreign-exchange markets.
D)decreases the real value of the domestic currency in foreign-exchange markets.

Question 8

Open-market purchases

A)increase investment and real GDP.
B)decrease investment and increase real GDP.
C)increase investment and decrease real GDP.
D)decrease investment and real GDP.

Question 9

If there is excess demand for money,then people will

A)deposit more money into interest-bearing accounts,and the interest rate will fall.
B)deposit more money into interest-bearing accounts,and the interest rate will rise.
C)withdraw money from interest-bearing accounts,and the interest rate will fall.
D)withdraw money from interest-bearing accounts,and the interest rate will rise.

Question 10

According to John Maynard Keynes,

A)the demand for money in a country is determined entirely by that nation's central bank.
B)the supply of money in a country is determined by the overall wealth of the citizens of that country.
C)the interest rate adjusts to balance the supply of,and demand for,money.
D)the interest rate adjusts to balance the supply of,and demand for,goods and services.

Question 11

Figure 35-3.
Refer to Figure 35-3.Which of the following sequences (numbered arrows)shows the logic of the interest-rate effect?

A)1,2,3,4
B)1,4,3,2
C)3,4,2,1
D)3,2,1,4

Question 12

According to liquidity preference theory,if the quantity of money demanded is greater than the quantity supplied,then the interest rate will

A)increase and the quantity of money demanded will decrease.
B)increase and the quantity of money demanded will increase.
C)decrease and the quantity of money demanded will decrease.
D)decrease and the quantity of money demanded will increase.

Question 13

According to classical macroeconomic theory,

A)output is determined by the supplies of capital and labor and the available production technology.
B)for any given level of output,the interest rate adjusts to balance the supply of,and demand for,loanable funds.
C)given output and the interest rate,the price level adjusts to balance the supply of,and demand for,money.
D)All of the above are correct.

Question 14

The interest-rate effect

A)depends on the idea that increases in interest rates increase the quantity of money demanded.
B)depends on the idea that increases in interest rates increase the quantity of money supplied.
C)is the most important reason,in the case of the United States,for the downward slope of the aggregate-demand curve.
D)is the least important reason,in the case of the United States,for the downward slope of the aggregate-demand curve.

Question 15

Which of the following shifts aggregate demand to the left?

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 supply

Question 16

Other things the same,which of the following happens if the price level falls?

A)Money demand shifts rightward.
B)Initially there is an excess demand for money in the money market.
C)The interest rate falls.
D)None of the above is correct.

Question 17

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

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.

Question 18

The interest rate falls if

A)the price level falls or the money supply falls.
B)the price level falls or the money supply rises.
C)the price level rises or the money supply falls.
D)the price level rises or the money supply rises.

Question 19

Liquidity preference theory is most relevant to the

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.

Question 20

Which of the following statements is correct for the long run?

A)Output is determined by the amount of capital,labor,and technology; the interest rate adjusts to balance the supply and demand for money; the price level adjusts to balance the supply and demand for loanable funds.
B)Output is determined by the amount of capital,labor,and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.
C)Output is determined by the amount of capital,labor,and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level is relatively slow to adjust.
D)Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.

Question 21

Which of the following policy actions shifts the aggregate-demand curve?

A)an increase in the money supply
B)an increase in taxes
C)an increase in government spending
D)All of the above are correct.

Question 22

Monetary policy

A)can be implemented quickly and most of its impact on aggregate demand occurs very soon after policy is implemented.
B)can be implemented quickly,but most of its impact on aggregate demand occurs months after policy is implemented.
C)cannot be implemented quickly,but once implemented most of its impact on aggregate demand occurs very soon afterward.
D)cannot be implemented quickly and most of its impact on aggregate demand occurs months after policy is implemented.

Question 23

The term crowding-out effect refers to

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.

Question 24

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

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 $3 / 4$ for the MPC.
D)fact that the multiplier effect is represented by an infinite geometric series.

Question 25

Assuming no crowding-out,investment-accelerator,or multiplier effects,a $100 billion increase in government expenditures shifts aggregate demand

A)right by more than $100 billion.
B)right by $100 billion.
C)left by more than $100 billion.
D)left by $100 billion.

Question 26

An increase in the MPC

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.

Question 27

Keynes argued that aggregate demand is

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.

Question 28

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

A)price level $\uarr\Rightarrow$ demand for money $\uarr\Rightarrow$ equilibrium interest rate $\uarr\Rightarrow$ quantity of goods and services demanded $\downarrow$
B)price level $\uarr\Rightarrow$ demand for money $\downarrow\Rightarrow$ equilibrium interest rate $\uarr\Rightarrow$ quantity of goods and services demanded $\downarrow$
C)price level $\downarrow\Rightarrow$ demand for money $\downarrow\Rightarrow$ equilibrium interest rate $\uarr\Rightarrow$ quantity of goods and services demanded $\downarrow$
D)price level $\uarr\Rightarrow$ equilibrium interest rate $\uarr\Rightarrow$ demand for money $\uarr\Rightarrow$ quantity of goods and services demanded $\downarrow$

Question 29

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending,assuming policymakers want to stabilize output?

A)increase taxes
B)increase the money supply
C)increase government expenditures
D)All of the above are correct.

Question 30

If the MPC = 0.85,then the government purchases multiplier is about

A)1.18.
B)3.33.
C)6.67.
D)8.5.

Question 31

Which of the following sequences best represents the crowding-out effect?

A)government purchases $\uarr\Rightarrow$ GDP $\uarr\Rightarrow$ supply of money $\downarrow\Rightarrow$ equilibrium interest rate $\uarr\Rightarrow$ quantity of goods and services demanded $\downarrow$
B)government purchases $\downarrow\Rightarrow$ GDP $\downarrow\Rightarrow$ demand for money $\downarrow\Rightarrow$ equilibrium interest rate $\downarrow\Rightarrow$ quantity of goods and services demanded $\downarrow$
C)government purchases $\uarr\Rightarrow$ GDP $\uarr\Rightarrow$ demand for money $\uarr\Rightarrow$ equilibrium interest rate $\uarr\Rightarrow$ quantity of goods and services demanded $\downarrow$
D)taxes $\uarr\Rightarrow$ GDP $\downarrow\Rightarrow$ demand for money $\downarrow\Rightarrow$ equilibrium interest rate $\uarr\Rightarrow$ quantity of goods and services demanded $\downarrow$

Question 32

In the long run,fiscal policy influences

A)saving,investment,and growth; in the short run,fiscal policy primarily influences technology and the production function.
B)saving,investment,and growth; in the short run,fiscal policy primarily influences the aggregate demand for goods and services.
C)technology and the production function; in the short run,fiscal policy primarily influences saving,investment,and growth.
D)the aggregate demand for goods and services; in the short run,fiscal policy primarily influences technology and the production function.

Question 33

Figure 35-4.On the figure,MS represents money supply and MD represents money demand.
Refer to Figure 35-4.Suppose the current equilibrium interest rate is r₁.Let Y₁ represent the corresponding quantity of goods and services demanded,and let P₁ represent the corresponding price level.Starting from this situation,if the Federal Reserve increases the money supply and if the price level remains at P₁,then

A)there will be an increase in the equilibrium quantity of goods and services demanded.
B)there will be a decrease in the equilibrium quantity of goods and services demanded.
C)there will be an increase in the equilibrium interest rate.
D)fewer firms will choose to borrow to build new factories and buy new equipment.

Question 34

Suppose an economy's marginal propensity to consume (MPC)is 0.6.Then

A)1 + MPC + MPC ² + MPC ³ = 1.844 and,if we continued adding up terms in this geometric series,we would get closer and closer to the multiplier value of 1.96.
B)1 + MPC + MPC ² + MPC ³ = 1.844 and,if we continued adding up terms in this geometric series,we would get closer and closer to the multiplier value of 3.
C)1 + MPC + MPC ² + MPC ³ = 2.176 and,if we continued adding up terms in this geometric series,we would get closer and closer to the multiplier value of 3.
D)1 + MPC + MPC ² + MPC ³ = 2.176 and,if we continued adding up terms in this geometric series,we would get closer and closer to the multiplier value of 2.5.

Question 35

A tax cut shifts the aggregate demand curve the farthest if

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.

Question 36

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

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.

Question 37

There is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending.Which of the following is correct?

A)By themselves,both the change in output and the change in the interest rate increase desired investment.
B)By themselves,both the change in output and the change in the interest rate decrease desired investment.
C)By itself,the change in output increases desired investment spending and by itself the change in the interest rate decreases desired investment spending.
D)By itself,the change in output decreases desired investment spending and by itself the change in the interest rate increases desired investment spending.

Question 38

Suppose the multiplier has a value that exceeds 1,and there are no crowding out or investment accelerator effects.Which of the following would shift aggregate demand to the right by more than the increase in expenditures?

A)an increase in government expenditures
B)an increase in net exports
C)an increase in investment spending
D)All of the above are correct.

Question 39

The marginal propensity to consume (MPC)is defined as the fraction of

A)extra income that a household consumes rather than saves.
B)extra income that a household either consumes or saves.
C)total income that a household consumes rather than saves.
D)total income that a household either consumes or saves.

Question 40

A decrease in government spending initially and primarily shifts

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.

Question 41

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

Question 42

If the spending multiplier is 8,then the marginal propensity to consume must be 7/8.

Question 43

A policy that results in slow and steady growth of the money supply is an example of

A)an "easy" monetary policy.
B)a "passive" monetary policy.
C)a "practical" monetary policy.
D)an "active" monetary policy.

Question 44

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

Question 45

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Question 46

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

Question 47

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

Question 48

Automatic stabilizers

A)increase the problems that lags cause in using fiscal policy as a stabilization tool.
B)are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.
C)are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession.
D)All of the above are correct.

Question 49

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.

Question 50

A severe problem that many economists have with the active use of monetary policy and fiscal policy to stabilize the economy is that,while those policies obviously work well in practice,they are not well understood on a theoretical level.

Question 51

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.

Question 52

An increase in the money supply decreases the interest rate in the short run.

Question 53

The primary argument against active monetary and fiscal policy is that

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.

Question 54

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

Question 55

Other things the same,an increase in taxes shifts aggregate demand to the left.In the short run this makes output fall which makes the interest rate rise.

Question 56

Monetary policy affects the economy with a long lag,in part because

A)proposals to change monetary policy must go through both the House and Senate before being sent to the president.
B)monetary policy works through changes in interest rates,and the Fed does not have the ability to change interest rates quickly.
C)changes in interest rates primarily influence consumption spending,and households make consumption plans far in advance.
D)changes in interest rates primarily influence investment spending,and firms make investment plans far in advance.

Question 57

Some economists,called supply-siders,argue that changes in the money supply exert a strong influence on aggregate supply.

Question 58

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

Question 59

In the short run,

A)the price level alone adjusts to balance the supply and demand for money.
B)output responds to changes in the aggregate demand for goods and services.
C)changes in the money supply cause a proportional change in the price level.
D)increases in the money supply shift the aggregate supply curve causing output to rise.

Question 60

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

Question 61

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Question 62

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

Question 63

What is the difference between monetary policy and fiscal policy?

Question 64

Suppose that consumers become pessimistic about the future health of the economy.What will happen to aggregate demand and to output?
What might the government have to do to keep output stable?

Question 65

Explain why the interest rate is the opportunity cost of holding currency.What is the benefit of holding currency?