Deck 34: True False

Question 1

An increase in the price level shifts the money demand curve to the left,causing interest rates to increase.

Answer 1

False

Question 2

For a country such as the U.S. ,the wealth effect exerts a very important influence on the slope of the aggregate-demand curve,since U.S.wealth is large relative to wealth in most other countries.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

For the U.S.economy,the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

Question 5

Other things equal,the higher the price level,the higher is the real wealth of households.

Question 6

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

Question 7

For the most part,fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

Question 8

In liquidity preference theory,an increase in the interest rate,other things the same,decreases the quantity of money demanded,but does not shift the money demand curve.

Question 9

If the inflation rate is zero,then the nominal and real interest rate are the same.

Question 10

When the Fed increases the money supply,the interest rate decreases.This decrease in the interest rate increases consumption and investment demand,so the aggregate-demand curve shifts to the right.

Question 11

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.

Question 12

Other things the same,an increase in the price level causes the real value of the dollar to fall in the market for foreign-currency exchange.

Question 13

An increase in the money supply shifts the aggregate-supply curve to the right.

Question 14

When the Fed announces a target for the federal funds rate,it essentially accommodates the day-to-day fluctuations in money demand by adjusting the money supply accordingly.

Question 15

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

Question 16

According to the theory of liquidity preference,the interest rate adjusts to balance the supply of,and demand for,loanable funds.

Question 17

Stock prices often rise when the Fed raises interest rates.

Question 18

The theory of liquidity preference was developed by Irving Fisher.

Question 19

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

Question 20

Both monetary policy and fiscal policy affect aggregate demand.

Question 21

Unemployment insurance and welfare programs work as automatic stabilizers.

Question 22

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

Question 23

If the marginal propensity to consume is 4/5,then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

Question 24

In principle,the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

Question 25

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

Question 26

Government expenditures on capital goods such as roads could increase aggregate supply.Such effects on aggregate supply are likely to matter more in the short run than in the long run.

Question 27

During recessions,unemployment insurance payments tend to rise.

Question 28

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 29

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

Question 30

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Question 31

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

Question 32

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

Question 33

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

Question 34

The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.

Question 35

A significant lag for monetary policy is the time it takes to for a change in the money supply to change the economy.A significant lag for fiscal policy is the time it takes to pass legislation authorizing it.

Question 36

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 37

An essential piece of the liquidity preference theory is the demand for money.

Question 38

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

Question 39

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 40

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 41

According to the IGM poll,most economists think that the crowding out effects were stronger than the stimulative effects of ARRA.

Question 42

According to the IGM poll,most economists think that the benefits of ARRA exceeded the costs.

Question 43

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

Question 44

An implication of the Employment Act of 1946 is that the government should respond to changes in the private economy to stabilize aggregate demand.

Question 45

If the government faced a balanced budget rule,it would be forced to raise taxes or decrease spending during a recession.

Question 46

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

Question 47

The automatic stabilizers in the U.S.economy are sufficiently strong to prevent recessions.

Question 48

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

Question 49

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 50

Many economists oppose a constitutional amendment that would require a balanced budget for the federal government because it would probably make the business cycle more volatile.