Deck 26: Feedback Effects From GDP to the Money Market

Question 1

Increases in the interest rate reduce the multiplier effect of an increase in government purchases.

Answer 1

True

Question 2

An increase in government spending leads to a(n)

A) downward shift of the aggregate expenditure line and a leftward shift of the money demand curve
B) upward shift of the aggregate expenditure line and a rightward shift of the money demand curve
C) downward shift of the aggregate expenditure line and a rightward shift of the money demand curve
D) upward shift of the aggregate expenditure line and a leftward shift of the money demand curve
E) upward shift of the aggregate expenditure line but no shift of the money demand curve

Answer 2

upward shift of the aggregate expenditure line and a rightward shift of the money demand curve

Question 3

An increase in government spending will lead to which of the following?

A) an increase in equilibrium GDP,a decrease in money demand,a decrease in the interest rate,and an increase in investment spending
B) a decrease in equilibrium GDP,a decrease in money demand,an increase in the interest rate,and a decrease in investment spending
C) an increase in equilibrium GDP,an increase in money demand,an increase in the interest rate,and an increase in investment spending
D) a decrease in equilibrium GDP,a decrease in money demand,a decrease in the interest rate,and an increase in investment spending
E) an increase in equilibrium GDP,an increase in money demand,an increase in the interest rate,and a decrease in investment spending

Answer 3

an increase in equilibrium GDP,an increase in money demand,an increase in the interest rate,and a decrease in investment spending

Question 4

Which of the following dampens the effect on GDP of a change in government spending?

A) The money supply changes when real income changes.
B) Taxes change when government spending changes.
C) Money demand changes when real income changes.
D) People do not expect much from the government.
E) Aggregate spending does not respond to changes in the interest rate.

Question 5

In the long run,the crowding-out effect of an increase in government purchases is

A) more complete than in the short run
B) canceled out by increases in infrastructure spending
C) less complete than in the short run
D) canceled out by improved consumer confidence
E) a multiple of the initial change in spending

Question 6

If autonomous consumption decreases,which of the following is the most likely effect in the short run?

A) a decrease in output,an increase in money demand,and an increase in the interest rate
B) an increase in output,a decrease in money demand,and a decrease in the interest rate
C) a decrease in output,a decrease in money demand,and a decrease in the interest rate
D) an increase in output,an increase in money demand,and a decrease in the interest rate
E) an increase in output,an increase in money demand,and an increase in the interest rate

Question 7

Refer to Figure 14-9.If the aggregate expenditure line shifts from AE₁(r = 8%)to AE₂(r = 10%),which of the following is the most likely cause of that shift?

A) An increase in the money supply
B) A decrease in the money supply
C) An increase in government purchases
D) A decrease in government purchases
E) An increase in taxes

Question 8

In the short-run macro model,an increase in government spending

A) may reduce real GDP
B) partially crowds out private investment spending
C) usually crowds out exports
D) usually crowds out spending on services
E) requires an increase in taxes

Question 9

If the federal government announces a tax cut,which of the following is most likely in the short run?

A) A decrease in output,an increase in money demand,and an increase in the interest rate
B) An increase in output,a decrease in money demand,and a decrease in the interest rate
C) A decrease in output,a decrease in money demand,and a decrease in the interest rate
D) An increase in output,an increase in money demand,and a decrease in the interest rate
E) An increase in output,an increase in money demand,and an increase in the interest rate.

Question 10

Increases in government purchases,investment spending,and autonomous consumption all tend to

A) increase real GDP and raise the interest rate
B) increase real GDP and lower the interest rate
C) increase real GDP but leave the interest rate unchanged
D) decrease real GDP and lower the interest rate
E) decrease real GDP and raise the interest rate

Question 11

In the short-run macro model,which of the following increases when government spending increases?

A) The interest rate
B) Investment spending
C) Taxes
D) Spending on consumer durables
E) The money supply

Question 12

If the interest rate increases due to an increase in government purchases,the rise in real GDP will be greater than what would have occurred if the interest rate had remained stable.

Question 13

In the classical model there is complete crowding out when government spending increases,but in the short-run macro model there is only partial crowding out.

Question 14

What will be the effects of a decrease in government spending?

A) an increase in equilibrium GDP,a decrease in money demand,a decrease in the interest rate,and an increase in investment spending
B) a decrease in equilibrium GDP,a decrease in money demand,an increase in the interest rate,and a decrease in investment spending
C) an increase in equilibrium GDP,an increase in money demand,an increase in the interest rate,and an increase in investment spending
D) a decrease in equilibrium GDP,a decrease in money demand,a decrease in the interest rate,and an increase in investment spending
E) an increase in equilibrium GDP,an increase in money demand,an increase in the interest rate,and a decrease in investment spending

Question 15

In the short run,following an increase in government purchases,

A) the aggregate expenditure line shifts upward by more than the increase in government purchases
B) real GDP declines by the change in government purchases times the expenditure multiplier
C) the money supply curve shifts rightward because real income rises
D) the interest rate rises because the money demand curve shifts rightward
E) autonomous consumption and investment increase because of the increase in real income

Question 16

An increase in government purchases will increase GDP by an amount equal to the change in government purchases times the expenditure multiplier.

Question 17

Which of the following statements about the effects of an increase in government purchases is most accurate?

A) In the classical model,it will cause complete crowding out.In the short-run macro model,crowding out will be incomplete.
B) In the classical model,it will cause incomplete crowding out.In the short-run macro model,crowding out will be complete.
C) Crowding out will be complete in both the classical and short-run macro model.
D) Crowding out will be incomplete in both the classical and short-run macro model.
E) In the classical model,the increase in government spending will lead to a decrease in investment spending and autonomous consumption.In the short-run macro model,it will not.

Question 18

An increase in government spending can lead to a decrease in GDP if the interest rate changes enough.

Question 19

On a short-run macro model diagram,the impact of a decrease in government purchases (G)is illustrated by

A) a downward shift of the aggregate expenditure line by the full amount of the change in G
B) an upward shift of the aggregate expenditure line followed by an equal downward shift of that line
C) a leftward shift of the money supply curve
D) a downward shift of the aggregate expenditure line by an amount less than the change in G
E) the increase in real income

Question 20

An increase in government purchases,an increase in the interest rate,and an increase in consumption all shift the aggregate expenditure line upward.

Question 21

Crowding out is important only in the classical model.

Question 22

Crowding out occurs

A) when an increase in government spending crowds out tax revenues.
B) when an increase in government spending increases investment spending.
C) when an increase in government spending crowds out bonds.
D) when an increase in government spending crowds out other types of spending.
E) when an increase in government spending crowds out the money supply.

Question 23

If businesses become very pessimistic and reduce spending,which of the following is the most likely in the short run?

A) An increase in output,an increase in money demand and an increase in the interest rate.
B) A decrease in output,an increase in money demand and an increase in the interest rate.
C) A decrease in output,a decrease in money demand and a decrease in the interest rate.
D) An increase in output,a decrease in money demand and a decrease in the interest rate.
E) A decrease in output,a decrease in money demand and an increase in the interest rate.

Question 24

One consequence of an increase in government spending is that

A) autonomous consumption will increase
B) autonomous consumption and investment spending will decrease
C) the increase in GDP will equal the size of the amount of spending
D) autonomous consumption and investment spending will increase
E) investment spending will increase

Question 25

When the feedback effects from income to the money market are included,

A) a given change in the money supply will cause a smaller change in the quantity of money demanded.
B) a given change in the money supply will cause a larger change in the interest rate
C) given change in the money supply will cause no change in the interest rate
D) a given change in the money supply will cause a smaller change in the interest rate
E) a given change in the money supply will cause a larger change in the quantity of money demanded.

Question 26

The equilibrium interest rate will change if

A) the money demand curve shifts
B) there is a movement along the money demand curve
C) crowding out becomes so serious that the dollar loses value
D) the federal funds rate fluctuates rapidly
E) Congress threatens to put a cap on interest rates

Question 27

]If consumers become more optimistic,which of the following is the most likely in the short run?

A) A decrease in output,a decrease in money demand,and a decrease in the interest rate.
B) An increase in output,an increase in money demand,and an increase in the interest rate.
C) An increase in output,an increase in money demand,and a decrease in the interest rate.
D) A decrease in output,an increase in money demand,and a decrease in the interest rate.
E) An increase in output,a decrease in money demand,and a decrease in the interest rate.

Question 28

If government spending increases,which of the following is most likely to occur?

A) GDP,money demand,the interest rate,and investment spending will all increase.
B) GDP,money demand,the interest rate,and investment spending will all decrease.
C) GDP,money demand and the interest rate will increase,while investment spending will decrease.
D) GDP,money demand and the interest rate will decrease,while investment spending will increase.
E) GDP and money demand will increase,but the interest rate will not change.

Question 29

The rise in equilibrium GDP shifts the money demand curve to the left.

Question 30

Whenever spending changes,which of the following dampens the overall effect on GDP?

A) A change in the money supply.
B) A change in taxes.
C) A change in the interest rate.
D) A change in the public's expectations.
E) None of the above.