Question 1

Suppose there were a large increase in net exports. If the Fed wanted to stabilize output, it could
A)buy bonds to increase the money supply.
B)buy bonds to decrease the money supply.
C)sell bonds to increase the money supply.
D)sell bonds to decrease the money supply.

Accepted Answer

To stabilize output after a large increase in net exports, the Fed would sell bonds to decrease the money supply, which would increase interest rates and reduce aggregate demand, counteracting the increase in net exports.

Question 2

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could
A)buy bonds to raise interest rates.
B)buy bonds to lower interest rates.
C)sell bonds to raise interest rates.
D)sell bonds to lower interest rates.

Accepted Answer

The answer of Suppose that businesses and consumers become much...

Question 3

In 1961, President John F. Kennedy, acting upon advice from his economists, proposed tax cuts. The advice he received
A)was opposed to the teaching of Keynes, who had taught that tax cuts were counterproductive.
B)was opposed to the teaching of Keynes, who had taught that all attempts to stabilize the economy were futile.
C)came from economists who had studied Keynes's ideas when those ideas were only a few years old.
D)came from economists who were unaware of Keynes's ideas because those ideas had not yet been widely disseminated at that time.

Accepted Answer

The question indicates that Kennedy's economists gave him advice in 1961, and asks about their relationship to Keynes's teachings. Choice A says that the advice was opposed to Keynes's teaching that tax cuts were counterproductive. However, this statement is incorrect—Keynes advocated for tax cuts as a way to stimulate demand during a recession. Choice B suggests that Keynes believed that all attempts to stabilize the economy were futile, which is also false. Choice D says that the economists were unaware of Keynes's ideas because they had not been widely disseminated at the time, which is unlikely since Keynes's ideas were well-known by 1961. Therefore, choice C is the best answer, as it suggests that the economists had studied Keynes's ideas when they were still relatively new.

Question 4

In the early 1960s, the Kennedy administration made considerable use of
A)fiscal policy to stimulate the economy.
B)fiscal policy to slow down the economy.
C)monetary policy to stimulate the economy.
D)monetary policy to slow down the economy.

Accepted Answer

The Kennedy administration used fiscal policy to stimulate the economy through measures such as the Accelerated Public Works Program, which increased government spending on infrastructure projects, and the 1963 tax cut, which provided consumers with more disposable income to spend. They did not make significant use of monetary policy during this time period.

Question 5

Keynes argued that
A)irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment.
B)irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply.
C)changes in business and consumer expectations generally stabilize the economy.
D)All of the above are correct.

Accepted Answer

Keynes argued that irrational waves of pessimism, such as a sudden loss of confidence in the economy or a business, can cause a decrease in aggregate demand and an increase in unemployment. This is because individuals and companies may reduce their spending and investments in response to the negative outlook, leading to a decrease in overall economic activity.

Question 6

Keynes used the term "animal spirits" to refer to
A)policy makers harming the economy in the pursuit of self interest.
B)arbitrary changes in attitudes of household and firms.
C)mean-spirited economists who believed in the classical dichotomy.
D)firms' relentless efforts to maximize profits.

Accepted Answer

Keynes used the term "animal spirits" to describe the unpredictable and irrational changes in the attitudes of households and firms that influence their decisions regarding spending, investment, and saving. These changes are difficult to predict and can cause fluctuations in the economy.

Question 7

If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by
A)increasing the money supply, which raises interest rates.
B)increasing the money supply, which lowers interest rates.
C)decreasing the money supply, which raises interest rates.
D)decreasing the money supply, which lowers interest rates.

Accepted Answer

By increasing the money supply, the Federal Reserve can encourage spending and investment, which can help mitigate the effects of pessimism on the economy. Lowering interest rates makes borrowing cheaper and more attractive, which in turn can stimulate economic activity.

Question 8

Who asserted that "the Federal Reserve's job is to take away the punch bowl just as the party gets going?"
A)president George W. Bush
B)president John F. Kennedy
C)economist John Maynard Keynes
D)former chairman of the Federal Reserve System William McChesney Martin

Accepted Answer

William McChesney Martin, who served as the chairman of the Federal Reserve System from 1951 to 1970, is credited with making the famous statement that "the Federal Reserve's job is to take away the punch bowl just as the party gets going." This was meant to illustrate the central bank's role in managing the economy and preventing overheating or inflation.

Question 9

A reduction in U.S net exports would shift U.S. aggregate demand
A)rightward. In an attempt to stabilize the economy, the government could raise taxes.
B)rightward. In an attempt to stabilize the economy, the government could cut taxes.
C)leftward. In an attempt to stabilize the economy, the government could raise taxes.
D)leftward. In an attempt to stabilize the economy, the government could cut taxes.

Accepted Answer

A reduction in U.S. net exports decreases aggregate demand, shifting it leftward. To stabilize the economy, the government could cut taxes to increase disposable income and boost consumption, counteracting the decrease in demand.

Question 10

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?
A)decrease the money supply
B)increase government expenditures
C)increase taxes
D)All of the above are correct.

Accepted Answer

Advocating for an active stabilization policy during severe unemployment means that the government should take action to stimulate the economy. One way to do this is by increasing government expenditures, such as investing in infrastructure projects or providing financial assistance to struggling industries. Decreasing the money supply or increasing taxes would have the opposite effect and could potentially worsen the unemployment problem. Therefore, the best choice would be to increase government expenditures.

Question 11

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?
A)decrease taxes
B)increase government expenditures
C)increase the money supply
D)None of the above is correct.

Accepted Answer

Keynes's followers would not support any policy action when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium, as the economy is self-correcting in this scenario.

Question 12

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.

Accepted Answer

Monetary policy can be implemented quickly, but it takes time for its impact on aggregate demand to be fully realized. This is because it takes time for changes in interest rates or money supply to affect consumer and business spending decisions. Typically, the lag between implementation of monetary policy and its effects on the economy is several months.

Question 13

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?"
A)Dwight D. Eisenhower
B)John F. Kennedy
C)Ronald Reagan
D)Bill Clinton

Accepted Answer

The U.S. president who responded with this quote was John F. Kennedy.

Question 14

The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?
A)increase government expenditures or increase the money supply
B)increase government expenditures or decrease the money supply
C)decrease government expenditures or increase the money supply
D)decrease government expenditures or decrease the money supply

Accepted Answer

The answer of The price of imported oil rises. If...

Question 15

Suppose aggregate demand shifts to the left and policymakers want to stabilize output. What can they do?
A)repeal an investment tax credit or increase the money supply
B)repeal an investment tax credit or decrease the money supply
C)institute an investment tax credit or increase the money supply
D)institute an investment tax credit or decrease the money supply

Accepted Answer

The answer of Suppose aggregate demand shifts to the left...

Question 16

The Kennedy tax cut of 1964 was
A)successful in stimulating the economy.
B)designed to shift the aggregate demand curve to the right.
C)designed to shift the aggregate supply curve to the right.
D)All of the above are correct.

Accepted Answer

The answer of The Kennedy tax cut of 1964 was
A)successful...

Question 17

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.

Accepted Answer

The answer of Which of the following policy alternatives would...

Question 18

The Kennedy tax cut of 1964 included an investment tax credit that was designed to
A)increase aggregate demand in the short run and aggregate supply in the long run.
B)increase aggregate supply in the short run and aggregate demand in the long run.
C)only increase aggregate supply in the long run.
D)only increase aggregate demand in the short run.

Accepted Answer

The investment tax credit provided an incentive for businesses to invest in new capital, which would increase their productivity and reduce their costs in the long run. This would lead to an increase in aggregate supply in the long run. Additionally, the tax cut as a whole would increase disposable income and consumer spending, leading to an increase in aggregate demand in the short run.

Question 19

What actions could be taken to stabilize output in response to a large decrease in U.S. net exports?
A)increase government expenditures or increase the money supply
B)increase government expenditures or decrease the money supply
C)decrease government expenditures or increase the money supply
D)decrease government expenditures or decrease the money supply

Accepted Answer

A large decrease in net exports will decrease aggregate demand and potentially lead to a recession. To stabilize output, the government could increase government expenditures (fiscal policy) or increase the money supply (monetary policy) to increase aggregate demand and stimulate economic growth. Choice A suggests both options, while the other choices suggest contractionary policies that could exacerbate the recession.

Question 20

Suppose there were a large decline in net exports. If the Fed wanted to stabilize output, it could
A)buy bonds to raise interest rates.
B)buy bonds to lower interest rates.
C)sell bonds to raise interest rates.
D)sell bonds to lower interest rates.

Accepted Answer

If net exports decline, it implies a decrease in the demand for domestic goods and services, which will lead to a decrease in aggregate demand and output. To stabilize output, the Fed can use expansionary monetary policy by buying bonds, which will increase the money supply and lower interest rates. This will encourage borrowing and investment, which in turn will increase aggregate demand and output. Choice A and C are incorrect because buying or selling bonds to raise interest rates will be contractionary monetary policy, which will decrease borrowing and investment, decrease aggregate demand, and lead to further output contraction. Choice D is incorrect because selling bonds to lower interest rates is not an option for the Fed as it will increase money supply and inflation.

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

Suppose there were a large increase in net exports. If the Fed wanted to stabilize output, it could

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

In 1961, President John F. Kennedy, acting upon advice from his economists, proposed tax cuts. The advice he received

In the early 1960s, the Kennedy administration made considerable use of

Keynes argued that

Keynes used the term "animal spirits" to refer to

If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by

Who asserted that "the Federal Reserve's job is to take away the punch bowl just as the party gets going?"

A reduction in U.S net exports would shift U.S. aggregate demand

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

Monetary policy

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?"

The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?

Suppose aggregate demand shifts to the left and policymakers want to stabilize output. What can they do?

The Kennedy tax cut of 1964 was

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

The Kennedy tax cut of 1964 included an investment tax credit that was designed to

What actions could be taken to stabilize output in response to a large decrease in U.S. net exports?

Suppose there were a large decline in net exports. If the Fed wanted to stabilize output, it could