Question 1

There are three factors that help explain the slope of the aggregate demand curve. Which two are less important? Why are they less important?

Accepted Answer

The answer of There are three factors that help explain...

Question 2

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.

Accepted Answer

The statement is false. The use of monetary and fiscal policy to stabilize the economy is well understood on a theoretical level by most economists. However, there may be debates and disagreements over the most effective policies and their implementation.

Question 3

Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion. Suppose that the MPC is .80 and that there are no crowding out or accelerator effects. What is the combined effects of these changes? Why is the combined change not equal to zero?

Accepted Answer

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Question 4

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

Accepted Answer

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Question 5

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

Accepted Answer

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Question 6

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

Accepted Answer

This is true. In 2009, President Obama signed the American Recovery and Reinvestment Act, which included over $800 billion in government spending aimed at stimulating the economy during the Great Recession.

Question 7

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

Accepted Answer

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Question 8

Suppose that there are no crowding-out effects and the MPC is .9. By how much must the government increase expenditures to shift the aggregate demand curve right by $10 billion?

Accepted Answer

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Question 9

How does a reduction in the money supply by the Fed make owning stocks less attractive?

Accepted Answer

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Question 10

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

Accepted Answer

When unemployment benefits increase, those who receive the benefits have more money to spend, which increases their consumption and can therefore increase aggregate demand.

Question 11

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

Accepted Answer

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Question 12

What is the difference between monetary policy and fiscal policy?

Accepted Answer

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Question 13

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

Accepted Answer

The Employment Act of 1946 explicitly states that it is the responsibility of the government to use fiscal and monetary policy to promote maximum employment, production, and purchasing power. This includes responding to changes in the private economy in order to stabilize aggregate demand.

Question 14

Use the money market to explain the interest-rate effect and its relation to the slope of the aggregate demand curve.

Accepted Answer

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Question 15

Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is you answer affected by the presence of the multiplier, crowding-out, taxes, and investment-accelerator effects?

Accepted Answer

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Question 16

Explain how unemployment insurance acts as an automatic stabilizer.

Accepted Answer

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