Question 1

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.

Accepted Answer

Classical macroeconomic theory holds that output is determined by the supplies of capital and labor and the available production technology (A), and that for any given level of output, the interest rate adjusts to balance the supply of, and demand for, loanable funds (B). Additionally, given output and the interest rate, the price level adjusts to balance the supply of, and demand for, money (C). Therefore, all of the above options are considered correct according to classical macroeconomic theory.

Question 2

According to the liquidity preference theory, an increase in the overall price level of 10 percent
A) increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded.
B) decreases the equilibrium interest rate, which in turn increases the quantity of goods and services demanded.
C) increases the quantity of money supplied by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged.
D) decreases the quantity of money demanded by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged.

Accepted Answer

The liquidity preference theory suggests that an increase in the overall price level leads to an increase in the demand for money. As people need more money to carry out transactions at higher prices, they hold onto more of their money, which decreases the supply of loanable funds. This, in turn, increases the equilibrium interest rate. Higher interest rates make borrowing more expensive, which can decrease investment and consumption, leading to a decrease in the quantity of goods and services demanded.

Question 3

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.

Accepted Answer

Fiscal policy, through changes in government spending and taxation, affects aggregate demand and can have both short-term and long-term impacts on the economy. In the short run, changes in fiscal policy can have a significant impact on output and employment levels. In the long run, fiscal policy can also affect the economy by influencing the level of investment, productivity, and potential output.

Question 4

For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve?
A) An increase in the price level decreases the interest rate.
B) An increase in the price level increases the interest rate.
C) An increase in the money supply decreases the interest rate.
D) An increase in the money supply increases the interest rate.

Accepted Answer

According to the basic aggregate demand and supply model, as the price level increases, the interest rate increases, and consumption spending decreases. This results in a downward-sloping aggregate demand curve.

Question 5

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is
A) relatively important in the United States because expenditures on consumer durables is very responsive to changes in wealth.
B) relatively important in the United States because consumption spending is a large part of GDP.
C) relatively unimportant in the United States because money holdings are a small part of consumer wealth.
D) relatively unimportant because it takes a large change in wealth to cause a significant change in interest rates.

Accepted Answer

The answer of The wealth effect helps explain the slope...

Question 6

Which of the following claims concerning the importance of effects that explain the slope of the U.S. aggregate-demand curve is correct?
A) The exchange-rate effect is relatively small because exports and imports are a small part of real GDP.
B) The interest-rate effect is relatively small because investment spending is not very responsive to interest rate changes.
C) The wealth effect is relatively large because money holdings are a significant portion of most households' wealth.
D) None of the above is correct.

Accepted Answer

The answer of Which of the following claims concerning the...

Question 7

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?
A) the wealth effect
B) the interest-rate effect
C) the exchange-rate effect
D) the real-wage effect

Accepted Answer

The interest-rate effect is the most important reason for the downward slope of the aggregate-demand curve because as the price level increases, people demand more money to purchase goods and services. This increase in demand for money causes interest rates to rise, which in turn reduces borrowing and investment, leading to a decrease in aggregate demand.

Question 8

On the graph that depicts the theory of liquidity preference,
A) the demand-for-money curve is vertical.
B) the supply-of-money curve is vertical.
C) the interest rate is measured along the horizontal axis.
D) the price level is measured along the vertical axis.

Accepted Answer

The answer of On the graph that depicts the theory...

Question 9

Using the liquidity-preference model, when the Federal Reserve increases the money supply,
A) the equilibrium interest rate decreases.
B) the aggregate-demand curve shifts to the left.
C) the quantity of goods and services demanded is unchanged for a given price level.
D) the long-run aggregate-supply curve shifts to the right.

Accepted Answer

According to the liquidity-preference model, an increase in the money supply lowers the interest rate, which leads to an increase in investment and consumption spending. This results in an increase in aggregate demand and a shift to the right of the AD curve. Therefore, the equilibrium interest rate decreases as a result of an increase in the money supply.

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.

Accepted Answer

According to Keynes, the interest rate adjusts to balance the supply of, and demand for, money. This is because the demand for money is not entirely determined by the central bank, and the supply of money is not determined solely by the overall wealth of citizens. Therefore, the interest rate acts as a lever to balance these two forces.

Question 11

Shifts in the aggregate-demand curve can cause fluctuations in
A) neither the level of output nor the level of prices.
B) the level of output, but not in the level of prices.
C) the level of prices, but not in the level of output.
D) the level of output and in the level of prices.

Accepted Answer

Shifts in the aggregate-demand curve can cause fluctuations in both the level of output and the level of prices. When the aggregate-demand curve shifts to the right, both the level of output and the level of prices increase. When the aggregate-demand curve shifts to the left, both the level of output and the level of prices decrease. Therefore, D is the correct answer.

Question 12

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.

Accepted Answer

The answer of The wealth effect stems from the idea...

Question 13

The interest-rate effect
A) depends on the idea that increases in interest rates decrease the quantity of goods and services demanded.
B) depends on the idea that increases in interest rates decrease the quantity of goods and services supplied.
C) is responsible for the downward slope of the money-demand curve.
D) is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.

Accepted Answer

The interest-rate effect is a key reason for the downward slope of the aggregate-demand curve. When interest rates rise, it becomes more expensive for households and firms to borrow money, reducing their willingness to invest, purchase goods and services, and take on long-term projects. This results in a decrease in the quantity of goods and services demanded, which in turn leads to a decrease in real GDP. As a result, the interest-rate effect is a primary driver of the downward slope of the aggregate-demand curve. Choice A correctly identifies the relationship between interest rates and the quantity of goods and services demanded. Choices B and C are incorrect; the interest-rate effect does not decrease the quantity of goods and services supplied, nor is it responsible for the downward slope of the money-demand curve. Choice D is also incorrect, as the interest-rate effect is actually one of the most important drivers of the downward slope of the aggregate-demand curve.

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.

Accepted Answer

The interest-rate effect is the idea that an increase in interest rates will cause a decrease in investment spending, leading to a decrease in aggregate demand. This is because higher interest rates increase the cost of borrowing, making it less attractive for individuals and firms to take out loans to invest in projects. As a result, the interest-rate effect is one of the main reasons for the downward slope of the aggregate-demand curve.

Question 15

According to classical macroeconomic theory,
A) the price level is sticky in the short run and it plays only a minor role in the short-run adjustment process.
B) for any given level of output, the interest rate adjusts to balance the supply of, and demand for, money.
C) output is determined by the supplies of capital and labor and the available production technology.
D) All of the above are correct.

Accepted Answer

The answer of According to classical macroeconomic theory,
A) the price...

Question 16

Which of the following is likely more important for explaining the slope of the aggregate-demand curve of a small economy than it is for the United States?
A) the wealth effect
B) the interest-rate effect
C) the exchange-rate effect
D) the real-wage effect

Accepted Answer

The exchange-rate effect is likely more important for explaining the slope of the aggregate-demand curve of a small economy than it is for the United States. In a small economy, exports and imports constitute a larger proportion of the overall economy, so changes in the exchange rate can have a more significant impact on the demand for goods and services. The wealth effect, interest-rate effect, and real-wage effect are likely to be important for both small and large economies.

Question 17

According to the theory of liquidity preference,
A) if the interest rate is below the equilibrium level, then the quantity of money people want to hold is less than the quantity of money the Fed has created.
B) if the interest rate is above the equilibrium level, then the quantity of money people want to hold is greater than the quantity of money the Fed has created.
C) the demand for money is represented by a downward-sloping line on a supply-and-demand graph.
D) All of the above are correct.

Accepted Answer

The answer of According to the theory of liquidity preference,
A)...

Question 18

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?
A) wealth effect, exchange-rate effect, interest-rate effect
B) exchange-rate effect, interest-rate effect, wealth effect
C) interest-rate effect, wealth effect, exchange-rate effect
D) interest-rate effect, exchange-rate effect, wealth effect

Accepted Answer

The answer of With respect to their impact on aggregate...

Question 19

Shifts in aggregate demand affect the price level in
A) the short run but not in the long run.
B) the long run but not in the short run.
C) both the short and long run.
D) neither the short nor long run.

Accepted Answer

Shifts in aggregate demand impact both the short and long run. In the short run, an increase in aggregate demand will cause an increase in the price level while a decrease in aggregate demand will cause a decrease in the price level. In the long run, the price level will return to its original level but the output level will be affected due to changes in factors such as labor, capital, and technology. Similarly, a decrease in aggregate demand would cause prices in the short run and lead to a return of prices to its original level in the long run.

Question 20

Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference?
A) only the nominal interest rate
B) both the nominal interest rate and the real interest rate
C) only the interest rate on long-term bonds
D) only the interest rate on short-term government bonds

Accepted Answer

The theory of liquidity preference attempts to explain both the nominal interest rate and the real interest rate. It suggests that the demand for money depends on the interest rate, and that the supply of money is controlled by the central bank. As a result, changes in the money supply and demand can affect both the nominal and real interest rates. The theory does not focus on a specific type of bond or maturity.

Quiz 16: The Influence of Monetary and Fiscal Policy on Aggregate Demand

According to classical macroeconomic theory,

According to the liquidity preference theory, an increase in the overall price level of 10 percent

Fiscal policy affects the economy

For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve?

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is

Which of the following claims concerning the importance of effects that explain the slope of the U.S. aggregate-demand curve is correct?

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

On the graph that depicts the theory of liquidity preference,

Using the liquidity-preference model, when the Federal Reserve increases the money supply,

According to John Maynard Keynes,

Shifts in the aggregate-demand curve can cause fluctuations in

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

The interest-rate effect

The interest-rate effect

According to classical macroeconomic theory,

Which of the following is likely more important for explaining the slope of the aggregate-demand curve of a small economy than it is for the United States?

According to the theory of liquidity preference,

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

Shifts in aggregate demand affect the price level in

Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference?