Question 1

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) increase taxes
B) increase government expenditures
C) increase the money supply
D) All of the above are correct.

Accepted Answer

The answer of Which of the following policies would Keynes's...

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

Suppose there is a tax increase. To stabilize output, the Federal Reserve will
A) increase government spending.
B) increase the money supply.
C) decrease government spending.
D) decrease the money supply.

Accepted Answer

When there is a tax increase, there is a decrease in disposable income and therefore a decrease in consumption, which can lead to a decrease in aggregate demand and output. To stabilize output, the Federal Reserve can increase the money supply, which can increase consumption and investment and thus increase aggregate demand and output. Therefore, the best choice is B, which is to increase the money supply.

Question 4

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

Accepted Answer

To stabilize output in response to a large decrease in U.S. net exports, expansionary fiscal policy or monetary policy should be implemented. This means either decreasing taxes or increasing the money supply, or a combination of both. These policies increase aggregate demand, which can counter the negative impact of decreased net exports on output. Option C is the only choice that includes expansionary policies.

Question 5

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 relatively quickly, but its full impact on aggregate demand may take several months to materialize. For example, when the central bank lowers interest rates, it may take some time for consumers and businesses to react by borrowing more and spending more on investment. Similarly, when the central bank tightens policy by raising interest rates, it may take some time for consumers and businesses to respond by borrowing and spending less. Therefore, while the short-term effects of monetary policy can be relatively quick, the full impact may take longer to unfold.

Question 6

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

The advocate for an active stabilization policy would want the government to increase its expenditures in order to stimulate economic activity and create jobs. Decreasing the money supply or increasing taxes would have the opposite effect and likely worsen the situation.

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

When businesses and consumers become pessimistic, they tend to decrease spending, which can lead to a decrease in aggregate demand, a decrease in prices and a decrease in real GDP. To counteract this, the Federal Reserve can increase the money supply, which will lead to lower interest rates, making borrowing less expensive and increasing spending. This results in an increase in aggregate demand and helps to prevent a decline in prices and real GDP.

Question 8

Suppose there was a large increase in net exports. If the Fed wanted to stabilize output, it could
A) increase the money supply, which will reduce interest rates.
B) decrease the money supply, which will reduce interest rates.
C) increase the money supply, which will increase interest rates.
D) decrease the money supply, which will increase interest rates.

Accepted Answer

To stabilize output in the face of increased net exports, the Fed might aim to counteract the inflationary pressure by decreasing the money supply, which would lead to higher interest rates, thereby cooling down the economy.

Question 9

Suppose there is an increase in government spending. To stabilize output, the Federal Reserve would
A) increase government spending.
B) increase the money supply.
C) decrease government spending.
D) decrease the money supply.

Accepted Answer

The answer of Suppose there is an increase in government...

Question 10

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 11

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 answer of The Kennedy tax cut of 1964 included...

Question 12

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 states that the proposal for tax cuts came from advice given by President Kennedy's economists. The timeframe is given as 1961. This means that Keynes's ideas were only a few years old at the time, as he died in 1946. Therefore, choice C is the best option. Choices A and B are incorrect because they both state that Keynes was opposed to tax cuts, which is not true. Choice D is incorrect because Keynes's ideas had already been widely disseminated by 1961.

Question 13

Suppose an increase in interest rates causes rising unemployment and falling output. To counter this, the Federal Reserve would
A) increase government spending.
B) increase the money supply.
C) decrease government spending.
D) decrease the money supply.

Accepted Answer

Increasing the money supply would help to lower interest rates, which could in turn lead to an increase in spending and investment, potentially helping to reduce unemployment and increase output. Decreasing government spending or decreasing the money supply would likely have the opposite effect, exacerbating the economic downturn. Increasing government spending would not necessarily address the root cause of the problem (higher interest rates) and could potentially lead to higher inflation.

Question 14

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?
A) a decrease in the money supply
B) an increase in tax rates
C) an increase in government purchases
D) an increase in interest rates.

Accepted Answer

Proponents of stabilization policy would advocate for an increase in government purchases in order to stimulate economic activity and reduce unemployment. This policy would inject money into the economy and create jobs through government spending on infrastructure projects or hiring workers for public services. Decreasing the money supply, increasing tax rates, or increasing interest rates may have a contractionary effect on the economy, leading to decreased spending and potentially exacerbating unemployment.

Question 15

Suppose households attempt to decrease their money holdings. To counter this decrease in money demand and stabilize output, the Federal Reserve will
A) increase government spending.
B) increase the money supply.
C) decrease government spending.
D) decrease the money supply.

Accepted Answer

The answer of Suppose households attempt to decrease their money...

Question 16

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

A large decline in net exports would lead to a decrease in aggregate demand and output. To stabilize output, the Fed needs to increase aggregate demand by lowering interest rates. One way to do this is by buying bonds, which increases the demand for bonds and lowers their yield (interest rates). Therefore, the correct choice is to buy bonds to lower interest rates (option B).

Question 17

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

If aggregate demand shifts to the left, output decreases and unemployment increases. To stabilize output, policymakers can increase aggregate demand. To increase aggregate demand, they can institute an investment tax credit, which would encourage businesses to invest more, or increase the money supply, which would make it easier and cheaper for people to borrow and spend. Repealing an investment tax credit or decreasing the money supply would further decrease aggregate demand and worsen the recession. Therefore, the best choice is to institute an investment tax credit or increase the money supply.

Question 18

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 19

Suppose households attempt to increase their money holdings. To stabilize output by countering this increase in money demand, the Federal Reserve would
A) increase government spending.
B) increase the money supply.
C) decrease government spending.
D) decrease the money supply.

Accepted Answer

If households attempt to increase their money holdings, this will lead to a decrease in the money supply, which will reduce spending and aggregate demand, leading to a decrease in output. To stabilize output, the Federal Reserve can counteract this decrease in money supply by increasing the money supply. By increasing the money supply, the Federal Reserve can increase spending and aggregate demand, which will stabilize output.

Question 20

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 increase expenditures.
B) rightward. In an attempt to stabilize the economy, the government could decrease expenditures.
C) leftward. In an attempt to stabilize the economy, the government could increase expenditures.
D) leftward. In an attempt to stabilize the economy, the government could decrease expenditures.

Accepted Answer

The answer of A reduction in U.S net exports would...

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

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?

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

Suppose there is a tax increase. To stabilize output, the Federal Reserve will

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

Monetary policy

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?

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

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

Suppose there is an increase in government spending. To stabilize output, the Federal Reserve would

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

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

Suppose an increase in interest rates causes rising unemployment and falling output. To counter this, the Federal Reserve would

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

Suppose households attempt to decrease their money holdings. To counter this decrease in money demand and stabilize output, the Federal Reserve will

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

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

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

Suppose households attempt to increase their money holdings. To stabilize output by countering this increase in money demand, the Federal Reserve would

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