Question 1

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 2

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 advocate for government intervention to stabilize the economy during times of economic instability, such as severe unemployment. One way to increase aggregate demand and combat unemployment is through an increase in government purchases, as this creates job opportunities and stimulates economic activity. The other options (a decrease in the money supply, an increase in tax rates, and an increase in interest rates) would likely have a contractionary effect on the economy, potentially worsening the unemployment problem.

Question 3

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

When interest rates rise, borrowing becomes more expensive and people and businesses tend to save more and spend less. This leads to a decrease in spending, decreasing the demand for goods and services, and ultimately reducing output and employment. To counter these effects, the Federal Reserve can increase the money supply by purchasing bonds, which reduces interest rates and increases liquidity in the market, encouraging borrowing and spending.

Question 4

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 5

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 was designed to incentivize businesses to invest in new capital equipment, which would increase their productivity and thus increase the aggregate supply in the long run. In the short run, the increased investment would create demand for new equipment, increasing the aggregate demand in the short run as well.

Question 6

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

If businesses and consumers become pessimistic, the Federal Reserve can try to boost the economy by increasing the money supply, which lowers interest rates. Lower interest rates make borrowing money more affordable for businesses and individuals, which stimulates spending and investment, leading to an increase in real GDP. Additionally, lower interest rates can lead to inflation, which can help offset any pessimism-related decrease in the price level.

Question 7

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

When net exports decrease, it means that there are fewer exports and more imports, leading to a decrease in aggregate demand. To stabilize output, the government can take expansionary fiscal or monetary policy measures. Decreasing taxes can increase consumption and investment, boosting aggregate demand. Increasing the money supply can also increase spending and investment, also boosting aggregate demand. Therefore, decreasing taxes or increasing the money supply would be the best options to stabilize output in response to a large decrease in U.S. net exports.

Question 8

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 9

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 through decisions of central banks, but its impact on the economy takes time to materialize. It can take anywhere from a few months to a couple of years for the full effect of monetary policy to be felt on aggregate demand. This is due to various factors, such as lags in the transmission of policy changes to interest rates, borrowing, and spending decisions by households and businesses.

Question 10

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

President Kennedy proposed tax cuts based on the advice he received from economists who had studied Keynes's ideas when they were relatively new. During this time, Keynesian economics was gaining popularity and influence in the US, and the idea of using fiscal policy (such as tax cuts) to stabilize the economy was becoming more accepted. Therefore, it is unlikely that the advice Kennedy received was opposed to Keynesian ideas.

Question 11

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 12

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

Someone who advocates for an active stabilization policy during severe unemployment would want the government to increase government expenditures in order to stimulate the economy and create jobs. Decreasing the money supply would have the opposite effect and could worsen the situation. Increasing taxes would also likely not be effective in stimulating the economy during a period of severe unemployment.

Question 13

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 14

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 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

When aggregate demand shifts to the left, it can lead to a decrease in output and potentially a recession. Policymakers can stabilize output by either increasing aggregate demand or shifting aggregate supply to the right. Instituting an investment tax credit can increase investment spending, which can lead to an increase in aggregate demand, thereby stabilizing output. Increasing the money supply can also increase aggregate demand, but this can potentially cause inflation. Therefore, instituting an investment tax credit is the best choice to stabilize output in this scenario.

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 decrease aggregate demand and output. To stabilize output, the Fed could buy bonds, which would lower interest rates and stimulate investment and consumption spending. This would increase aggregate demand and offset the decline in net exports. Selling bonds would have the opposite effect, raising interest rates and further decreasing aggregate demand and output. Therefore, buying bonds to lower interest rates is the best choice.

Question 17

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 18

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, it can lead to a decrease in spending and a reduction in the overall demand in the economy. To counteract this, the Federal Reserve can increase the money supply to provide liquidity to the market and stimulate spending. This can help stabilize output in the economy. Therefore, the best choice in this scenario is to increase the money supply.

Question 19

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...

Question 20

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 are trying to increase their money holdings, this means that there is an increase in money demand in the economy. To stabilize output, the Federal Reserve needs to counteract this increase in demand by increasing the money supply. This can be done through various monetary policy tools such as open market operations, lowering reserve requirements, or decreasing the discount rate. Increasing government spending or decreasing government spending are fiscal policy tools which may or may not have an impact on output stabilization but they do not directly address the increase in money demand. Decreasing the money supply would only exacerbate the situation and lead to further instability in the economy.

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

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

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

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

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

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

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

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

Monetary policy

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

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

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?

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

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

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

Suppose there were a large decline 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

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

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

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