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 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

The Federal Reserve would increase the money supply to counter the effects of rising interest rates. This is because an increase in the money supply would lead to a decrease in the cost of borrowing money, making it easier for businesses to invest and create jobs. Additionally, increasing the money supply would also help boost consumer spending, which in turn would stimulate overall economic activity and output.

Question 3

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 4

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 5

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 there were a large decline in net exports, it would represent a decrease in aggregate demand, leading to a decrease in output. To stabilize output, the Fed would want to increase aggregate demand, which it could do by lowering interest rates through buying bonds. Lowering interest rates would encourage borrowing and spending, which would increase aggregate demand and potentially offset the negative impact of the decline in net exports.

Question 6

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 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 may reduce their spending, leading to decreased aggregate demand and potentially lower prices and GDP. To counteract this, the Federal Reserve can increase the money supply, which will lower interest rates and encourage borrowing and investment. This can stimulate spending and boost aggregate demand, mitigating the negative impact of pessimism.

Question 8

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 indicates a decrease in either consumption, investment, government spending, or net exports. This leads to lower output and employment levels in the economy. In this situation, policymakers can increase aggregate demand by instituting an investment tax credit, encouraging businesses to increase investment spending, which will stimulate economic growth. They can also increase the money supply by implementing expansionary monetary policy, which will increase consumption and investment spending by lowering interest rates. However, decreasing the money supply or repealing an investment tax credit will further suppress aggregate demand, worsening the output gap.

Question 9

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 reduces households' disposable income, which leads to a decrease in consumption and a decrease in aggregate demand, potentially causing output to fall. To stabilize output, the Federal Reserve can increase the money supply, which can lower interest rates and stimulate investment and consumption, offsetting the initial decrease in demand caused by the tax increase. Therefore, increasing the money supply is the best choice to stabilize output when there is a tax increase.

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

Someone who wants the government to follow an active stabilization policy during severe unemployment would advocate for an increase in government expenditures to stimulate demand and increase employment. Decreasing the money supply or increasing taxes would have the opposite effect and likely worsen the unemployment situation.

Question 11

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 by central banks, often within a matter of weeks. However, the impact of monetary policy on aggregate demand takes time to be felt in the economy. There is a lag between the time policy is implemented and the time it takes for changes to interest rates or the money supply to affect borrowing and spending decisions by households and firms. This lag can vary in length, but it is typically several months before the full impact of monetary policy is felt. Therefore, while the implementation of monetary policy can be quick, its impact on the economy occurs with a lag.

Question 12

A policy that results in slow and steady growth of the money supply is an example of
A) an "easy" monetary policy.
B) a "passive" monetary policy.
C) a "practical" monetary policy.
D) an "active" monetary policy.

Accepted Answer

A policy that results in slow and steady growth of the money supply is an example of a "passive" monetary policy because it is not actively trying to stimulate or slow down the economy. Instead, it is simply maintaining a stable and predictable monetary environment.

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 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 to stimulate aggregate demand and reduce unemployment. Option A is incorrect because a decrease in the money supply would typically lead to higher interest rates and could further exacerbate unemployment. Option B is incorrect because an increase in tax rates would reduce consumer spending and investments, further aggravating the recession. Option D is incorrect because an increase in interest rates could further slow down economic activity rather than stimulate it.

Question 15

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 16

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 17

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 18

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

A large decrease in U.S. net exports would result in a decrease in aggregate demand, leading to a decrease in output. To stabilize output, expansionary fiscal or monetary policy would be required. One way to achieve this is to decrease taxes, which would increase disposable income and consumption. Another way is to increase the money supply, which would facilitate borrowing and investment, increasing aggregate demand and output. Therefore, the best choice is to decrease taxes or increase the money supply, and option C is the only one with both options.

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 would increase the demand for money, leading to a decrease in the money supply. To stabilize output, the Federal Reserve would need to increase the money supply to counteract this decrease. Therefore, the correct choice is B: increase the money supply.

Question 20

For the following questions, use the diagram below:
Figure 34-7 
-Refer to Figure 34-7. The aggregate-demand curve could shift from AD1 to AD2 as a result of
A) an increase in government purchases.
B) a decrease in net exports.
C) households saving a smaller fraction of their income.
D) a decrease in the price level.

Accepted Answer

The answer of For the following questions, use the diagram...

Quiz 34: 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 an increase in interest rates causes rising unemployment and falling output. To counter this, 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?

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

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

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

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

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

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

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?

Monetary policy

A policy that results in slow and steady growth of the money supply is an example of

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

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

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

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

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

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

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

For the following questions, use the diagram below: Figure 34-7 -Refer to Figure 34-7. The aggregate-demand curve could shift from AD1 to AD2 as a result of