question
Which of the following policy actions shifts the aggregate-demand curve?
answer
a. an increase in the money supply
b. an increase in taxes
c. an increase in government spending
d. All of the above are correct.
D
b. an increase in taxes
c. an increase in government spending
d. All of the above are correct.
D
question
The logic of the multiplier effect applies
answer
a. only to changes in government spending.
b. to any change in spending on any component of GDP.
c. only to changes in the money supply.
d. only when the crowding-out effect is sufficiently strong.
B
b. to any change in spending on any component of GDP.
c. only to changes in the money supply.
d. only when the crowding-out effect is sufficiently strong.
B
question
The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy because it
answer
a. reduces investment and thereby increases consumer spending.
b. increases the money supply and thereby reduces interest rates.
c. increases income and thereby increases consumer spending.
d. decreases income and thereby increases consumer spending.
C
b. increases the money supply and thereby reduces interest rates.
c. increases income and thereby increases consumer spending.
d. decreases income and thereby increases consumer spending.
C
question
Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?
answer
a. the crowding-out effect
b. the multiplier effect
c. the exchange-rate effect
d. the interest-rate effect
B
b. the multiplier effect
c. the exchange-rate effect
d. the interest-rate effect
B
question
The idea that expansionary fiscal policy has a positive effect on investment is known as
answer
a. monetary policy.
b. crowding out.
c. the investment accelerator.
d. the multiplier.
C
b. crowding out.
c. the investment accelerator.
d. the multiplier.
C
question
The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates
answer
a. the accelerator effect.
b. the multiplier effect.
c. the chain effect.
d. the bandwagon effect.
B
b. the multiplier effect.
c. the chain effect.
d. the bandwagon effect.
B
question
The process of the investment accelerator involves
answer
a. positive feedback from aggregate demand to investment.
b. negative feedback from aggregate demand to investment.
c. positive feedback from aggregate supply to investment.
d. negative feedback from aggregate supply to investment.
A
b. negative feedback from aggregate demand to investment.
c. positive feedback from aggregate supply to investment.
d. negative feedback from aggregate supply to investment.
A
question
Which of the following correctly explains the crowding-out effect?
answer
a. An increase in government expenditures decreases the interest rate and so increases investment spending.
b. An increase in government expenditures increases the interest rate and so reduces investment spending.
c. A decrease in government expenditures increases the interest rate and so increases investment spending.
d. A decrease in government expenditures decreases the interest rate and so reduces investment spending.
B
b. An increase in government expenditures increases the interest rate and so reduces investment spending.
c. A decrease in government expenditures increases the interest rate and so increases investment spending.
d. A decrease in government expenditures decreases the interest rate and so reduces investment spending.
B
question
The term crowding-out effect refers to
answer
a. the reduction in aggregate supply that results when a monetary expansion causes the interest rate to decrease.
b. the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease.
c. the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase.
d. the reduction in aggregate demand that results when a decrease in government spending or an increase in taxes causes the interest rate to increase.
C
b. the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease.
c. the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase.
d. the reduction in aggregate demand that results when a decrease in government spending or an increase in taxes causes the interest rate to increase.
C
question
If the MPC is 5/6 then the multiplier is
answer
6, so a $200 increase in government spending increases aggregate demand by $1200.
question
The multiplier effect
answer
a. and the crowding-out effect both amplify the effects of an increase in government expenditures.
b. and the crowding-out effect both diminish the effects of an increase in government expenditures.
c. diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects.
d. amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.
D
b. and the crowding-out effect both diminish the effects of an increase in government expenditures.
c. diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects.
d. amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.
D
question
Which of the following sequences best represents the crowding-out effect?
answer
a. government purchases ↑ ⇒ GDP ↑ ⇒ supply of money ↓
⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
b. government purchases ↓ ⇒ GDP ↓ ⇒ demand for money ↓
⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↓
c. government purchases ↑ ⇒ GDP ↑ ⇒ demand for money ↑
⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
d. taxes ↑ ⇒ GDP ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑
⇒ quantity of goods and services demanded ↓
C
⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
b. government purchases ↓ ⇒ GDP ↓ ⇒ demand for money ↓
⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↓
c. government purchases ↑ ⇒ GDP ↑ ⇒ demand for money ↑
⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓
d. taxes ↑ ⇒ GDP ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑
⇒ quantity of goods and services demanded ↓
C
question
Suppose the MPC is 0.9. There are no crowding out or investment accelerator effects. If the government increases its expenditures by $30 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion, then by how far does aggregate demand shift to the right?
answer
a. $283 billion and $254.7 billion
b. $283 billion and $283 billion
c. $300 billion and $270 billion
d. $300 billion and $300 billion
C
b. $283 billion and $283 billion
c. $300 billion and $270 billion
d. $300 billion and $300 billion
C
question
Most economists believe that policy
answer
a. only affects aggregate demand fiscal and not aggregate supply.
b. primarily affects aggregate demand.
c. primarily effects aggregate supply.
d. only affects aggregate supply and not aggregate demand.
B
b. primarily affects aggregate demand.
c. primarily effects aggregate supply.
d. only affects aggregate supply and not aggregate demand.
B
question
Monetary policy is determined by
answer
a. the president and Congress and involves changing government spending and taxation.
b. the president and Congress and involves changing the money supply.
c. the Federal Reserve and involves changing government spending and taxation.
d. the Federal Reserve and involves changing the money supply.
D
b. the president and Congress and involves changing the money supply.
c. the Federal Reserve and involves changing government spending and taxation.
d. the Federal Reserve and involves changing the money supply.
D
question
Fiscal policy is determined by
answer
a. the president and Congress and involves changing government spending and taxation.
b. the president and Congress and involves changing the money supply.
c. the Federal Reserve and involves changing government spending and taxation.
d. the Federal Reserve and involves changing the money supply.
A
b. the president and Congress and involves changing the money supply.
c. the Federal Reserve and involves changing government spending and taxation.
d. the Federal Reserve and involves changing the money supply.
A
question
The wealth effect helps explain the slope of the aggregate-demand curve. This effect is
answer
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.
C
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.
C
question
People choose to hold a larger quantity of money if
answer
a. the interest rate rises, which causes the opportunity cost of holding money to rise.
b. the interest rate falls, which causes the opportunity cost of holding money to rise.
c. the interest rate rises, which causes the opportunity cost of holding money to fall.
d. the interest rate falls, which causes the opportunity cost of holding money to fall.
D
b. the interest rate falls, which causes the opportunity cost of holding money to rise.
c. the interest rate rises, which causes the opportunity cost of holding money to fall.
d. the interest rate falls, which causes the opportunity cost of holding money to fall.
D
question
According to the theory of liquidity preference, money demand
answer
a. and the money supply are positively related to the interest rate.
b. and the money supply are negatively related to the interest rate.
c. is negatively related to the interest rate, while the money supply is independent of the interest rate.
d. is independent of the interest rate, while money supply is negatively related to the interest rate.
C
b. and the money supply are negatively related to the interest rate.
c. is negatively related to the interest rate, while the money supply is independent of the interest rate.
d. is independent of the interest rate, while money supply is negatively related to the interest rate.
C
question
The opportunity cost of holding money
answer
a. decreases when the interest rate decreases, so people desire to hold more of it.
b. decreases when the interest rate decreases, so people desire to hold less of it.
c. increases when the interest rate decreases, so people desire to hold more of it.
d. increases when the interest rate decreases, so people desire to hold less of it.
A
b. decreases when the interest rate decreases, so people desire to hold less of it.
c. increases when the interest rate decreases, so people desire to hold more of it.
d. increases when the interest rate decreases, so people desire to hold less of it.
A
question
In which of the following cases would the quantity of money demanded be smallest?
answer
a. r = 0.06, P = 1.2
b. r = 0.05, P = 1.0
c. r = 0.04, P = 1.2
d. r = 0.06, P = 1.0
D
b. r = 0.05, P = 1.0
c. r = 0.04, P = 1.2
d. r = 0.06, P = 1.0
D
question
In which of the following cases would the quantity of money demanded be largest?
answer
a. r = 0.03, P = 1.2
b. r = 0.03, P = 1.3
c. r = 0.04, P = 1.2
d. r = 0.05, P = 0.9
B
b. r = 0.03, P = 1.3
c. r = 0.04, P = 1.2
d. r = 0.05, P = 0.9
B
question
Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more,
answer
a. the smaller the MPC and the stronger the influence of income on money demand.
b. the smaller the MPC and the weaker the influence of income on money demand.
c. the larger the MPC and the stronger the influence of income on money demand.
d. the larger the MPC and the weaker the influence of income on money demand.
D
b. the smaller the MPC and the weaker the influence of income on money demand.
c. the larger the MPC and the stronger the influence of income on money demand.
d. the larger the MPC and the weaker the influence of income on money demand.
D
question
As real GDP falls,
answer
a. money demand rises, so the interest rate rises.
b. money demand rises, so the interest rate falls
c. money demand falls, so the interest rate rises.
d. money demand falls, so the interest rate falls.
D
b. money demand rises, so the interest rate falls
c. money demand falls, so the interest rate rises.
d. money demand falls, so the interest rate falls.
D
question
Suppose households attempt to increase their money holdings. To stabilize output by countering this increase in money demand, the Federal Reserve would
answer
a. increase government spending.
b. increase the money supply.
c. decrease government spending.
d. decrease the money supply.
B
b. increase the money supply.
c. decrease government spending.
d. decrease the money supply.
B
question
In which of the following cases would the quantity of money demanded be smallest?
answer
a. r = 0.06, P = 1.2
b. r = 0.05, P = 1.0
c. r = 0.04, P = 1.2
d. r = 0.06, P = 1.0
D
b. r = 0.05, P = 1.0
c. r = 0.04, P = 1.2
d. r = 0.06, P = 1.0
D
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