Macroeconomics [ch. 21]

35 Questions  I  By Emy_2
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Macroeconomics Quizzes & Trivia
The influence of monetary and fiscal policy on aggregate demand

  
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Questions and Answers

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  • 1. 
    An increase in the interest rate increases the quantity demanded of money because it increases the rate of return on money
    • A. 

      True

    • B. 

      False


  • 2. 
    When money demand is drawn on a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level shifts money demand to the right
    • A. 

      True

    • B. 

      False


  • 3. 
    Keynes's theory of liquidity preference suggests that the interest rate is determined by the supply and demand for money
    • A. 

      True

    • B. 

      False


  • 4. 
    The interest-rate effect suggests that aggregate demand slopes downward because an increase in the price level shifts money demand to the right, increases the interest rate, and reduces investment
    • A. 

      True

    • B. 

      False


  • 5. 
    An increase in the money supply shifts the money supply curve to the right, increases the interest rate, decreases investment, and shifts the aggregate-demand curve to the left
    • A. 

      True

    • B. 

      False


  • 6. 
    Suppose investors and consumers become pessimistic about the future and cut back on expenditures.  If the Fed engages in activist stabilization policy, the policy response should be to decrease the money supply
    • A. 

      True

    • B. 

      False


  • 7. 
    In the short run, a decision by the Fed to increase the money supply is essentially the same as a decision to decrease the interest rate target
    • A. 

      True

    • B. 

      False


  • 8. 
    Because of the multiplier effect, an increase in government spending of $40 billion will shift the aggregate-demand curve to the right by more than $40 billion (assuming there is no crowding out)
    • A. 

      True

    • B. 

      False


  • 9. 
    If the MPC (marginal propensity to consume) is .80, then the value of the multiplier is 8
    • A. 

      True

    • B. 

      False


  • 10. 
    Crowding out occurs when an increase in government spending increases incomes, shifts money demand to the right, raises the interest rate, and reduces private investment
    • A. 

      True

    • B. 

      False


  • 11. 
    Suppose the government increases its expenditure by $10 billion.  If the crowding-out effect exceeds the multiplier effect, then the aggregate-demand curve shifts to the right by more than $10 billion
    • A. 

      True

    • B. 

      False


  • 12. 
    Suppose investors and consumers become pessimistic about the future and cut back on expenditures.  If fiscal policymakers engage in activist stabilization policy, the policy response should be the decrease government spending and increase taxes 
    • A. 

      True

    • B. 

      False


  • 13. 
    Many economists prefer automatic stabilizers because they affect the economy with a shorter lag than activist stabilization policies
    • A. 

      True

    • B. 

      False


  • 14. 
    In the short run, the interest rate is determined by the loanable-funds market, while in the long run, the interest rate is determined by money demand and money supply
    • A. 

      True

    • B. 

      False


  • 15. 
    Unemployment benefits are an example of an automatic stabilizer because when incomes fall, unemployment benefits rise
    • A. 

      True

    • B. 

      False


  • 16. 
    Keynes's liquidity preference theory of the interest rate suggests that the interest rate is determined by
    • A. 

      They supply and demand for loanable funds

    • B. 

      The supply and demand for money

    • C. 

      The supply and demand for labor

    • D. 

      Aggregate supply and aggregate demand


  • 17. 
    When money demand is expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the interest rate
    • A. 

      Increases the quantity demanded of money

    • B. 

      Increases the demand for money

    • C. 

      Decreases the quantity demanded of money

    • D. 

      Decreases the demand for money

    • E. 

      Does none of the above


  • 18. 
    When the supply and demand for money are expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level
    • A. 

      Shifts money demand to the right and increases the interest rate

    • B. 

      Shifts money demand to the left and increases the interest rate

    • C. 

      Shifts money demand to the right and decreases the interest rate

    • D. 

      Shifts money demand to the left and decreases the interest rate

    • E. 

      Does none of the above


  • 19. 
    For the United States, the most important source of the downward slope of the aggregate-demand curve is
    • A. 

      The exchange-rate effect

    • B. 

      The wealth effect

    • C. 

      The fiscal effect

    • D. 

      The interest-rate effect

    • E. 

      None of the above


  • 20. 
    In the market for real output, the initial effect of an increase in the money supply is to
    • A. 

      Shift aggregate demand to the right

    • B. 

      Shift aggregate demand to the left

    • C. 

      Shift aggregate supply to the right

    • D. 

      Shift aggregate supply to the left


  • 21. 
    The initial effect of an increase in the money supply is to
    • A. 

      Increase the price level

    • B. 

      Decrease the price level

    • C. 

      Increase the interest rate

    • D. 

      Decrease the interest rate


  • 22. 
    The long-run effect of an increase in the money supply is to
    • A. 

      Increase the price level

    • B. 

      Decrease the price level

    • C. 

      Increase the interest rate

    • D. 

      Decrease the interest rate


  • 23. 
    Suppose a wave of investor and consumer pessimism causes a reduction in spending. If the Federal Reserve chooses to engage in activist stabilization policy, it should
    • A. 

      Increase government spending and decrease taxes

    • B. 

      Decrease government spending and increase taxes

    • C. 

      Increase the money supply and decrease interest rates

    • D. 

      Decrease the money supply and increase interest rates


  • 24. 
    The initial impact of an increase in government spending is to shift
    • A. 

      Aggregate supply to the right

    • B. 

      Aggregate supply to the left

    • C. 

      Aggregate demand to the right

    • D. 

      Aggregate demand to the left


  • 25. 
    If the marginal propensity to consume (MPC) is .75, the value of the multiplier is
    • A. 

      .75

    • B. 

      4

    • C. 

      7.5

    • D. 

      None of the above


  • 26. 
    An increase in the marginal propensity to consume (MPC)
    • A. 

      Raises the value of the multiplier

    • B. 

      Lowers the value of the multiplier

    • C. 

      Has no impact on the value of the multiplier

    • D. 

      Rarely occurs because the MPC is set by congressional legislation


  • 27. 
    Suppose a wave of investor and consumer optimism has increased spending so that the current level of output exceeds the long-run natural rate. If policymakers choose to engage in activist stabilization policy, they should
    • A. 

      Decrease taxes, which shifts aggregate demand to the right

    • B. 

      Decrease taxes, which shifts aggregate demand to the left

    • C. 

      Decrease government spending, which shifts aggregate demand to the right

    • D. 

      Decrease government spending, which shifts aggregate demand to the left


  • 28. 
    When an increase in government purchases raises incomes, shifts money demand to the right, raises the interest rate, and lowers investment, we have seen a demonstration of
    • A. 

      The multiplier effect

    • B. 

      The investment accelerator

    • C. 

      The crowding-out effect

    • D. 

      Supply-side economics

    • E. 

      None of the above


  • 29. 
    Which of the following statements regarding taxes is correct?
    • A. 

      Most economists believe that, in the short run, the greatest impact of a change in taxes is on aggregate supply, not aggregate demand

    • B. 

      A permanent change in taxes has a greater effect on aggregate demand than a temporary change in taxes

    • C. 

      An increase in taxes shifts the aggregate-demand curve to the right

    • D. 

      A decrease in taxes shifts the aggregate-supply curve to the left


  • 30. 
    Suppose the government increases its purchases by $16 billion. If the multiplier effect exceeds the crowding-out effect, then
    • A. 

      The aggregate-supply curve shifts to the right by more than $16 billion

    • B. 

      The aggregate-supply curve shifts to the left by more than $16 billion

    • C. 

      The aggregate-demand curve shifts to the right by more than $16 billion

    • D. 

      The aggregate-demand curve shifts to the left by more than $16 billion


  • 31. 
    When an increase in government purchases increases the income of some people, and those people spend some of that increase in income on additional consumer goods, we have seen a demonstration of
    • A. 

      The multiplier effect

    • B. 

      The investment accelerator

    • C. 

      The crowding-out effect

    • D. 

      Supply-side economics

    • E. 

      None of the above


  • 32. 
    When an increase in government purchases causes firms to purchase additional plant and equipment, we have seen a demonstration of
    • A. 

      The multiplier effect

    • B. 

      The investment accelerator

    • C. 

      The crowding-out effect

    • D. 

      Supply-side economics

    • E. 

      None of the above


  • 33. 
    Which of the following is an automatic stabilizer?
    • A. 

      Military spending

    • B. 

      Spending on public schools

    • C. 

      Unemployment benefits

    • D. 

      Spending on the space shuttle

    • E. 

      All of the above are automatic stabilizers


  • 34. 
    Which of the following statements about stabilization policy is true? 
    • A. 

      In the short run, a decision by the Fed to increase the targeted money supply is essentially the same as a decision to increase the targeted interest rate

    • B. 

      Congress has veto power over the monetary policy decisions by the Fed

    • C. 

      Long lags enhance the ability of policymakers to "fine-tune" the economy

    • D. 

      Many economists prefer automatic stabilizers because they affect the economy with a shorter lab than activist stabilization policy

    • E. 

      All of the above are true


  • 35. 
    Which of the following best describes how an increase in the money supply shifts aggregate demand?
    • A. 

      The money supply shifts right, the interest rate rises, investment decreases, and aggregate demand shifts left

    • B. 

      The money supply shifts right, the interest rate falls, investment increases, and aggregate demand shifts right

    • C. 

      The money supply shifts right, prices rise, spending falls, and aggregate demand shifts left

    • D. 

      The money supply shifts right, prices fall, spending increases, and aggregate demand shifts right


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