Macroeconomics [Ch. 21]

1. 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)

True

False

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

True

False

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

True

False

4. 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

True

False

5. 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

True

False

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

True

False

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

True

False

8. 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

True

False

9. Which of the following is an automatic stabilizer?

Military spending

Spending on public schools

Unemployment benefits

Spending on the space shuttle

All of the above are automatic stabilizers

10. 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

True

False

11. 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

True

False

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

.75

4

7.5

None of the above

13. 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

True

False

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

They supply and demand for loanable funds

The supply and demand for money

The supply and demand for labor

Aggregate supply and aggregate demand

15. The initial impact of an increase in government spending is to shift

Aggregate supply to the right

Aggregate supply to the left

Aggregate demand to the right

Aggregate demand to the left

16. An increase in the marginal propensity to consume (MPC)

Raises the value of the multiplier

Lowers the value of the multiplier

Has no impact on the value of the multiplier

Rarely occurs because the MPC is set by congressional legislation

17. 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

The multiplier effect

The investment accelerator

The crowding-out effect

Supply-side economics

None of the above

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

True

False

19. 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

True

False

20. 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

True

False

21. 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

The multiplier effect

The investment accelerator

The crowding-out effect

Supply-side economics

None of the above

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

The multiplier effect

The investment accelerator

The crowding-out effect

Supply-side economics

None of the above

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

Shift aggregate demand to the right

Shift aggregate demand to the left

Shift aggregate supply to the right

Shift aggregate supply to the left

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

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

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

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

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

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

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

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

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

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

26. 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

Decrease taxes, which shifts aggregate demand to the right

Decrease taxes, which shifts aggregate demand to the left

Decrease government spending, which shifts aggregate demand to the right

Decrease government spending, which shifts aggregate demand to the left

27. Which of the following statements about stabilization policy is true?

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

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

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

All of the above are true

28. 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

Increases the quantity demanded of money

Increases the demand for money

Decreases the quantity demanded of money

Decreases the demand for money

Does none of the above

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

The exchange-rate effect

The wealth effect

The fiscal effect

The interest-rate effect

None of the above

30. Which of the following statements regarding taxes is correct?

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

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

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

31. 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

Shifts money demand to the right and increases the interest rate

Shifts money demand to the left and increases the interest rate

Shifts money demand to the right and decreases the interest rate

Shifts money demand to the left and decreases the interest rate

Does none of the above

32. The long-run effect of an increase in the money supply is to

Increase the price level

Decrease the price level

Increase the interest rate

Decrease the interest rate

33. 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

True

False

34. The initial effect of an increase in the money supply is to

Increase the price level

Decrease the price level

Increase the interest rate

Decrease the interest rate

35. 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

Increase government spending and decrease taxes

Decrease government spending and increase taxes

Increase the money supply and decrease interest rates

Decrease the money supply and increase interest rates

Macroeconomics [ch. 21]