Question 1

According to liquidity preference theory, the slope of the money demand curve is explained as follows:

Accepted Answer

A)  Interest rates rise as the Fed reduces the quantity of money demanded.
B)  Interest rates fall as the Fed reduces the supply of money.
C)  People will want to hold less money as the cost of holding it falls.
D)  People will want to hold more money as the cost of holding it falls.

Question 2

When the Fed lowers the growth rate of the money supply, it must take into account

Accepted Answer

A)  only the short-run effect on production.
B)  only the short-run effects on inflation and production.
C)  only the long-run effect on inflation.
D)  the long-run effect on inflation as well as the short-run effect on production.

Question 3

Other things the same, which of the following responses would we expect to result from an decrease in U.S. interest rates?

Accepted Answer

A)  U.S. citizens decide to hold more foreign bonds.
B)  People choose to hold more currency.
C)  You decide to purchase a new oven for your cookie factory.
D)  All of the above are correct.

Question 4

According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

Accepted Answer

A)  rises and the aggregate quantity of goods demanded rises.
B)  rises and the aggregate quantity of goods demanded falls.
C)  falls and the aggregate quantity of goods demanded rises.
D)  falls and the aggregate quantity of goods demanded falls.

Question 5

When the interest rate is below the equilibrium level,

Accepted Answer

A)  the quantity of money that the Federal Reserve has supplied exceeds the quantity of money that people want to hold.
B)  people respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts.
C)  bond issuers and banks respond by lowering the interest rates they offer.
D)  All of the above are correct.

Question 6

There is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct?

Accepted Answer

A)  By themselves, both the change in output and the change in the interest rate increase desired investment.
B)  By themselves, both the change in output and the change in the interest rate decrease desired investment.
C)  By itself, the change in output increases desired investment spending and by itself the change in the interest rate decreases desired investment spending.
D)  By itself, the change in output decreases desired investment spending and by itself the change in the interest rate increases desired investment spending.

Question 7

Which of the following sequences best represents the crowding-out effect?

Accepted Answer

A)  government purchases  ↑⇒\uparrow \Rightarrow↑⇒  GDP ↑⇒\uparrow \Rightarrow↑⇒  supply of money  ↓⇒\darr\Rightarrow↓⇒  equilibrium interest rate  ↑⇒\uparrow \Rightarrow↑⇒  quantity of goods and services demanded  ↓\darr↓ 
B)  government purchases  ↓⇒\darr\Rightarrow↓⇒  GDP  ↓⇒\darr\Rightarrow↓⇒  demand for money  ↓⇒\darr\Rightarrow↓⇒  equilibrium interest rate  ↓⇒\darr\Rightarrow↓⇒  quantity of goods and services demanded  ↓\darr↓ 
C)  government purchases  ↑⇒\uparrow \Rightarrow↑⇒  GDP  ↑⇒\uparrow \Rightarrow↑⇒  demand for money  ↑⇒\uparrow \Rightarrow↑⇒  equilibrium interest rate  ↑⇒\uparrow \Rightarrow↑⇒  quantity of goods and services demanded  ↓\darr↓ 
D)  taxes  ↑⇒\uparrow \Rightarrow↑⇒ GDP  ↓⇒\darr\Rightarrow↓⇒  demand for money  ↓⇒\darr\Rightarrow↓⇒  equilibrium interest rate  ↑⇒\uparrow \Rightarrow↑⇒  quantity of goods and services demanded  ↓\darr↓

Question 8

If the Fed conducts open-market sales, which of the following quantities increase(s) ?

Accepted Answer

A)  interest rates, prices, and investment spending
B)  interest rates and prices, but not investment spending
C)  interest rates and investment, but not prices
D)  interest rates, but not investment or prices

Question 9

Which of the following actions might we logically expect to result from rising stock prices?

Accepted Answer

A)  Jim increases his consumption spending.
B)  Firms sell fewer shares of new stock.
C)  Firms spend less on investment.
D)  None of the above is correct.

Question 10

When the Fed sells government bonds, the reserves of the banking system

Accepted Answer

A)  increase, so the money supply increases.
B)  increase, so the money supply decreases.
C)  decrease, so the money supply increases.
D)  decrease, so the money supply decreases.

Question 11

Assume the MPC is 0.75. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

Accepted Answer

A)  left by $200 billion.
B)  left by $400 billion.
C)  right by $800 billion.
D)  None of the above is correct.

Question 12

The process of the investment accelerator involves

Accepted 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.

Question 13

Figure 21-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. 1 to r2, then A) there would be no crowding out. B) the full multiplier effect of the increase in government purchases would be realized. C) the AD curves that actually apply, before and after the change in government purchases, would be separated horizontally by the distance equal to the multiplier times the change in government purchases. D) All of the above are correct." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 21-6. Suppose the graphs are drawn to show the effects of an increase in government purchases. If it were not for the increase in r from r1 to r2, then

Accepted Answer

A)  there would be no crowding out.
B)  the full multiplier effect of the increase in government purchases would be realized.
C)  the AD curves that actually apply, before and after the change in government purchases, would be separated horizontally by the distance equal to the multiplier times the change in government purchases.
D)  All of the above are correct.

Question 14

Figure 21-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. 1, A) the price level is held fixed at P1. B) the interest rate is held fixed at r1. C) the money supply is changing so as to keep the money market in equilibrium. D) the expected inflation rate is changing so as to keep the real interest rate constant." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 21-2. As we move from one point to another along the money-demand curve MD1,

Accepted Answer

A)  the price level is held fixed at P1.
B)  the interest rate is held fixed at r1.
C)  the money supply is changing so as to keep the money market in equilibrium.
D)  the expected inflation rate is changing so as to keep the real interest rate constant.

Question 15

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

Accepted Answer

A)  interest rate
B)  money supply
C)  quantity of output
D)  price level

Question 16

Which of the following events would shift money demand to the left?

Accepted Answer

A)  an increase in the interest rate or an increase in the price level
B)  an increase in the interest rate, but not an increase in the price level
C)  an increase in the price level, but not an increase in the interest rate
D)  neither an increase in the interest rate nor an increase in the price level

Question 17

According to liquidity preference theory, if there were a shortage of money, then

Accepted Answer

A)  the interest rate would be above equilibrium and the quantity of money demanded would be too large for equilibrium.
B)  the interest rate would be above equilibrium and the quantity of money demanded would be too small for equilibrium.
C)  the interest rate would be below equilibrium and the quantity of money demanded would be too small for equilibrium.
D)  the interest rate would be below equilibrium and the quantity of money demanded would be too large for equilibrium.

Question 18

Other things the same, which of the following happens if the price level falls?

Accepted Answer

A)  Money demand shifts rightward.
B)  Initially there is an excess demand for money in the money market.
C)  The interest rate falls.
D)  None of the above is correct.

Question 19

According to the theory of liquidity preference, an increase in the price level causes the

Accepted Answer

A)  interest rate and investment to rise.
B)  interest rate and investment to fall.
C)  interest rate to rise and investment to fall.
D)  interest rate to fall and investment to rise.

Question 20

The Employment Act of 1946 states that

Accepted Answer

A)  the Fed should use monetary policy only to control the rate of inflation.
B)  the government should promote full employment and production.
C)  the government should periodically increase the minimum wage and unemployment insurance benefits.
D)  All of the above are correct.

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

Which of the following events would shift money demand to the left?

Correct Answer
verified

Correct Answer
verified

According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

Correct Answer
verified

The Employment Act of 1946 states that

Correct Answer
verified

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

Correct Answer
verified

Assume the MPC is 0.75. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

Correct Answer
verified

When the Fed lowers the growth rate of the money supply, it must take into account

Correct Answer
verified

Which of the following sequences best represents the crowding-out effect?

Correct Answer
verified

According to liquidity preference theory, the slope of the money demand curve is explained as follows:

Correct Answer
verified

There is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct?

Correct Answer
verified

When the Fed sells government bonds, the reserves of the banking system

Correct Answer
verified

Other things the same, which of the following responses would we expect to result from an decrease in U.S. interest rates?

Correct Answer
verified

If the Fed conducts open-market sales, which of the following quantities increase(s) ?

Correct Answer
verified

The process of the investment accelerator involves

Correct Answer
verified

When the interest rate is below the equilibrium level,

Correct Answer
verified

Which of the following actions might we logically expect to result from rising stock prices?

Correct Answer
verified

According to the theory of liquidity preference, an increase in the price level causes the

Correct Answer
verified

Other things the same, which of the following happens if the price level falls?

Correct Answer
verified

Correct Answer
verified

According to liquidity preference theory, if there were a shortage of money, then

Correct Answer
verified

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

Which of the following events would shift money demand to the left?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

Correct AnswerverifiedShow Answer

The Employment Act of 1946 states that

Correct AnswerverifiedShow Answer

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

Correct AnswerverifiedShow Answer

Assume the MPC is 0.75. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

Correct AnswerverifiedShow Answer

When the Fed lowers the growth rate of the money supply, it must take into account

Correct AnswerverifiedShow Answer

Which of the following sequences best represents the crowding-out effect?

Correct AnswerverifiedShow Answer

According to liquidity preference theory, the slope of the money demand curve is explained as follows:

Correct AnswerverifiedShow Answer

There is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct?

Correct AnswerverifiedShow Answer

When the Fed sells government bonds, the reserves of the banking system

Correct AnswerverifiedShow Answer

Other things the same, which of the following responses would we expect to result from an decrease in U.S. interest rates?

Correct AnswerverifiedShow Answer

If the Fed conducts open-market sales, which of the following quantities increase(s) ?

Correct AnswerverifiedShow Answer

The process of the investment accelerator involves

Correct AnswerverifiedShow Answer

When the interest rate is below the equilibrium level,

Correct AnswerverifiedShow Answer

Which of the following actions might we logically expect to result from rising stock prices?

Correct AnswerverifiedShow Answer

According to the theory of liquidity preference, an increase in the price level causes the

Correct AnswerverifiedShow Answer

Other things the same, which of the following happens if the price level falls?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

According to liquidity preference theory, if there were a shortage of money, then

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified