Question 1

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 = 0.08; r2 = 0.12; Y1 = 13,000; Y2 = 10,000; P1 = 1.0; and P2 = 1.2. Which of the following statements is correct? A) When r = r2, nominal output is higher than it is when r = r1. B) When r = r2, real output is higher than it is when r = r1. C) When r = r2, the expected rate of inflation is higher than it is when r = r1. D) If the velocity of money is 4 when r = r2, then the quantity of money is $3,000." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 21-2. Assume the money market is always in equilibrium, and suppose r1 = 0.08; r2 = 0.12; Y1 = 13,000; Y2 = 10,000; P1 = 1.0; and P2 = 1.2. Which of the following statements is correct?

Accepted Answer

A)  When r = r2, nominal output is higher than it is when r = r1.
B)  When r = r2, real output is higher than it is when r = r1.
C)  When r = r2, the expected rate of inflation is higher than it is when r = r1.
D)  If the velocity of money is 4 when r = r2, then the quantity of money is $3,000.E) All of the above
F) C) and D)

Question 2

According to liquidity preference theory, the money-supply curve would shift rightward

Accepted Answer

A)  if the money demand curve shifted right.
B)  if the Federal Reserve chose to increase the money supply.
C)  if the interest rate increased.
D)  All of the above are correct.E) A) and B)
F) B) and C)

Question 3

If there is excess money supply, people will

Accepted Answer

A)  deposit more into interest-bearing accounts, and the interest rate will fall.
B)  deposit more into interest-bearing accounts, and the interest rate will rise.
C)  withdraw money from interest-bearing accounts, and the interest rate will fall.
D)  withdraw money from interest-bearing accounts, and the interest rate will rise.E) A) and D)
F) None of the above

Question 4

An increase in government purchases is likely to

Accepted Answer

A)  decrease interest rates.
B)  result in a net decrease in aggregate demand.
C)  crowd out investment spending by business firms.
D)  decrease money demand.E) B) and D)
F) None of the above

Question 5

Suppose there are both multiplier and crowding out effects but without any accelerator effects. An increase in government expenditures would definitely

Accepted Answer

A)  shift aggregate demand right by a larger amount than the increase in government expenditures.
B)  shift aggregate demand right by the same amount as an the increase in government expenditures.
C)  shift aggregate demand right by a smaller amount than the increase in government expenditures.
D)  Any of the above outcomes are possible.E) A) and B)
F) None of the above

Question 6

Assume the multiplier is 5 and that the crowding-out effect is $20 billion. An increase in government purchases of $10 billion will shift the aggregate-demand curve to the

Accepted Answer

A)  right by $150 billion.
B)  right by $70 billion.
C)  right by $30 billion.
D)  None of the above is correct.E) B) and D)
F) All of the above

Question 7

If, at some interest rate, the quantity of money supplied is greater than the quantity of money demanded, people will desire to

Accepted Answer

A)  sell interest-bearing assets, causing the interest rate to decrease.
B)  sell interest-bearing assets, causing the interest rate to increase.
C)  buy interest-bearing assets, causing the interest rate to decrease.
D)  buy interest-bearing assets, causing the interest rate to increase.E) B) and D)
F) None of the above

Question 8

According to liquidity preference theory, the opportunity cost of holding money is

Accepted Answer

A)  the interest rate on bonds.
B)  the inflation rate.
C)  the cost of converting bonds to a medium of exchange.
D)  the difference between the inflation rate and the interest rate on bonds.E) None of the above
F) A) and B)

Question 9

If a $1,000 increase in income leads to a $750 increase in consumption expenditures, then the marginal propensity to consume is

Accepted Answer

A)  0.75 and the multiplier is 1 1/3.
B)  0.75 and the multiplier is 4.
C)  0.25 and the multiplier is 1 1/3.
D)  0.25 and the multiplier is 4.E) C) and D)
F) B) and C)

Question 10

According to liquidity preference theory, a decrease in the price level causes the interest rate to

Accepted Answer

A)  increase, which increases the quantity of goods and services demanded.
B)  increase, which decreases the quantity of goods and services demanded.
C)  decrease, which increases the quantity of goods and services demanded.
D)  decrease, which decreases the quantity of goods and services demanded.E) B) and C)
F) None of the above

Question 11

Suppose an economy's marginal propensity to consume (MPC)  is 0.6. Then

Accepted Answer

A)  1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 1.96.
B)  1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3.
C)  1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3.
D)  1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 2.5.E) All of the above
F) None of the above

Question 12

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. 
-Refer to Figure 21-2. Which of the following quantities is held constant as we move from one point to another on either graph?

Accepted Answer

A)  the nominal interest rate
B)  the quantity of money demanded
C)  investment
D)  the expected rate of inflationE) A) and B)
F) All of the above

Question 13

An essential piece of the liquidity preference theory is the demand for money.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

Accepted Answer

A)  the crowding-out effect
B)  the multiplier effect
C)  the exchange-rate effect
D)  the interest-rate effectE) A) and B)
F) A) and C)

Question 15

In the long run, fiscal policy influences

Accepted Answer

A)  saving, investment, and growth; in the short run, fiscal policy primarily influences technology and the production function.
B)  saving, investment, and growth; in the short run, fiscal policy primarily influences the aggregate demand for goods and services.
C)  technology and the production function; in the short run, fiscal policy primarily influences saving, investment, and growth.
D)  the aggregate demand for goods and services; in the short run, fiscal policy primarily influences technology and the production function.E) A) and D)
F) A) and C)

Question 16

The interest-rate effect

Accepted Answer

A)  depends on the idea that increases in interest rates increase the quantity of money demanded.
B)  depends on the idea that increases in interest rates increase the quantity of money supplied.
C)  is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.
D)  is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.E) None of the above
F) C) and D)

Question 17

An increase in government spending

Accepted Answer

A)  increases the interest rate and so investment spending increases.
B)  increases the interest rate and so investment spending decreases.
C)  decreases the interest rate and so increases investment spending increases.
D)  decreases the interest rate and so investment spending decreases.E) B) and D)
F) A) and B)

Question 18

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 21-5. What is measured along the vertical axis of the graph?

Accepted Answer

A)  the quantity of output
B)  the amount of crowding out
C)  the interest rate
D)  the price levelE) A) and C)
F) B) and C)

Question 19

Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?

Accepted Answer

A)  both the multiplier effect and the crowding-out effect
B)  the multiplier effect, but not the crowding-out effect
C)  the crowding-out effect, but not the multiplier effect
D)  neither the crowding out effect nor the multiplier effectE) B) and D)
F) None of the above

Question 20

To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could

Accepted Answer

A)  increase the money supply by buying bonds.
B)  Increase the money supply by selling bonds
C)  decrease the money supply by buying bonds.
D)  increase the money supply by selling bonds.E) A) and C)
F) B) and D)

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

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

Correct Answer
verified

The interest-rate effect

Correct Answer
verified

In the long run, fiscal policy influences

Correct Answer
verified

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. What is measured along the vertical axis of the graph?

Correct Answer
verified

An increase in government purchases is likely to

Correct Answer
verified

According to liquidity preference theory, a decrease in the price level causes the interest rate to

Correct Answer
verified

Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?

Correct Answer
verified

If, at some interest rate, the quantity of money supplied is greater than the quantity of money demanded, people will desire to

Correct Answer
verified

Assume the multiplier is 5 and that the crowding-out effect is $20 billion. An increase in government purchases of $10 billion will shift the aggregate-demand curve to the

Correct Answer
verified

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then

Correct Answer
verified

According to liquidity preference theory, the money-supply curve would shift rightward

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

According to liquidity preference theory, the opportunity cost of holding money is

Correct Answer
verified

To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could

Correct Answer
verified

An increase in government spending

Correct Answer
verified

If there is excess money supply, people will

Correct Answer
verified

An essential piece of the liquidity preference theory is the demand for money.

Correct Answer
verified

Suppose there are both multiplier and crowding out effects but without any accelerator effects. An increase in government expenditures would definitely

Correct Answer
verified

If a $1,000 increase in income leads to a $750 increase in consumption expenditures, then the marginal propensity to consume is

Correct Answer
verified

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

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

Correct AnswerverifiedShow Answer

The interest-rate effect

Correct AnswerverifiedShow Answer

In the long run, fiscal policy influences

Correct AnswerverifiedShow Answer

Figure 21-5. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 21-5. What is measured along the vertical axis of the graph?

Correct AnswerverifiedShow Answer

An increase in government purchases is likely to

Correct AnswerverifiedShow Answer

According to liquidity preference theory, a decrease in the price level causes the interest rate to

Correct AnswerverifiedShow Answer

Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?

Correct AnswerverifiedShow Answer

If, at some interest rate, the quantity of money supplied is greater than the quantity of money demanded, people will desire to

Correct AnswerverifiedShow Answer

Assume the multiplier is 5 and that the crowding-out effect is $20 billion. An increase in government purchases of $10 billion will shift the aggregate-demand curve to the

Correct AnswerverifiedShow Answer

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then

Correct AnswerverifiedShow Answer

According to liquidity preference theory, the money-supply curve would shift rightward

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

According to liquidity preference theory, the opportunity cost of holding money is

Correct AnswerverifiedShow Answer

To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could

Correct AnswerverifiedShow Answer

An increase in government spending

Correct AnswerverifiedShow Answer

If there is excess money supply, people will

Correct AnswerverifiedShow Answer

An essential piece of the liquidity preference theory is the demand for money.

Correct AnswerverifiedShow Answer

Suppose there are both multiplier and crowding out effects but without any accelerator effects. An increase in government expenditures would definitely

Correct AnswerverifiedShow Answer

If a $1,000 increase in income leads to a $750 increase in consumption expenditures, then the marginal propensity to consume is

Correct AnswerverifiedShow Answer

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