Question 1

Scenario 34-2. The following facts apply to a small, imaginary economy.
• Consumption spending is $6,720 when income is $8,000.
• Consumption spending is $7,040 when income is $8,500.
-Refer to Scenario 34-2. The marginal propensity to consume for this economy is

Accepted Answer

A)   0.64.
B)   0.83.
C)   0.56.
D)   0.840.E) A) and D)
F) A) and B)

Question 2

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. 
-Refer to Figure 34-4. Which of the following events could explain a decrease in the equilibrium interest rate from r1 to r3?

Accepted Answer

A)   a decrease in the price level
B)   a decrease in the number of firms building new factories and buying new equipment
C)   an increase in the price level
D)   an increase in the number of firms building new factories and buying new equipmentE) B) and C)
F) A) and B)

Question 3

An increase in the U.S. interest rate

Accepted Answer

A)   raises the opportunity cost of holding dollars.
B)   induces households to increase consumption.
C)   shifts money demand to the right.
D)   leads to a depreciation of the U.S. dollar.E) A) and B)
F) A) and C)

Question 4

According to liquidity preference theory, if there were a surplus 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.E) C) and D)
F) A) and B)

Question 5

Suppose foreigners find U.S. goods and services more desirable for some reason other than a change in the exchange rate. Which policies could be used to offset the resulting change in output?

Accepted Answer

A)   an increase in the money supply and an increase in government purchases.
B)   an increase in the money supply and a decrease in government purchases.
C)   a decrease in the money supply and an increase in government purchases.
D)   a decrease in the money supply and a decrease in government purchases.E) C) and D)
F) A) and B)

Question 6

Explain how unemployment insurance acts as an automatic stabilizer.

Accepted Answer

As income falls, unemployment rises. Mor...

Question 7

The Kennedy tax cut of 1964 was

Accepted Answer

A)   successful in stimulating the economy.
B)   designed to shift the aggregate demand curve to the right.
C)   designed to shift the aggregate supply curve to the right.
D)   All of the above are correct.E) B) and C)
F) All of the above

Question 8

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

Accepted Answer

A) True 
 B)False

Question 9

In recent years, the Fed has chosen to target interest rates rather than the money supply because

Accepted Answer

A)   Congress passed a law requiring them to do so.
B)   the President requested them to do so.
C)   the money supply is hard to measure with sufficient precision.
D)   changes in the interest rate change aggregate demand, but changes in the money supply do not.E) All of the above
F) C) and D)

Question 10

Figure 34-13 
-Refer to Figure 34-13. The economy is currently at point A. Given the current situation, the Federal Reserve will _____ bonds, which causes interest rates to _____.

Accepted Answer

The answer of Figure 34-13 
-Refer to Figure 34-13. The...

Question 11

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

Accepted Answer

A)   buy bonds to raise interest rates.
B)   buy bonds to lower interest rates.
C)   sell bonds to raise interest rates.
D)   sell bonds to lower interest rates.E) A) and B)
F) A) and C)

Question 12

If the interest rate is above the Fed's target, the Fed should

Accepted Answer

A)   buy bonds to increase the money supply.
B)   buy bonds to decrease the money supply.
C)   sell bonds to increase the money supply.
D)   sell bonds to decrease the money supply.E) C) and D)
F) B) and D)

Question 13

A 2009 article in The Economist noted that

Accepted Answer

A)   recent research has allowed economists to estimate the values of fiscal multipliers with a great deal of precision.
B)   research on multipliers indicates that multipliers for permanent tax cuts tend to be smaller than multipliers for temporary tax cuts.
C)   most of the evidence on multipliers for government spending is based on changes in military expenditures.
D)   All of the above are correct.E) A) and B)
F) C) and D)

Question 14

When the Federal Reserve conducts an open-market purchase, the money supply and aggregate demand _____.

Accepted Answer

increases,...

Question 15

When the Fed increases the money supply, we expect

Accepted Answer

A)   interest rates and stock prices to rise.
B)   interest rates and stock prices to fall.
C)   interest rates to rise and stock prices to fall.
D)   interest rates to fall and stock prices to rise.E) A) and D)
F) All of the above

Question 16

If the stock market crashes, then

Accepted Answer

A)   aggregate demand increases, which the Fed could offset by increasing the money supply.
B)   aggregate demand increases, which the Fed could offset by decreasing the money supply.
C)   aggregate demand decreases, which the Fed could offset by increasing the money supply.
D)   aggregate demand decreases, which the Fed could offset by decreasing the money supply.E) A) and B)
F) A) and D)

Question 17

Figure 34-7 
-Refer to Figure 34-7. Which of the following is correct?

Accepted Answer

A)   Unemployment rises as the economy moves from point a to point b. 
B)   Either fiscal or monetary policy could be used to move the economy from point b to point a.
C)   If the economy is left alone, then as the economy moves from point b to long-run equilibrium, the price level will fall farther.
D)   All of the above are correct.E) B) and C)
F) A) and B)

Question 18

According to liquidity preference theory, a decrease in the price level shifts the

Accepted Answer

A)   money demand curve rightward, so the interest rate increases.
B)   money demand curve rightward, so the interest rate decreases.
C)   money demand curve leftward, so the interest rate decreases.
D)   money demand curve leftward, so the interest rate increases.E) A) and C)
F) A) and B)

Question 19

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

Accepted Answer

A)   the equilibrium interest rate increases.
B)   the aggregate-demand curve shifts to the right.
C)   the quantity of goods and services demanded is unchanged for a given price level.
D)   the short-run aggregate-supply curve shifts to the left.E) B) and C)
F) All of the above

Question 20

The Employment Act of 1946

Accepted Answer

A)   implies that the government should avoid being a cause of economic fluctuations.
B)   implies that the government should respond to changes in the private economy to stabilize aggregate demand.
C)   reflected the ideas promoted in Keynes's influential book, The General Theory of Employment, Interest, and Money.
D)   All of the above are correctE) A) and D)
F) C) and D)

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

If the interest rate is above the Fed's target, the Fed should

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Scenario 34-2. The following facts apply to a small, imaginary economy. • Consumption spending is $6,720 when income is $8,000. • Consumption spending is $7,040 when income is $8,500. -Refer to Scenario 34-2. The marginal propensity to consume for this economy is

Correct AnswerverifiedShow Answer

An increase in the U.S. interest rate

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When the Fed increases the money supply, we expect

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Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

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If the stock market crashes, then

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The Kennedy tax cut of 1964 was

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Explain how unemployment insurance acts as an automatic stabilizer.

Correct AnswerverifiedAs income falls, unemployment rises. Mor...View AnswerShow Answer

In recent years, the Fed has chosen to target interest rates rather than the money supply because

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The Employment Act of 1946

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A 2009 article in The Economist noted that

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Figure 34-13 -Refer to Figure 34-13. The economy is currently at point A. Given the current situation, the Federal Reserve will _____ bonds, which causes interest rates to _____.

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According to liquidity preference theory, a decrease in the price level shifts the

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Figure 34-7 -Refer to Figure 34-7. Which of the following is correct?

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When the Federal Reserve conducts an open-market purchase, the money supply and aggregate demand _____.

Correct Answerverifiedincreases,...View AnswerShow Answer

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

Correct AnswerverifiedShow Answer

Suppose foreigners find U.S. goods and services more desirable for some reason other than a change in the exchange rate. Which policies could be used to offset the resulting change in output?

Correct AnswerverifiedShow Answer

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. -Refer to Figure 34-4. Which of the following events could explain a decrease in the equilibrium interest rate from r1 to r3?

Correct AnswerverifiedShow Answer

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As income falls, unemployment rises. Mor...
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Figure 34-13 -Refer to Figure 34-13. The economy is currently at point A. Given the current situation, the Federal Reserve will _ bonds, which causes interest rates to _.

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increases,...
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