Question 1

Opponents of active stabilization policy

Accepted Answer

A)  advocate a monetary policy designed to offset changes in the unemployment rate.
B)  argue that fiscal policy is unable to change aggregate demand or aggregate supply.
C)  believe that the political process creates lags in the implementation of fiscal policy.
D)  None of the above is correct.E) A) and C)
F) B) and D)

Question 2

Taxes tend to

Accepted Answer

A)  rise and so shift aggregate demand right during recessions.
B)  rise and so shift aggregate demand left during recessions.
C)  fall and so shift aggregate demand right during recessions.
D)  fall and so shift aggregate demand left during recessions.E) None of the above
F) B) and C)

Question 3

The multiplier is computed as MPC/(1 - MPC).

Accepted Answer

A) True 
 B)False

Question 4

If the multiplier is 5,the MPC is

Accepted Answer

A)  0.05.
B)  0.5.
C)  0.6.
D)  0.8.E) B) and D)
F) B) and C)

Question 5

Suppose that there is a multiplier effect that is greater than one and that there are no crowding out or investment accelerator effects.Which of the following would shift aggregate demand right by more than the increase in expenditures?

Accepted Answer

A)  an increase in government expenditures.
B)  an increase in net exports.
C)  an increase in investment spending.
D)  All of the above are correct.E) C) and D)
F) B) and C)

Question 6

If the stock market booms

Accepted Answer

A)  household spending increases.To offset the effects of this on the price level and real GDP, the Fed would increase the money supply.
B)  household spending increases.To offset the effects of this on the price level and real GDP, the Fed would decrease the money supply.
C)  household spending decreases.To offset the effects of this on the price level and real GDP, the Fed would increase the money supply.
D)  household spending decreases.To offset the effects of this on the price level and real GDP, the Fed would decrease the money supply.E) B) and C)
F) A) and D)

Question 7

A decrease in government spending initially and primarily shifts

Accepted Answer

A)  aggregate demand right.
B)  aggregate demand left.
C)  aggregate supply right.
D)  neither aggregate demand nor aggregate supply.E) A) and B)
F) None of the above

Question 8

Stock prices often rise when the Fed raises interest rates.

Accepted Answer

A) True 
 B)False

Question 9

The multiplier effect

Accepted Answer

A)  and the crowding-out effect both amplify the effects of an increase in government expenditures.
B)  and the crowding-out effect both diminish the effects of an increase in government expenditures.
C)  diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects.
D)  amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.E) C) and D)
F) A) and B)

Question 10

According to the crowding-out effect,an increase in government spending

Accepted Answer

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

Question 11

Automatic stabilizers

Accepted Answer

A)  increase the problems that lags cause in using fiscal policy as a stabilization tool.
B)  are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.
C)  are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession.
D)  All of the above are correct.E) A) and D)
F) A) and B)

Question 12

An increase in the U.S.interest rate

Accepted Answer

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

Question 13

If the government cuts the tax rate,workers get to keep

Accepted Answer

A)  less of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
B)  less of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.
C)  more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
D)  more of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.E) B) and D)
F) All of the above

Question 14

In the long run,fiscal policy primarily affects

Accepted Answer

A)  aggregate demand.In the short run, it affects primarily aggregate supply.
B)  aggregate supply.In the short run, it affects primarily saving, investment, and growth.
C)  saving, investment, and growth.In the short run, it affects primarily aggregate demand.
D)  saving, investment, and growth.In the short run, it affects primarily aggregate supply.E) B) and D)
F) All of the above

Question 15

If expected inflation is constant and the nominal interest rate increased 3 percentage points,the real interest rate would

Accepted Answer

A)  increase 3 percentage points.
B)  increase, but by less than 3 percentage points.
C)  decrease, but by less than 3 percentage points.
D)  decrease by 3 percentage points.E) C) and D)
F) A) and B)

Question 16

Which of the following shifts money demand right?

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 levelE) B) and D)
F) A) and D)

Question 17

Most economists believe that a cut in tax rates

Accepted Answer

A)  would generally increase government tax revenue.
B)  would have no effect on aggregate demand.
C)  has a relatively small effect on the aggregate supply curve.
D)  All of the above are correct.E) B) and C)
F) B) and D)

Question 18

According to liquidity preference theory,if the quantity of money demanded is greater than the quantity supplied,the interest rate will

Accepted Answer

A)  increase and the quantity of money demanded will decrease.
B)  increase and the quantity of money demanded will increase.
C)  decrease and the quantity of money demanded will decrease.
D)  decrease and the quantity of money demanded will increase.E) A) and D)
F) A) and C)

Question 19

If at some interest rate the quantity of money demanded is greater than the quantity of money supplied,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 C)
F) All of the above

Question 20

For the United States,the most important reason for the downward slope of the aggregate demand curve is the interest-rate effect.

Accepted Answer

A) True 
 B)False

Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Opponents of active stabilization policy

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In the long run,fiscal policy primarily affects

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If the government cuts the tax rate,workers get to keep

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Automatic stabilizers

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If expected inflation is constant and the nominal interest rate increased 3 percentage points,the real interest rate would

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The multiplier effect

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For the United States,the most important reason for the downward slope of the aggregate demand curve is the interest-rate effect.

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The multiplier is computed as MPC/(1 - MPC).

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According to the crowding-out effect,an increase in government spending

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Most economists believe that a cut in tax rates

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According to liquidity preference theory,if the quantity of money demanded is greater than the quantity supplied,the interest rate will

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Stock prices often rise when the Fed raises interest rates.

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An increase in the U.S.interest rate

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Which of the following shifts money demand right?

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If the stock market booms

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Taxes tend to

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Suppose that there is a multiplier effect that is greater than one and that there are no crowding out or investment accelerator effects.Which of the following would shift aggregate demand right by more than the increase in expenditures?

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

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A decrease in government spending initially and primarily shifts

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If the multiplier is 5,the MPC is

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