Question 1

The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates

Accepted Answer

A)  the accelerator effect.
B)  the multiplier effect.
C)  the chain effect.
D)  the bandwagon effect.E) A) and B)
F) A) and C)

Question 2

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Accepted Answer

A) True 
 B)False

Question 3

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

Accepted Answer

A)  zero.
B)  likely smaller than if the cut had been permanent.
C)  likely about the same as if the cut had been permanent.
D)  likely larger than if the cut had been permanent.E) None of the above
F) B) and C)

Question 4

Unemployment insurance and welfare programs work as automatic stabilizers.

Accepted Answer

A) True 
 B)False

Question 5

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always half as strong as the multiplier effect, and if the MPC equals 0.8, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

Accepted Answer

A)  by $5 billion
B)  by $10 billion
C)  by $20 billion
D)  by $50 billionE) A) and D)
F) B) and D)

Question 6

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Accepted Answer

A) True 
 B)False

Question 7

Figure 21-1 
-Refer to Figure 21-1. There is an excess demand for money at an interest rate of

Accepted Answer

A)  2 percent.
B)  3 percent.
C)  4 percent.
D)  None of the above is correct.E) A) and B)
F) A) and C)

Question 8

For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve?

Accepted Answer

A)  An increase in the price level decreases the interest rate.
B)  An increase in the price level increases the interest rate.
C)  An increase in the money supply decreases the interest rate.
D)  An increase in the money supply increases the interest rate.E) A) and C)
F) B) and C)

Question 9

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 C)

Question 10

When the interest rate is above the equilibrium level,

Accepted Answer

A)  the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied.
B)  people respond by buying interest-bearing bonds or by depositing money in interest-bearing bank accounts.
C)  bond issuers and banks respond by lowering the interest rates they offer.
D)  All of the above are correct.E) A) and B)
F) B) and D)

Question 11

According to liquidity preference theory, the money-supply curve is

Accepted Answer

A)  upward sloping.
B)  downward sloping.
C)  vertical.
D)  horizontal.E) B) and D)
F) A) and B)

Question 12

If there is excess demand for money, then people will

Accepted Answer

A)  deposit more money into interest-bearing accounts, and the interest rate will fall.
B)  deposit more money 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) B) and D)
F) A) and C)

Question 13

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

Accepted Answer

A) True 
 B)False

Question 14

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

Accepted Answer

A)  assumption that increases in government purchases have no effect on consumer spending.
B)  assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred.
C)  empirical evidence that points to a value of aboutfor the MPC.
D)  fact that the multiplier effect is represented by an infinite geometric series.E) A) and C)
F) B) and C)

Question 15

People will want to hold more money if the price level

Accepted Answer

A)  or if the interest rate increases.
B)  or if the interest rate decreases.
C)  increases or if the interest rate decreases.
D)  decreases or if the interest rate increases.E) A) and B)
F) A) and C)

Question 16

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

Accepted Answer

A)  Your aunt puts more money in her savings account.
B)  Foreign citizens decide to buy fewer U.S. bonds.
C)  You decide to purchase a new oven for your cookie factory.
D)  All of the above are correct.E) A) and B)
F) All of the above

Question 17

If expected inflation is constant and the nominal interest rate increases by 3.5 percentage points, then the real interest rate

Accepted Answer

A)  increases by 3.5 percentage points.
B)  increases, but by less than 3.5 percentage points.
C)  decreases, but by less than 3.5 percentage points.
D)  decreases by 3.5 percentage points.E) B) and C)
F) A) and B)

Question 18

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 AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Finally, assume the horizontal distance between the curves AD1 and AD3 is $30 billion. The extent of crowding out, for any particular level of the price level, is A) $25 billion. B) $30 billion. C) $45 billion. D) $60 billion." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 21-6. Suppose the multiplier is 3 and the government increases its purchases by $25 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Finally, assume the horizontal distance between the curves AD1 and AD3 is $30 billion. The extent of crowding out, for any particular level of the price level, is

Accepted Answer

A)  $25 billion.
B)  $30 billion.
C)  $45 billion.
D)  $60 billion.E) B) and D)
F) A) and D)

Question 19

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

Question 20

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

Accepted Answer

A)  MPC = 1/2, and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures.
B)  MPC = 2/3, and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures
C)  MPC = 3/4, and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures
D)  All of the above are correct.E) B) and D)
F) C) and D)

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

Correct Answer
verified

If expected inflation is constant and the nominal interest rate increases by 3.5 percentage points, then the real interest rate

Correct Answer
verified

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

Correct Answer
verified

According to liquidity preference theory, the money-supply curve is

Correct Answer
verified

For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve?

Correct Answer
verified

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

Correct Answer
verified

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

Correct Answer
verified

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Correct Answer
verified

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

Correct Answer
verified

The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates

Correct Answer
verified

Figure 21-1 -Refer to Figure 21-1. There is an excess demand for money at an interest rate of

Correct Answer
verified

People will want to hold more money if the price level

Correct Answer
verified

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Correct Answer
verified

Unemployment insurance and welfare programs work as automatic stabilizers.

Correct Answer
verified

If there is excess demand for money, then people will

Correct Answer
verified

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

Correct Answer
verified

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

Correct Answer
verified

When the interest rate is above the equilibrium level,

Correct Answer
verified

Correct Answer
verified

If the stock market crashes, then

Correct Answer
verified

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

Correct AnswerverifiedShow Answer

If expected inflation is constant and the nominal interest rate increases by 3.5 percentage points, then the real interest rate

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to liquidity preference theory, the money-supply curve is

Correct AnswerverifiedShow Answer

For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve?

Correct AnswerverifiedShow Answer

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.

Correct AnswerverifiedShow Answer

If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

Correct AnswerverifiedShow Answer

The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates

Correct AnswerverifiedShow Answer

Figure 21-1 -Refer to Figure 21-1. There is an excess demand for money at an interest rate of

Correct AnswerverifiedShow Answer

People will want to hold more money if the price level

Correct AnswerverifiedShow Answer

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

Correct AnswerverifiedShow Answer

Unemployment insurance and welfare programs work as automatic stabilizers.

Correct AnswerverifiedShow Answer

If there is excess demand for money, then people will

Correct AnswerverifiedShow Answer

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the

Correct AnswerverifiedShow Answer

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

Correct AnswerverifiedShow Answer

When the interest rate is above the equilibrium level,

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the stock market crashes, then

Correct AnswerverifiedShow Answer

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