Chapter 16

Which of the following is an example of an increase in government purchases? a. The government builds new roads. b. The Federal Reserve purchases government bonds. c. The government decreases personal income taxes. d. The government increases unemployment insurance benefit payments.

a. The government builds new roads.

Assume the following.• The MPC has a value of 0.8.• The relationship between the interest rate, r, and investment, I, is given by theequation,I = 20,000 - br,where b is a positive constant.• Government purchases, G, are increased by $1,000.In which of the following cases would there be no crowding out? a. b = 0 b. b = 0.2 c. b = 0.8 d. b = 1

a. b = 0

Refer to Figure 34-7. If the economy is at point b, a policy to restore full employment would be a. an increase in the money supply. b. a decrease in government purchases. c. an increase in taxes. d. All of the above are correct.

a. an increase in the money supply.

If Congress increases taxes to balance the federal budget, then to prevent additional unemployment and a recession the Fed can a. reduce interest rates by increasing the money supply. b. increase interest rates by decreasing the money supply. c. increase interest rates by increasing the money supply. d. reduce interest rates by decreasing the money supply.

a. reduce interest rates by increasing the money supply.

Refer to Figure 34-8. An increase in government purchases will a. shift aggregate demand from AD1 to AD2. b. shift aggregate demand from AD1 to AD3. c. cause movement from point A to point B along AD1. d. have no effect on aggregate demand.

a. shift aggregate demand from AD1 to AD2.

Refer to Scenario 34-1. The marginal propensity to consume for this economy is a. 0.650. b. 0.750. c. 0.650 or 0.664, depending on whether income is $10,000 or $11,000. d. 0.800.

b. 0.750.

Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500? a. A stock-market boom stimulates consumer spending by $300, and there is an operative crowding-out effect. b. A stock-market boom stimulates consumer spending by $550, and there is a small operative crowding-out effect. c. An economic boom overseas increases the demand for U.S. net exports by $550, and there is no crowding-out effect. d. An economic boom overseas increases the demand for U.S. net exports by $300, and there is no crowding-out effect.

b. A stock-market boom stimulates consumer spending by $550, and there is a small operative crowding-out effect.

An aide to a U.S. Congressman computes the effect on aggregate demand of a $20 billion tax cut. The actual increase in aggregate demand is less than the aide expected. Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand? a. The actual MPC was larger than the MPC the aide used to compute the multiplier. b. The aide thought the tax cut would be permanent, but the actual tax cut was temporary. c. The increase in income shifted money demand less than the aide had anticipated. d. The increase in income resulted in investment rising more than the aide had anticipated.

b. The aide thought the tax cut would be permanent, but the actual tax cut was temporary.

A policy that results in slow and steady growth of the money supply is an example of a. an "easy" monetary policy. b. a "passive" monetary policy. c. a "practical" monetary policy. d. an "active" monetary policy.

b. a "passive" monetary policy.

Refer to Figure 34-7. The aggregate-demand curve could shift from AD1 to AD2 as a result of a. an increase in government purchases. b. a decrease in net exports. c. households saving a smaller fraction of their income. d. a decrease in the price level.

b. a decrease in net exports.

Suppose that the Federal reserve is concerned about the effects of falling stock prices on the economy. What could it do? a. buy bonds to raise the interest rate b. buy bonds to lower the interest rate c. sell bonds to raise the interest rate d. sell bonds to raise the interest rate

b. buy bonds to lower the interest rate

Monetary policy a. can be implemented quickly and most of its impact on aggregate demand occurs very soon after policy is implemented. b. can be implemented quickly, but most of its impact on aggregate demand occurs months after policy is implemented. c. cannot be implemented quickly, but once implemented most of its impact on aggregate demand occurs very soon afterward. d. cannot be implemented quickly and most of its impact on aggregate demand occurs months after policy is implemented.

b. can be implemented quickly, but most of its impact on aggregate demand occurs months after policy is implemented.

Suppose there is a tax increase. To stabilize output, the Federal Reserve will a. increase government spending. b. increase the money supply. c. decrease government spending. d. decrease the money supply.

b. increase the money supply.

Refer to Figure 34-3. For an economy such as the United States, what component of the demand for goods and services is most responsible for the decrease in output from Y1 to Y2? a. consumption b. investment c. net exports d. government spending

b. investment

Refer to Figure 34-3. What quantity is represented by the downward-sloping line on the left-hand graph? a. the supply of money b. the demand for money c. the rate of inflation d. Aggregate Demand.

b. the demand for money

The Employment Act of 1946 states that 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.

b. the government should promote full employment and production.

Other things the same, as the price level rises, a. the interest rate rises causing aggregate demand to shift. b. the interest rate rises causing a movement along a given aggregate-demand curve. c. the interest rate falls causing aggregate demand to shift. d. the interest rate falls causing a movement along a given aggregate-demand curve.

b. the interest rate rises causing a movement along a given aggregate-demand curve.

In which of the following cases does the aggregate-demand curve shift to the right? a. The price level rises, causing the interest rate to fall. b. The price level falls, causing the interest rate to fall. c. The money supply increases, causing the interest rate to fall. d. The money supply decreases, causing the interest rate to fall.

c. The money supply increases, causing the interest rate to fall.

Which of the following reduces the interest rate? a. an increase in government expenditures and an increase in the money supply b. an increase in government expenditures and a decrease in the money supply c. a decrease in government expenditures and an increase in the money supply d. a decrease in government expenditures and a decrease in the money supply

c. a decrease in government expenditures and an increase in the money supply

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment? a. a decrease in the money supply b. an increase in tax rates c. an increase in government purchases d. an increase in interest rates.

c. an increase in government purchases

Opponents of active stabilization policy 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.

c. believe that the political process creates lags in the implementation of fiscal policy.

If the Fed conducts open-market purchases, then which of the following quantities increase(s)? a. interest rates and investment spending b. interest rates, but not investment spending c. investment spending, but not interest rates d. neither interest rates nor investment spending

c. investment spending, but not interest rates

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

c. money demand curve leftward, so the interest rate decreases.

Refer to Figure 34-2. What does Y represent on the horizontal axis of the right-hand graph? a. the quantity of money b. the rate of inflation c. real output d. nominal output

c. real output

People hold money primarily because it a. increases in value when there is inflation. b. serves as a store of value. c. serves as a medium of exchange. d. functions as a unit of account.

c. serves as a medium of exchange.

Paul Samuelson, a famous economist, said that a. "the bond market has predicted zero out of the past nine recessions." b. "the stock market has predicted zero out of the past nine recessions." c. "the bond market has predicted nine out of the past five recessions." d. "the stock market has predicted nine out of the past five recessions."

d. "the stock market has predicted nine out of the past five recessions."

Which of the effects listed below increases the quantity of goods and services demanded when the price level falls and decreases the quantity of goods and services demanded when the price level rises? a. the wealth effect b. the interest-rate effect c. the exchange-rate effect d. All of the above are correct.

d. All of the above are correct.

Which of the following statements generates the greatest amount of disagreement among economists? a. Increases in the money supply shift aggregate demand to the right. b. In the long run, increases in the money supply increase prices, but not output. c. Recessions are associated with decreases in consumption, investment, and employment. d. Government should use fiscal policy to try to stabilize the economy.

d. Government should use fiscal policy to try to stabilize the economy.

Which of the following shifts aggregate demand to the right? a. The price level rises. b. The price level falls. c. The money supply falls. d. None of the above is correct.

d. None of the above is correct.

Which of the following shifts aggregate demand to the left? a. an increase in the price level b. an increase in the money supply c. a decrease in the price level d. a decrease in the money supply

d. a decrease in the money supply

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? 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.

d. a decrease in the money supply and a decrease in government purchases.

The multiplier effect is exemplified by the multiplied impact on a. the money supply of a given increase in government purchases. b. tax revenues of a given increase in government purchases. c. investment of a given increase in interest rates. d. aggregate demand of a given increase in government purchases.

d. aggregate demand of a given increase in government purchases.

A surplus or shortage in the money market is eliminated by adjustments in the price level according to a. both liquidity preference theory and classical theory. b. neither liquidity preference theory nor classical theory. c. liquidity preference theory, but not classical theory. d. classical theory, but not liquidity preference theory.

d. classical theory, but not liquidity preference theory.

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

d. decrease and the quantity of money demanded will increase.

If the Fed conducts open-market sales, the money supply a. increases and aggregate demand shifts right. b. increases and aggregate demand shifts left. c. decreases and aggregate demand shifts right. d. decreases and aggregate demand shifts left.

d. decreases and aggregate demand shifts left.

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

d. neither an increase in the interest rate nor an increase in the price level

If the interest rate is below the Fed's target, the Fed should a. buy bonds to increase bank reserves. b. buy bonds to decrease bank reserves. c. sell bonds to increase bank reserves. d. sell bonds to decrease bank reserves.

d. sell bonds to decrease bank reserves.

For the U.S. economy, money holdings are a a. large part of household wealth, and so the interest-rate effect is large. b. large part of household wealth, and so the wealth effect is large. c. small part of household wealth, and so the interest-rate effect is small. d. small part of household wealth, and so the wealth effect is small.

d. small part of household wealth, and so the wealth effect is small.

Monetary policy is determined by a. the president and Congress and involves changing government spending and taxation. b. the president and Congress and involves changing the money supply. c. the Federal Reserve and involves changing government spending and taxation. d. the Federal Reserve and involves changing the money supply.

d. the Federal Reserve and involves changing the money supply.

If there is excess demand for money, then people will 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.

d. withdraw money from interest-bearing accounts, and the interest rate will rise.