Macro Ch. 21 Practice Test

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

Suppose an increase in interest rates causes rising unemployment and falling output. To counter this, the Federal Reserve would a. increase government spending. b. increase the money supply. c. decrease government spending. d. decrease the money supply.

B

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

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase? a. the crowding-out effect b. the multiplier effect c. the exchange-rate effect d. the interest-rate effect

B

The theory of liquidity preference illustrates the principle that a. monetary policy can be described either in terms of the money supply or in terms of the interest rate. b. monetary policy can be described either in terms of the exchange rate or the interest rate. c. monetary policy must be described in terms of the money supply. d. monetary policy must be described in terms of the interest rate.

A

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

A

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures shifts aggregate demand a. right by more than $100 billion. b. right by $100 billion. c. left by more than $100 billion. d. left by $100 billion.

B

According to the theory of liquidity preference, money demand a. and the money supply are positively related to the interest rate. b. and the money supply are negatively related to the interest rate. c. is negatively related to the interest rate, while the money supply is independent of the interest rate. d. is independent of the interest rate, while money supply is negatively related to the interest rate.

C

When taxes increase, the interest rate a. increases, making the change in aggregate demand larger. b. increases, making the change in aggregate demand smaller c. decreases, making the change in aggregate demand larger. d. decreases, making the change in aggregate demand smaller.

D

In the short run, an increase in the money supply causes interest rates to a. increase, and aggregate demand to shift right. b. increase, and aggregate demand to shift left. c. decrease, and aggregate demand to shift right. d. decrease, and aggregate demand to shift left.

C

Shifts in aggregate demand affect the price level in a. the short run but not in the long run. b. the long run but not in the short run. c. both the short and long run. d. neither the short nor long run.

C

Figure 34-2. 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 34-2. Which of the following quantities is held constant as we move from one point to another on either graph? a. the nominal interest rate b. the quantity of money demanded c. investment d. the expected rate of inflation

D

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

If the Federal Reserve increases the money supply, then initially people want to a. sell bonds so the interest rate rises. b. sell bonds so the interest rate falls. c. buy bonds so the interest rate rises. d. buy bonds so the interest rate falls.

D

Monetary policy and fiscal policy influence a. output and prices in the short run and the long run. b. output and prices in the short run only. c. output in the short run and the long run. d. output in the short run only.

D

Most recessions and depressions a. are accurately forecasted. b. usually occur with ample advance warning. c. cause falling unemployment. d. occur with little advance warning.

D

People choose to hold a larger quantity of money if a. the interest rate rises, which causes the opportunity cost of holding money to rise. b. the interest rate falls, which causes the opportunity cost of holding money to rise. c. the interest rate rises, which causes the opportunity cost of holding money to fall. d. the interest rate falls, which causes the opportunity cost of holding money to fall.

D

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

Suppose households attempt to decrease their money holdings. To counter this decrease in money demand and stabilize output, the Federal Reserve will a. increase government spending. b. increase the money supply. c. decrease government spending. d. decrease the money supply.

D

Which of the following is correct? a. A higher price level shifts money demand rightward. b. When money demand shifts rightward, the interest rate rises. c. A higher interest rate reduces the quantity of goods and services demanded. d. All of the above are correct.

D

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

Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate-demand curve? a. When interest rates fall, In-and-Out Convenience Stores decides to build some new stores. b. The exchange rate falls, so French restaurants in Paris buy more Kansas beef. c. Tyler feels wealthier because of the price-level decrease and so he decides to remodel his kitchen. d. With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers.

D

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

B

During the economic downturn of 2008-2009, the Federal Reserve a. used open-market operations to purchase mortgages and corporate debt, just as it frequently does even when the economy is functioning normally. b. took the unusual step of using open-market operations to purchase mortgages and corporate debt. c. explicitly set its target rate of inflation at zero. d. explicitly set its target rate of inflation well above zero.

B

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

B

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

B

In a certain economy, when income is $400, consumer spending is $325. The value of the multiplier for this economy is 3.33. It follows that, when income is $450, consumer spending is a. $360. For this economy, an initial increase of $50 in consumer spending translates into a $266.67 increase in aggregate demand. b. $360. For this economy, an initial increase of $50 in consumer spending translates into a $166.50 increase in aggregate demand. c. $341.67. For this economy, an initial increase of $50 in consumer spending translates into a $266.67 increase in aggregate demand. d. $341.67. For this economy, an initial increase of $50 in consumer spending translates into a $166.25 increase in aggregate demand.

B

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

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment? a. decrease the money supply b. increase government expenditures c. increase taxes d. All of the above are correct.

B

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

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

C

In the long run, the level of output a. depends on the money supply. b. depends on the price level. c. is determined by supply-side factors. d. All of the above are correct.

C

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

People will want to hold more money if the price level 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.

C

Refer to Figure 34-1. At an interest rate of 4 percent, there is an excess a. demand for money equal to the distance between points a and b. b. demand for money equal to the distance between points b and c. c. supply of money equal to the distance between points a and b. d. supply of money equal to the distance between points b and c.

C

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 multiplier for this economy is a. 1.31. b. 6.25. c. 2.78. d. 2.27.

C

Supply-side economists focus more than other economists on a. how fiscal policy affects consumption. b. the multiplier affect of fiscal policy. c. how fiscal policy affects aggregate supply. d. the money supply.

C

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

C

Suppose the MPC is 0.60. Assume there are no crowding out or investment accelerator effects. If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion, then by how much does aggregate demand shift to the right? a. $300 billion and $180 billion b. $300 billion and $300 billion c. $500 billion and $300 billion d. $500 billion and $500 billion

C

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

Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more, a. the smaller the MPC and the stronger the influence of income on money demand. b. the smaller the MPC and the weaker the influence of income on money demand. c. the larger the MPC and the stronger the influence of income on money demand. d. the larger the MPC and the weaker the influence of income on money demand.

D

Critics of stabilization policy argue that a. there is a lag between the time policy is passed and the time policy has an impact on the economy. b. the impact of policy may last longer than the problem it was designed to offset. c. policy can be a source of, instead of a cure for, economic fluctuations. d. All of the above are correct.

D

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

The interest rate that the Federal Reserve pays banks on the reserves they hold is called the a. open-market rate. b. discount rate. c. preference rate. d. None of the above are correct.

D

A tax cut shifts the aggregate demand curve the farthest if a. the MPC is large and if the tax cut is permanent. b. the MPC is large and if the tax cut is temporary. c. the MPC is small and if the tax cut is permanent. d. the MPC is small and if the tax cut is temporary.

A

According to the liquidity preference theory, an increase in the overall price level of 10 percent a. increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded. b. decreases the equilibrium interest rate, which in turn increases the quantity of goods and services demanded. c. increases the quantity of money supplied by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged. d. decreases the quantity of money demanded by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged.

A

During recessions, automatic stabilizers tend to make the government's budget a. move toward deficit. b. move toward surplus. c. move toward balance. d. not necessarily move the budget in any particular direction.

A

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? 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 effect

A

Refer to Figure 34-4. Suppose the current equilibrium interest rate is r1. Let Y1 represent the corresponding quantity of goods and services demanded, and let P1 represent the corresponding price level. Starting from this situation, if the Federal Reserve increases the money supply and if the price level remains at P1, then a. there will be an increase in the equilibrium quantity of goods and services demanded. b. there will be a decrease in the equilibrium quantity of goods and services demanded. c. there will be an increase in the equilibrium interest rate. d. fewer firms will choose to borrow to build new factories and buy new equipment.

A

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