Macro Test 35 Influence of monetary and fiscal policy on agg demand

22. The initial impact of an increase in government spending is to shift aggregate a. demand to the right. c. supply to the right. b. demand to the left. d. supply to the left.

a. demand to the right.

30. Which of the following is an automatic stabilizer? a. Spending on state-run schools b. Military spending c. All of these answers are automatic stabilizers. d. Spending on a space programme e. Unemployment benefits

e. Unemployment benefits

17. For the Eurozone countries, the most important source of the downward slope of the aggregate demand curve is probably a. the wealth effect. b. none of these answers c. the exchange-rate effect. d. the fiscal effect. e. the interest-rate effect.

e. the interest-rate effect.

1. An increase in the interest rate increases the quantity demanded of money because it increases the rate of return on money.

F

10. Suppose investors and consumers become pessimistic about the future and cut back on expenditures. If fiscal policymakers engage in activist stabilization policy, the policy response should be to decrease government spending and increase taxes.

F

12. In the short run, the interest rate is determined by the loanable funds market, while in the long run, the interest rate is determined by money demand and money supply.

F

5. An increase in the money supply shifts the money supply curve to the right, increases the interest rate, decreases investment, and shifts the aggregate demand curve to the left.

F

7. If the MPC (marginal propensity to consume) is 0.80, then the value of the multiplier is 8.

F

9. Suppose the government increases its expenditure by €10 billion. If the crowding-out effect exceeds the multiplier effect, then the aggregate demand curve shifts to the right by more than €10 billion.

F

11. Many economists prefer automatic stabilizers because they affect the economy with a shorter lag than activist stabilization policies.

T

13. Unemployment benefits are an example of an automatic stabilizer because when incomes fall, unemployment benefits rise.

T

2. When money demand is drawn on a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level shifts money demand to the right.

T

3. Keynes's theory of liquidity preference suggests that the interest rate is determined by the supply and demand for money.

T

4. The interest-rate effect suggests that the aggregate demand curve slopes downward because an increase in the price level shifts money demand to the right, increases the interest rate, and reduces investment.

T

6. Because of the multiplier effect, an increase in government spending of €40 billion will shift the aggregate demand curve to the right by more than €40 billion (assuming there is no crowding out).

T

8. Crowding out occurs when an increase in government spending increases incomes, shifts money demand to the right, raises the interest rate, and reduces private investment.

T

25. Suppose a wave of investor and consumer optimism has increased spending so that the current level of output exceeds the long-run natural rate. If policy makers choose to engage in activist stabilization policy, they should decrease a. government spending, which the shifts the aggregate demand curve to the left. b. taxes, which shifts the aggregate demand curve to the right. c. taxes, which shifts the aggregate demand curve to the left. d. government spending, which shifts the aggregate demand curve to the right.

a. government spending, which the shifts the aggregate demand curve to the left.

24. An increase in the marginal propensity to consume (MPC) a. raises the value of the multiplier. b. has no impact on the value of the multiplier. c. rarely occurs because the MPC is set by national legislation. d. lowers the value of the multiplier.

a. raises the value of the multiplier.

16. When the supply and demand for money are expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level shifts money demand to the a. right and increases the interest rate. c. left and increases the interest rate. b. right and decreases the interest rate. d. left and decreases the interest rate.

a. right and increases the interest rate.

29. When an increase in government purchases increases the income of some people, and those people spend some of that increase in income on additional consumer goods, we have seen a demonstration of a. the multiplier effect. c. none of these answers. b. supply-side economics. d. the crowding-out effect.

a. the multiplier effect.

23. If the marginal propensity to consume MPC is 0.75, the value of the multiplier is a. 0.75. c. 5 b. 4. d. 7.5.

b. 4

15. When money demand is expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the interest rate a. decreases the quantity demanded of money. b. increases the quantity demanded of money. c. decreases the demand for money. d. increases the demand for money.

b. increases the quantity demanded of money.

32. Which of the following best describes how an increase in the money supply shifts the aggregate demand curve? a. The money supply shifts right, prices fall, spending increases, and the aggregate demand curve shifts right. b. The money supply shifts right, the interest rate rises, investment decreases, and the aggregate demand curve shifts left. c. The money supply shifts right, the interest rate falls, investment increases, and the aggregate demand curve shifts right. d. The money supply shifts right, prices rise, spending falls, and the aggregate demand curve shifts left.

c. The money supply shifts right, the interest rate falls, investment increases, and the aggregate demand curve shifts right.

28. Suppose the government increases its purchases by €16 billion. If the multiplier effect exceeds the crowding-out effect, then the aggregate a. supply curve shifts to the right by more than €16 billion. b. demand curve shifts to the left by more than €16 billion. c. demand curve shifts to the right by more than €16 billion. d. supply curve shifts to the left by more than €16 billion.

c. demand curve shifts to the right by more than €16 billion.

20. The long-run effect of an increase in the money supply is to a. increase the interest rate. c. increase the price level. b. decrease the price level. d. decrease the interest rate.

c. increase the price level.

26. When an increase in government purchases raises incomes, shifts money demand to the right, raises the interest rate, and lowers investment, we have seen a demonstration of a. supply-side economics. c. the crowding-out effect. b. the money multiplier. d. the multiplier effect.

c. the crowding-out effect.

14. Keynes's liquidity preference theory of the interest rate suggests that the interest rate is determined by a. aggregate supply and aggregate demand. b. the supply and demand for loanable funds. c. the supply and demand for money. d. the supply and demand for labour.

c. the supply and demand for money.

27. Which of the following statements regarding taxes is correct? a. Most economists believe that, in the short run, the greatest impact of a change in taxes is on aggregate supply, not aggregate demand. b. An increase in taxes shifts the aggregate demand curve to the right. c. A decrease in taxes shifts the aggregate supply curve to the left. d. A permanent change in taxes has a greater effect on aggregate demand than a temporary change in taxes.

d. A permanent change in taxes has a greater effect on aggregate demand than a temporary change in taxes.

31. Which of the following statements about stabilization policy is not true? a. The UK government has given control of interest rates, a key tool of activist stabilization policy, to the Bank of England. b. Many economists prefer automatic stabilizers because they affect the economy with a shorter lag than activist stabilization policy. c. None of these answers is true. d. Long lags enhance the ability of policy makers to fine-tune the economy. e. When policy makers implement activist stabilization policies, there is a significant risk that their policies may actually have a destabilizing effect.

d. Long lags enhance the ability of policy makers to fine-tune the economy.

21. Suppose a wave of investor and consumer pessimism in the USA causes a reduction in spending. If the US Federal Reserve (which has a broader remit than the Bank of England which is charged only with controlling inflation) chooses to engage in activist stabilization policy, it should a. increase government spending and decrease taxes. b. decrease the money supply. c. decrease government spending and increase taxes. d. decrease interest rates.

d. decrease interest rates.

19. The initial effect of an increase in the money supply is to a. increase the interest rate. c. decrease the price level. b. increase the price level. d. decrease the interest rate.

d. decrease the interest rate.

18. In the market for real output, the initial effect of an increase in the money supply is to shift the aggregate a. supply curve to the right. c. demand curve to the left. b. supply curve to the right. d. demand curve to the right.

d. demand curve to the right.