Ch. 21 Econ Quiz (FY17, Flowers)

Keynes used the term "animal spirits" to refer to

arbitrary changes in attitudes of household and firms

Automatic stabilizers 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.

are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession

In the short run, a decrease in the money supply causes interest rates to

increase, and aggregate demand to shift left.

According to the theory of liquidity preference, a decrease in the price level causes the

interest rate to fall and investment to rise.

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

interest-rate effect, exchange-rate effect, wealth effect

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

our analysis of monetary policy is not fundamentally altered if the Federal Reserve decides to target an interest rate.

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓

Which of the following is an example of crowding out? a. An increase in government spending increases interest rates, causing investment to fall. b. A decrease in private savings increases interest rates, causing investment to fall. c. A decrease in the money supply increases interest rates, causing investment to fall. d. An increase in taxes increases interest rates, causing investment to fall.

An increase in government spending increases interest rates, causing investment to fall.

Scenario 34-1. Take the following information as given for a small, imaginary economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. Refer to Scenario 34-1. The multiplier for this economy is

c. 4.00.

Assume the MPC is 0.625. Assume there is a multiplier effect and that the total crowding-out effect is $12 billion. An increase in government purchases of $30 billion will shift aggregate demand to the

c. right by $68 billion.

Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures?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.

d. All of the above are correct.

According to liquidity preference theory, the slope of the money demand curve is explained as follows:

d. People will want to hold more money as the cost of holding it falls.

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?

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

Liquidity preference theory is most relevant to the

short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

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.

the MPC is large and if the tax cut is permanent.

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

the equilibrium interest rate increases.

According to liquidity preference theory, a decrease in money demand for some reason other than a change in the price level causes

the interest rate to fall, so aggregate demand shifts right.

Critics of stabilization policy argue that

the lag problem ends up being a cause of economic fluctuations.

In recent years, the Fed has chosen to target interest rates rather than the money supply because

the money supply is hard to measure with sufficient precision.

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

the multiplier effect.