Chapter 16: The Influence of Monetary and Fiscal Policy on Aggregate Demand

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

false

multiplier

1/(1-mpc)

if the marginal propensity to consume is 0.75, the value of the multiplier is

4

suppose investors and consumers become pessimistic about the future and cut back on expenditures. if the fed engages in activist stabilization policy, the policy response should be to decrease the money supply

false

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

false

suppose a wave of investor and consumer pessimism causes a reduction in spending. if the federal reserve chooses to engage in activist stabilization policy, it should

increase the money supply and decrease interest rates

the long run effect of an increase in the money supply is to

increase the price level

theory of liquidity preference

keynes's theory that the interest rate is determined by the supply and demand for money in the short run

which of the following statements about stabilization policy is true

many economists prefer automatic stabilizers because they affect the economy with a shorter lag than activist stabilization policy

an increase in the marginal propensity to consume (mpc)

raises the value of the multiplier

in the market for real output, the initial effect of an increase in the money supply is to

shift aggregate demand to the right

which of the following statements regarding taxes is correct

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

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

decreases the quantity demanded of money

an increase in the interest rate increases the quantity demanded of money because it increases the rate of return on money

false

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

false

if the mpc (marginal propensity to consume) is 0.80, then the value of the multiplier is 8

false

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

false

suppose the government increases its purchases by $16 billion. if the multiplier effect exceeds the crowding out effect, then

the aggregate demand curve shifts to the right by more than $16 billion

multiplier effect

the amplification of the shift in aggregate demand from expansionary fiscal policy, which raises incomes and further increases consumption expenditures

investment accelerator

the amplification of the shift in aggregate demand from expansionary fiscal policy, which raises investment expenditures

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

the crowding out effect

crowding out effect

the dampening of the shift in aggregate demand from expansionary fiscal policy, which raises the interest rate and reduces investment spending

liquidity

the ease with which an asset is converted into a medium of exchange

marginal propensity to consume, or mpc

the fraction of extra income that a household spends on consumption

federal funds rate

the interest rate banks charge one another for short term loans

for the united states, the most important source of the downward slope of the aggregate demand curve is

the interest rate effect

when an increase in government purchases causes firms to purchase additional plant and equipment, we have seen a demonstration of

the investment accelerator

which of the following best describes how an increase in the money supply shifts aggregate demand

the money supply shifts right, the interest rate falls, investment increases, and aggregate demand shifts right

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

the multiplier effect

fiscal policy

the setting of the level of government spending and taxation by government policymakers

keynes's liquidity preference theory of the interest rate suggests that the interest rate is determined by

the supply and demand for money

stabilization policy

the use of fiscal and monetary policies to reduce fluctuations in the economy

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)

true

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

true

in the short run, a decision by the fed to increase the money supply is essentially the same as a decision to decrease the interest rate target

true

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

true

many economists prefer automatic stabilizers because they affect the economy with shorter lag than activist stabilization policies

true

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

true

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

true

when money demanded is drown 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

true

which of the following is an automatic stabilizer

unemployment benefits

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 right and increases the interest rate

the initial impact of an increase in government spending is to shift

aggregate demand to the right

the initial effect of an increase in the money supply is to

decrease the interest rate

automatic stabilizers

changes in fiscal policy that do not require deliberate action on the part of policymakers

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 policymakers choose to engage in activist stabilization policy, they should

decrease government spending, which shifts aggregate demand to the left