chapter 34

If the marginal propensity to consume MPC is 0.75, the value of the multiplier is

4

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.

Which of the following best describes how an increase in the money supply shifts the aggregate demand curve?

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

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

increase the price level.

An increase in the marginal propensity to consume (MPC)

raises the value of the multiplier.

Which of the following is an automatic stabilizer?

Unemployment benefits

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

shift the aggregate demand curve to the right.

. 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

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

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

f

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

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

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.

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

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

t

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

t

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

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

t

The most important source of the downward slope of the aggregate demand curve is probably

the interest-rate effect.

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

the supply and demand for money.

Which of the following statements about stabilization policy is not true?

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

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

aggregate demand to the right.

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

Suppose a wave of investor and consumer pessimism in the USA causes a reduction in spending. If the US Federal Reserve chooses to engage in activist stabilization policy, it should

decrease interest rates.