Chapter 34 Post-Class Assignment Part II: The Influence of Monetary and Fiscal Policy on Aggregate Demand

The change in the interest rate that you found previously will cause residential and business investment spending to ???, leading to ??? in the quantity of output demanded in the economy.

rise & an increase

The following graph shows the economy's aggregate demand curve. Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve.

Point on the money demand curve shifts to the right to 75

After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to ??? by ??? at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is known as the ??? effect.

$1 billion & crowding out

Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is ???, and the spending multiplier for this economy is ???.

0.6 & 2.5

Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to ???. This increases income yet again, causing a second change in consumption equal to ???. The total change in demand resulting from the initial change in government spending is ???.

240 billion, 1444 billion, & 1 trillion

The following graph shows the aggregate demand curve. Shift the aggregate demand curve on the graph to show the impact of a tax hike.

Aggregate demand curve shifts to the left

Depending on which curve is affected by the government policy, shift either the AS curve or the AD curve to reflect the change that would successfully restore the natural level of output.

Aggregate demand curve shifts to the right

Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand.

Aggregate demand curve shifts to the right

The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level decreases from 90 to 75. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money.

Money demand curve shifts to the left

Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money.

Money supply curve is straight up and down and starts at .5 (Trillions of Dollars)

Suppose you've just inherited $10,000 from a relative. You're trying to decide whether to put the $10,000 in a non-interest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a U.S. Treasury bond. The opportunity cost of holding the inheritance as money depends on the interest rate on the bond. For each of the interest rates in the following table, compute the opportunity cost of holding the $10,000 as money.

Opportunity Cost for 8% interest rate on Government Bonds= $800 Opportunity Cost for 10% interest rate on Government Bonds= $1,000

The government has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement as to whether the government should attempt to stabilize the economy. Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. Businesses make investment plans many months in advance. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. The current tax system acts as an automatic stabilizer. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president.

The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates.

What does the previous analysis suggest about the market for money? The quantity of money demanded decreases as the interest rate rises. The supply of money is independent of the interest rate. The quantity of money demanded increases as the interest rate rises.

The quantity of money demanded decreases as the interest rate rises.

Which of the following are examples of automatic stabilizers? Check all that apply. The discount rate The federal funds rate Unemployment insurance benefits

Unemployment insurance benefits

Should the government use monetary and fiscal policy in an effort to stabilize the economy? The following questions address the issue of how monetary and fiscal policies affect the economy, and the pros and cons of using these tools to combat economic fluctuations. The following graph shows a hypothetical aggregate demand curve (AD), short-run aggregate supply curve (AS), and long-run aggregate supply curve (LRAS) for the U.S. economy in May 2020. Suppose the government decides to intervene to bring the economy back to the natural level of output by using ??? policy.

an expansionary

Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $0.5 billion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to ??? by ???.

fall & $0.5 billion

The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 5.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. Suppose the Fed announces that it is lowering its target interest rate by 50 basis points, or 0.5 percentage point. To do this, the Fed will use open-market operations to ??? the ??? money by ??? the public.

increase, the supply of, & buying bonds from the public

Suppose that in May the government undertakes the type of policy that is necessary to bring the economy back to the natural level of output given in the previous scenario. In September 2020, consumer confidence increases, leading to an increase in consumer spending. Because of the ??? associated with implementing monetary and fiscal policy, the impact of the government's new policy will likely ??? once the effects of the policy are fully realized.

lags & push the economy beyond the natural level of output

After the decrease in the price level, the quantity of money demanded at the initial interest rate of 6% will be ??? than the quantity of money supplied by the Fed at this interest rate. People will try to ??? their money holdings. In order to do so, people will ??? bonds and other interest-bearing assets, and bond issuers will find that they ??? interest rates until the money market reaches its new equilibrium at an interest rate of ???%.

less, decrease, buy, can offer lower, & 4%

Suppose the governments of two different economies, economy J and economy K, implement a tax cut of the same size. The tax cut in economy J is permanent, while the tax cut in economy K is temporary. The economies are identical in all other respects. The tax cut will have a larger impact on aggregate demand in the economy with the ???.

permanent tax cut

Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will ??? the cost of borrowing, causing residential and business investment spending to ??? and the quantity of output demanded to ??? at each price level.

reduce, increase, & increase