Chapter 34 quiz

Fiscal policy affects the economy

in both the short and long run.

Critics of stabilization policy argue that

policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived.

In the long run, fiscal policy influences

saving, investment, and growth; in the short run, fiscal policy primarily influences the aggregate demand for goods and services.

Monetary policy is determined by

the Federal Reserve and involves changing the money supply.

Liquidity refers to

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

The lag problem associated with monetary policy is due mostly to

the fact that business firms make investment plans far in advance.

The Employment Act of 1946 states that

the government should promote full employment and production.

According to John Maynard Keynes,

the interest rate adjusts to balance the supply of, and demand for, money.

Shifts in the aggregate-demand curve can cause fluctuations in

the level of output and in the level of prices.

The idea that a decrease in the price level raises the real value of households' money holdings, which increases consumer spending and the quantity of goods and services demanded is known as

the wealth effect.

An example of an automatic stabilizer is

unemployment benefits

A tax cut targeted at ____ people may have a bigger effect because ​

​poorer; poorer people tend to spend a higher share of their income.

The Federal Open Market Committee is ​

​the group at the Federal Reserve that sets monetary policy.

People choose to hold a smaller quantity of money if​

​the interest rate increases, which causes the opportunity cost of holding money to increase.

People are likely to want to hold more money if the interest rate

decreases, making the opportunity cost of holding money fall.

Fiscal policy refers to the idea that aggregate demand is affected by changes in

government spending and taxes.

While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1.25 percent," a more precise account of the Fed's action would be as follows:

"Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent."

Which of the following is an example of an increase in government purchases?

The government builds new roads.

Opponents of active stabilization policy

believe that the political process creates lags in the implementation of fiscal policy.

Suppose that the Federal reserve is concerned about the effects of falling stock prices on the economy. What could it do?

buy bonds to lower the interest rate