Ch16

11. Liquidity refers to a. the relation between the price and interest rate of an asset. b. the risk of an asset relative to its selling price. c. the ease with which an asset is converted into a medium of exchange. d. the sensitivity of investment spending to changes in the interest rate.

C

12. People hold money primarily because it a. increases in value when there is inflation. b. serves as a store of value. c. serves as a medium of exchange. d. functions as a unit of account

C

17. Refer to Figure 34-2. As we move from one point to another along the money-demand curve MD1, a. the price level is held fixed at P1. b. the interest rate is held fixed at r1. c. the money supply is changing so as to keep the money market in equilibrium. d. the expected inflation rate is changing so as to keep the real interest rate constant.

A

45. In the early 1960s, the Kennedy administration made considerable use of a. fiscal policy to stimulate the economy. b. fiscal policy to slow down the economy. c. monetary policy to stimulate the economy. d. monetary policy to slow down the economy

A

33. Fiscal policy refers to the idea that aggregate demand is affected by changes in a. the money supply. b. government spending and taxes. c. Both a and b. d. Neither a and b.

B

41. When the government reduces taxes, which of the following decreases? a. consumption b. take-home pay c. household saving d. None of the above is correct.

D

40. An increase in the MPC a. increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand. b. increases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand. c. decreases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand. d. decreases the multiplier, so that changes in government expenditures have a smaller effect on aggregate demand.

A

43. If Congress increases taxes to balance the federal budget, then to prevent additional unemployment and a recession the Fed can a. reduce interest rates by increasing the money supply. b. increase interest rates by decreasing the money supply. c. increase interest rates by increasing the money supply. d. reduce interest rates by decreasing the money supply

A

44. Which of the following events shifts the aggregate-demand curve leftward? a. A decrease in government expenditures, but not a change in the price level. b. An increase in government expenditures or a decrease in the price level. c. A decrease in government expenditures or an increase in the price level. d. An increase in the price level, but not a decrease in government expenditures.

A

5. Fiscal policy is determined by a. the president and Congress and involves changing government spending and taxation. b. the president and Congress and involves changing the money supply. c. the Federal Reserve and involves changing government spending and taxation. d. the Federal Reserve and involves changing the money supply.

A

20. The interest rate falls if a. the price level falls or the money supply falls. b. the price level falls or the money supply rises. c. the price level rises or the money supply falls. d. the price level rises or the money supply rises.

B

31. A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a a. liquidity preference. b. liquidity trap. c. open-market trap. d. interest-rate contraction

B

37. Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase? a. the crowding-out effect b. the multiplier effect c. the wealth effect d. the interest-rate effect

B

38. The change in aggregate demand that results from fiscal expansion changing the interest rate is called the a. multiplier effect. b. crowding-out effect. c. accelerator effect. d. Ricardian equivalence effect.

B

39. If the marginal propensity to consume is 0.75, and there is no crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by a. $60 billion, but the effect would be larger if there were crowding out. b. $60 billion, but the effect would be smaller if there were crowding out. c. $45 billion, but the effect would be larger if there were crowding out. d. $45 billion, but the effect would be smaller if there were crowding out.

B

46. Suppose an increase in interest rates causes rising unemployment and falling output. To counter this, the Federal Reserve would a. increase government spending. b. increase the money supply. c. decrease government spending. d. decrease the money supply.

B

50. 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.

B

6. For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve? a. An increase in the price level decreases the interest rate. b. An increase in the price level increases the interest rate. c. An increase in the money supply decreases the interest rate. d. An increase in the money supply increases the interest rate.

B

8. Liquidity preference theory is most relevant to the a. short run and supposes that the price level adjusts to bring money supply and money demand into balance. b. short run and supposes that the interest rate adjusts to bring money supply and money demand into balance. c. long run and supposes that the price level adjusts to bring money supply and money demand into balance. d. long run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

B

35. In a certain economy, when income is $1000, consumer spending is $800. The value of the multiplier for this economy is 2.5. It follows that, when income is $1020, consumer spending is a. $816. For this economy, an initial increase of $100 in consumer spending translates into a $250 increase in aggregate demand. b. $816. For this economy, an initial increase of $100 in consumer spending translates into a $400 increase in aggregate demand. c. $812. For this economy, an initial increase of $100 in consumer spending translates into a $250 increase in aggregate demand. d. $812. For this economy, an initial increase of $100 in consumer spending translates into an $800 increase in aggregate demand.

C

9. According to liquidity preference framework, the money-supply curve is a. upward sloping. b. downward sloping. c. vertical. d. horizontal.

C

28. If the Federal Reserve increases the money supply, then initially there is a a. shortage in the money market, so people will want to sell bonds. b. shortage in the money market, so people will want to buy bonds. c. surplus in the money market, so people will want to sell bonds. d. surplus in the money market, so people will want to buy bonds.

D

29. For the U.S. economy, money holdings are a a. large part of household wealth, and so the interest-rate effect is large. b. large part of household wealth, and so the wealth effect is large. c. small part of household wealth, and so the interest-rate effect is small. d. small part of household wealth, and so the wealth effect is small

D

3. Monetary policy and fiscal policy influence a. output and prices in the short run and the long run. b. output and prices in the short run only. c. output in the short run and the long run. d. output in the short run only.

D

4. Monetary policy is determined by a. the president and Congress and involves changing government spending and taxation. b. the president and Congress and involves changing the money supply. c. the Federal Reserve and involves changing government spending and taxation. d. the Federal Reserve and involves changing the money supply.

D

42. Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $50 billion to the left. The government wants to change its spending to offset this decrease in demand. The MPC is 0.80. Suppose the effect on aggregate demand from a change in taxes is 4/5 the size of the change from government expenditures. There is no crowding out. What should the government do if it wants to offset the decrease in aggregate demand? a. Raise both taxes and expenditures by $5.56 billion dollars. b. Raise taxes by $40 billion dollars and increase expenditures by $50 billion dollars. c. Reduce taxes by $10 billion dollars and increase expenditures by $10 billion dollars. d. Reduce taxes by $5.56 billion dollars and increase expenditures by $5.56 billion dollars.

D

7. Using the liquidity-preference model, when the Federal Reserve decreases the money supply, a. the equilibrium interest rate increases. b. the aggregate-demand curve shifts to the right. c. the quantity of goods and services demanded is unchanged for a given price level. d. the short-run aggregate-supply curve shifts to the left.

A

10. According to liquidity preference theory, the money-supply curve would shift if the Fed a. engaged in open-market operations. b. increased money demand. c. increased the real income. d. did any of the above.

A

23. Other things equal, in the short run a lower price level leads households to a. increase consumption and firms to buy more capital goods. b. increase consumption and firms to buy fewer capital goods. c. decrease consumption and firms to buy more capital goods. d. decrease consumption and firms to buy fewer capital goods.

A

26. If the interest rate is above the Fed's target, the Fed should a. buy bonds to increase bank reserves. b. buy bonds to decrease bank reserves. c. sell bonds to increase bank reserves. d. sell bonds to decrease bank reserves.

A

32. Using the liquidity-preference model, when the Federal Reserve increases the money supply, a. the equilibrium interest rate decreases. b. the aggregate-demand curve shifts to the left. c. the quantity of goods and services demanded is unchanged for a given price level. d. the short-run aggregate-supply curve shifts to the right.

A

47. Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output? a. increase taxes b. increase the money supply c. increase government expenditures d. All of the above are correct.

A

14. Refer to Figure 34-1. If the current interest rate is 2 percent, a. there is an excess supply of money. b. people will sell more bonds, which drives interest rates up. c. as the money market moves to equilibrium, people will buy more goods. d. All of the above are correct.

B

16. Refer to Figure 34-2. A decrease in Y from Y1 to Y2 is explained as follows: a. The Federal Reserve increases the money supply, causing the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2. b. An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2. c. A decrease in P from P2 to P1 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2. d. An increase in the price level causes the money-demand curve to shift from MD2 to MD1; this shift of MD causes r to decrease from r2 to r1; and this decrease in r causes Y to decrease from Y1 to Y2.

B

15. Refer to Figure 34-1. At an interest rate of 4 percent, there is an excess a. demand for money equal to the distance between points a and b. b. demand for money equal to the distance between points b and c. c. supply of money equal to the distance between points a and b. d. supply of money equal to the distance between points b and c.

C

2. Shifts in aggregate demand affect the price level in a. the short run but not in the long run. b. the long run but not in the short run. c. both the short and long run. d. neither the short nor long run.

C

21. Which of the following statements is correct? a. Both liquidity preference theory and classical theory assume the interest rate adjusts to bring the money market into equilibrium. b. Both liquidity preference theory and classical theory assume the price level adjusts to bring the money market into equilibrium. c. Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium; classical theory assumes the price level adjusts to bring the money market into equilibrium. d. Liquidity preference theory assumes the price level adjusts to bring the money market into equilibrium; classical theory assumes the interest rate adjusts to bring the money market into equilibrium.

C

24. In the short run, an increase in the money supply causes interest rates to a. increase, and aggregate demand to shift right. b. increase, and aggregate demand to shift left. c. decrease, and aggregate demand to shift right. d. decrease, and aggregate demand to shift left

C

27. If the stock market booms, then a. aggregate demand increases, which the Fed could offset by purchasing bonds. b. aggregate supply increases, which the Fed could offset by selling bonds. c. aggregate demand increases, which the Fed could offset by selling bonds. d. aggregate supply increases, which the Fed could offset by purchasing the money supply

C

30. "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 a. shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate. b. the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an interest rate. c. changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate. d. the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate.

C

34. If the MPC = 4/5, then the government purchases multiplier is a. 5/4. b. 4/5. c. 5. d. 20.

C

36. Refer to Figure 34-5. What is measured along the vertical axis of the graph? a. the quantity of output b. the amount of crowding out c. the interest rate d. the price level

C

1. Shifts in the aggregate-demand curve can cause fluctuations in a. neither the level of output nor the level of prices. b. the level of output, but not in the level of prices. c. the level of prices, but not in the level of output. d. the level of output and in the level of prices.

D

13. In which of the following cases would the quantity of money demanded be smallest? a. r = 0.06, P = 1.2 b. r = 0.05, P = 1.0 c. r = 0.04, P = 1.2 d. r = 0.06, P = 1.0

D

18. Refer to Figure 34-2. If the money-supply curve MS on the left-hand graph were to shift to the left, this would a. represent an action taken by the Federal Reserve. b. shift the AD curve to the left. c. create, until the interest rate adjusted, an excess demand for money at the interest rate that equilibrated the money market before the shift. d. All of the above are correct.

D

19. Refer to Figure 34-2. Assume the money market is always in equilibrium, and suppose r1 = 0.08; r2 = 0.12; Y1 = 13,000; Y2 = 10,000; P1 = 1.0; and P2 = 1.2. Which of the following statements is correct? a. When r = r2, nominal output is higher than it is when r = r1. b. When r = r2, real output is higher than it is when r = r1. c. When r = r2, the expected rate of inflation is higher than it is when r = r1. d. If the velocity of money is 4 when r = r2, then the quantity of money is $3,000.

D

22. People will want to hold less money if the price level a. increases or if the interest rate increases. b. decreases or if the interest rate decreases. c. increases or if the interest rate decreases. d. decreases or if the interest rate increases.

D

25. If the Fed conducts open-market sales, which of the following quantities increase(s)? a. interest rates, prices, and investment spending b. interest rates and prices, but not investment spending c. interest rates and investment, but not prices d. interest rates, but not investment or prices

D

48. Refer to Figure 34-9. Suppose the economy is currently at point A. To restore full employment, the Federal Reserve should a. purchase government bonds, which will increase the money supply. b. purchase government bonds, which will reduce the money supply. c. sell government bonds, which will increase the money supply. d. sell government bonds, which will reduce the money supply

D

49. Most recessions and depressions a. are accurately forecasted. b. usually occur with ample advance warning. c. cause falling unemployment. d. occur with little advance warning

D