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
