Chapter 21

Refer to Figure 34-1. There is an excess demand for money at an interest rate of a. 2 percent. b. 3 percent. c. 4 percent. d. None of the above is correct.

a. 2 percent.

The opportunity cost of holding money a. decreases when the interest rate decreases, so people desire to hold more of it. b. decreases when the interest rate decreases, so people desire to hold less of it. c. increases when the interest rate decreases, so people desire to hold less of it. d. increases when the interest rate decreases, so people desire to hold more of it.

a. decreases when the interest rate decreases, so people desire to hold more of it.

The marginal propensity to consume ( MPC) is defined as the fraction of a. extra income that a household consumes rather than saves. b. total income that a household either consumes or saves. c. total income that a household consumes rather than saves. d. extra income that a household either consumes or saves.

a. extra income that a household consumes rather than saves.

The most important reason for the slope of the aggregate-demand curve is that as the price level a. increases, interest rates increase, and investment decreases. b. decreases, interest rates decrease, and investment decreases. c. decreases, interest rates increase, and investment increases. d. increases, interest rates decrease, and investment increases.

a. increases, interest rates increase, and investment decreases.

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

a. serves as a medium of exchange.

According to liquidity preference theory, the opportunity cost of holding money is a. the interest rate on bonds. b. the inflation rate. c. the difference between the inflation rate and the interest rate on bonds. d. the cost of converting bonds to a medium of exchange.

a. the interest rate on bonds.

The term crowding-out effect refers to a. the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase. b. the reduction in aggregate supply that results when a monetary expansion causes the interest rate to decrease. c. the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease. d. the reduction in aggregate demand that results when a decrease in government spending or an increase in taxes causes the interest rate to increase.

a. the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase.

A reduction in personal income taxes increases Aggregate Demand through a. an increase in private savings. b. an increase in personal consumption. c. an increase in national savings. d. an increase in investment spending.

b. an increase in personal consumption

Liquidity preference refers directly to Keynes' theory concerning a. the effects of wealth on expenditures. b. the effects of changes in money demand and supply on interest rates. c. the difference between temporary and permanent changes in income. d. the effects of changes in money demand and supply on exchange rates.

b. the effects of changes in money demand and supply on interest rates.

Monetary policy a. must be described in terms of money-supply targets. b. can be described either in terms of the money supply or in terms of the interest rate. c. must be described in terms of interest-rate targets. d. cannot be accurately described in terms of the interest rate or in terms of the money supply.

b. can be described either in terms of the money supply or in terms of the interest rate.

An increase in government purchases is likely to a. decrease interest rates. b. crowd out investment spending by business firms. c. reduce money demand. d. All of the above are correct.

b. crowd out investment spending by business firms.

The interest rate would fall and the quantity of money demanded would a. increase if there were a shortage in the money market. b. increase if there were a surplus in the money market. c. decrease if there were a surplus in the money market. d. decrease if there were a shortage in the money market.

b. increase if there were a surplus in the money market

Changes in the interest rate bring the money market into equilibrium according to a. neither liquidity preference theory nor classical theory. b. liquidity preference theory, but not classical theory. c. classical theory, but not liquidity preference theory. d. both liquidity preference theory and classical theory.

b. liquidity preference theory, but not classical theory.

If people decide to hold less money, then a. money demand increases, there is an excess demand for money, and interest rates rise. b. money demand decreases, there is an excess supply of money, and interest rates fall. c. money demand decreases, there is an excess supply of money, and interest rates rise. d. money demand increases, there is an excess demand for money, and interest rates fall.

b. money demand decreases, there is an excess supply of money, and interest rates fall.

The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates a. the accelerator effect. b. the multiplier effect. c. the chain effect. d. the bandwagon effect.

b. the multiplier effect.

Refer to Figure 34-2. Assume the money market is always in equilibrium. Under the assumptions of the model, a. the real interest rate is lower at Y2 than it is at Y1. b. the quantity of money is the same at Y1 as it is at Y2. c. the price level is lower at r2 than it is at r1. d. All of the above are correct.

b. the quantity of money is the same at Y1 as it is at Y2.

Which of the following is an example of an increase in government purchases? a. The government increases unemployment insurance benefit payments. b. The Federal Reserve purchases government bonds. c. The government builds new roads. d. The government decreases personal income taxes.

c. The government builds new roads.

According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, then the interest rate will a. increase and the quantity of money demanded will increase. b. decrease and the quantity of money demanded will decrease. c. decrease and the quantity of money demanded will increase. d. increase and the quantity of money demanded will decrease.

c. decrease and the quantity of money demanded will increase.

An increase in the MPC a. decreases 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. increases 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.

c. increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.

Other things the same, a decrease in the U.S. interest rate a. increases the opportunity cost of holding dollars. b. makes the U.S. dollar appreciate. c. induces firms to invest more. d. shifts money demand to the left.

c. induces firms to invest more.

According to the theory of liquidity preference, a decrease in the price level causes the a. interest rate and investment to rise. b. interest rate and investment to fall. c. interest rate to fall and investment to rise. d. interest rate to rise and investment to fall.

c. interest rate to fall and investment to rise.

Refer to Figure 34-2. If the graphs apply to an economy such as the U.S. economy, then the slope of the AD curve is primarily attributable to the a. Fisher effect. b. wealth effect. c. interest-rate effect. d. exchange-rate effect.

c. interest-rate effect.

According to liquidity preference theory, an increase in the price level shifts the a. money demand curve rightward, so the interest rate decreases. b. money demand curve leftward, so the interest rate increases. c. money demand curve rightward, so the interest rate increases. d. money demand curve leftward, so the interest rate decreases.

c. money demand curve rightward, so the interest rate increases.

Most economists believe that fiscal policy a. only affects aggregate demand and not aggregate supply. b. only affects aggregate supply and not aggregate demand. c. primarily affects aggregate demand. d. primarily effects aggregate supply.

c. primarily affects aggregate demand.

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 the money supply. d. the Federal Reserve and involves changing government spending and taxation.

c. the Federal Reserve and involves changing the money supply.

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

c. ​the equilibrium interest rate decreases.

Some economists argue that a. monetary policy should actively be used to stabilize the economy. b. fiscal policy should actively be used to stabilize the economy. c. fiscal policy can be used to shift the AD curve. d. All of the above are correct.

d. All of the above are correct.

When the interest rate is above the equilibrium level, a. the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. b. people respond by buying interest-bearing bonds or by depositing money in interest-bearing bank accounts. c. bond issuers and banks respond by lowering the interest rates they offer. d. All of the above are correct.

d. All of the above are correct.

Which of the following statements is correct for the long run? a. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level is relatively slow to adjust. b. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for money; the price level adjusts to balance the supply and demand for loanable funds. c. Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money. d. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.

d. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.

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

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

d. crowding-out effect.

Refer to Figure 34-3. For an economy such as the United States, what component of the demand for goods and services is most responsible for the decrease in output from Y 1 to Y 2? a. net exports b. government spending c. consumption d. investment

d. investment

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. the level of output and in the level of prices.

As the interest rate falls, a. the quantity of money demanded falls, which would reduce a shortage. b. the quantity of money demanded rises, which would reduce a shortage. c. the quantity of money demanded falls, which would reduce a surplus. d. the quantity of money demanded rises, which would reduce a surplus.

d. the quantity of money demanded rises, which would reduce a surplus.

An increase in government spending shifts aggregate demand a. to the left. The larger the multiplier is, the less it shifts. b. to the right. The larger the multiplier is, the less it shifts. c. to the left. The larger the multiplier is, the farther it shifts. d. to the right. The larger the multiplier is, the farther it shifts.

d. to the right. The larger the multiplier is, the farther it shifts.

Which of the following is an example of a decrease in government purchases?​ a. ​The government increases personal income taxes. b. ​The government decreases unemployment insurance benefit payments. c. ​The Federal Reserve sells government bonds. d. ​The government cancels an order for new military equipment.

d. ​The government cancels an order for new military equipment.