Econ chapter 21

If the marginal propensity to consume (MPC) is 0.75, the value of the multiplier is

4

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.

Explain how an increase in government spending may lead to crowding out.

An increase in government spending raises incomes, shifts money demand right, raises the interest rate, and reduces investment.

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.

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.

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.

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

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

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.

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.

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.

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.

Keynes's liquidity preference theory of the interest rate suggests that the interest rate is determined by

the supply and demand for money.

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 a shorter lag than activist stabilization policies.

true

Unemployment benefits are an example of an automatic stabilizer because when incomes fall, unemployment benefits rise.

true

Which of the following is an automatic stabilizer?

unemployment benefits

How does a cut in taxes affect aggregate supply?

It causes an increase in aggregate supply by increasing the incentive to work.

Explain how an increase in the money supply shifts the aggregate-demand curve.

The money supply shifts right, the interest rate decreases, investment increases at each price level, which is a rightward shift in the aggregate-demand curve

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.