Exam 4

#4.) Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire a. increased consumption, which shifts the aggregate-demand curve right. b. increased consumption, which shifts the aggregate-demand curve left. c. decreased consumption, which shifts the aggregate-demand curve right. d. decreased consumption, which shifts the aggregate-demand curve left.

a. increased consumption, which shifts the aggregate-demand curve right.

#3.) In his video lecture "The Myth of the Fair Tax," Professor Salerno argued that a. taxation splits society into two classes: taxpayers and tax-consumers. b. on the market, people pay prices for a good in proportion to the benefits they receive from the good. c. tax loopholes for wealthy people are unfair and reduce productivity in the economy. d. all of the above.

a. taxation splits society into two classes: taxpayers and tax-consumers.

#12.) People choose to hold a smaller quantity of money if a. the interest rate rises, which causes the opportunity cost of holding money to rise. b. the interest rate falls, which causes the opportunity cost of holding money to rise. c. the interest rate rises, which causes the opportunity cost of holding money to fall. d. the interest rate falls, which causes the opportunity cost of holding money to fall.

a. the interest rate rises, which causes the opportunity cost of holding money to rise.

#9.) If aggregate demand shifts right, then in the short run a. the price level and real GDP both rise. b. the price level rises and real GDP falls. c. the price level falls and real GDP rises. d. the price and real GDP both fall.

a. the price level and real GDP both rise.

#16.) If the government purchases multiplier is 4, then the MPC is a. 0.05. b. 0.75. c. 0.25. d. 0.8.

b. 0.75.

#6.) Suppose businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases. Their reaction would initially shift a. aggregate demand right. b. aggregate demand left. c. aggregate supply right. d. aggregate supply left.

b. aggregate demand left.

#8.) Other things the same, if the price level rises by 2% and people were expecting it to rise by 5%, then some firms have a. higher than desired prices which increases their sales. b. higher than desired prices which depresses their sales. c. lower than desired prices which increases their sales. d. lower than desired prices which depresses their sales.

b. higher than desired prices which depresses their sales.

#11.) If there are floods or droughts or a decrease in the availability of raw materials a. aggregate supply shifts right. b. output falls in the short run. c. prices fall in the short run. d. None of the above is correct.

b. output falls in the short run.

#7.) Suppose the economy is in long-run equilibrium. There is a large influx of skilled immigrants, a major new discovery of oil, and a major new technological advance in electricity production. In the long run, we would expect a. the price level to rise and real GDP to fall. b. the price level to fall and real GDP to rise. c. the price level and real GDP both to stay the same. d. All of the above are possible.

b. the price level to fall and real GDP to rise

#20.) The primary argument against active monetary and fiscal policy is that a. attempts to stabilize the economy do not constitute a proper role for government in a democratic society. b. these policies affect the economy with a long lag. c. these policies affect the economy too quickly and with too much impact. d. history demonstrates that interest rates respond unpredictably to active policies, leading to unpredictable effects on income.

b. these policies affect the economy with a long lag.

#15.) If the MPC is 4/5 then the multiplier is a. 5/4, so a $100 increase in government spending increases aggregate demand by $125. b. 5/4, so a $100 increase in government spending increases aggregate supply by $125. c. 5, so a $100 increase in government spending increases aggregate demand by $500. d. 5, so a $100 increase in government spending increases aggregate supply by $500.

c. 5, so a $100 increase in government spending increases aggregate demand by $500.

#5.) Other things the same, when the price level falls, interest rates a. rise, so firms increase investment. b. rise, so firms decrease investment. c. fall, so firms increase investment. d. fall, so firms decrease investment.

c. fall, so firms increase investment.

#19.) Supply-side economists focus more than other economists on a. how fiscal policy affects consumption. b. the multiplier effect of fiscal policy. c. how fiscal policy affects aggregate supply. d. the money supply.

c. how fiscal policy affects aggregate supply.

#10.) If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the price level a. and output are higher than in the original long-run equilibrium. b. and output are lower than in the original long-run equilibrium. c. is lower and output is the same as the original long-run equilibrium. d. is the same and output is lower than in the original long-run equilibrium.

c. is lower and output is the same as the original long-run equilibrium.

#1.) In the video, "Money, Banking and the Federal Reserve," the main promoters and beneficiaries of the creation of the Federal Reserve System were identified as: a. farmers. b. bank depositors. c. large Wall Street banks. d. small rural banks.

c. large Wall Street banks.

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

c. money demand curve leftward, so the interest rate decreases.

#17.) The term crowding-out effect refers to a. the reduction in aggregate supply that results when a monetary expansion causes the interest rate to decrease. b. the reduction in aggregate demand that results when a monetary expansion causes the interest rate to decrease. c. the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase. 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.

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

#2.) In the video, "Money, Banking and the Federal Reserve," Professor Salerno and the other economists interviewed identify the following kind of monetary arrangement as a primary cause of instability in modern economies: a. 100-percent reserve banking b. the gold standard c. barter. d. Fractional-reserve banking

d. Fractional-reserve banking

#18.) The multiplier effect is exemplified by the multiplied impact on a. the money supply of a given increase in government purchases. b. tax revenues of a given increase in government purchases. c. investment of a given increase in interest rates. d. aggregate demand of a given increase in government purchases.

d. aggregate demand of a given increase in government purchases.

#14.) If the Fed conducts open-market sales, the money supply a. increases and aggregate demand shifts right. b. increases and aggregate demand shifts left. c. decreases and aggregate demand shifts right. d. decreases and aggregate demand shifts left.

d. decreases and aggregate demand shifts left.