MACRO TEST CH 34

the government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output:

the multiplier effect

the interest rate falls if:

the price level falls or the money supply rises

the term crowding-out effect refers to:

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

on the graph that depicts the theory of liquidity preference:

the supply of money curve is vertical

the multiplier for changes in government spending is calculated as:

1/(1 - MPC)

shifts in the aggregate-demand curve can cause fluctuations in:

the level of output and in the level of prices

using the liquidity-preference model, when the Federal Reserve increases the money supply:

THE EQUILIBRIUM INTEREST RATE DECREASES

shifts in aggregate demand affect the price level in:

both the short and long run

what Fed actions would both increase the money supply?

buy bonds and lower the reserve requirment

what policy actions shifts the aggregate-demand curve?

an increase in the money supply an increase in taxes an increase in government spending

opponents of active stabilization policy:

believe that the political process creates lags in the implementation of fiscal policy

when the Fed sells government bonds, the reserves of the banking system:

decrease, so the money supply decreases

if the Fed fears inflation, it _____ by ______ government securities

decreases aggregate demand/ selling

when the interest rate decreases, the opportunity cost of holding money:

decreases, so the quantity of money demanded increases

fiscal policy refers to the idea that aggregate demand is affected by changes in:

government spending and taxes

macroeconomics forecasts are:

imprecise; this makes policy lags more relevant

What policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?

increase government expenditures

when the interest rate increases, the opportunity cost of holding money:

increase, so the quantity of money demanded decreases

If taxes:

increase, then consumption decreases, and aggregate demand shifts leftward

to eliminate a recessionary gap, the government can _____ government expenditures on goods and services or ______ taxes

increase/decrease

during 2002, the Federal Reserve feared that the United States economy was growing too slowly and was stuck in a recession. To move the economy back to potential (the natural level) GDP, the most likely policy action was for the Fed to ______ the quantity of money and thus ______

increase/increase aggregate demand

if businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by:

increasing the money supply, which lowers interest rates

according to the theory of liquidity preference, the money supply:

is independent of the interest rate, while money demand is negatively related to the interest rate

a reduction in US net exports would shift US aggregate demand:

leftward. In attempt to stabilize the economy, the government could cut taxes

government purchases are said to have a:

multiplier effect on aggregate demand

in the short run:

output responds to changes in the aggregate demand for goods and services

in the long run, changes in the money supply affect:

prices

according to the theory of liquidity preference:

the demand for money is represented by a downward sloping line on a supply-and-demand graph

people choose to hold a smaller quantity of money if:

the interest rates rises, which causes the opportunity cost of holding money to rise