Macroeconomics chapter 21.1

Critics of stabilization policy argue that a. policy affects aggregate demand quickly, but the effects on aggregate demand are long-lived. b. policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived. c. policy affects aggregate demand with a lag, but the effects are short-lived. d. policy does not affect aggregate demand.

B

According to the theory of liquidity preference, if the interest rate rises a. people want to hold more money. This response is shown by moving to the right along the money demand curve. b. people want to hold more money. This response is shown by shifting the money demand curve right. c. people want to hold less money. This response is shown by moving to the left along the money demand curve. d. people want to hold less money. This response is shown by shifting the money demand curve left.

C

The Kennedy tax cut of 1964 was a. successful in stimulating the economy. b. designed to shift the aggregate demand curve to the right. c. designed to shift the aggregate supply curve to the right. d. All of the above are correct.

D

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

D

When households decide to hold more money, a. interest rates fall and investment decreases. b. interest rates fall and investment increases. c. interest rates rise and investment increases. d.interest rates rise and investment decreases.

D

A tax cut targeted at ____ people may have a bigger effect because a. poorer; poorer people tend to spend a higher share of their income. b. poorer; poorer people tend to spend a lower share of their income. c. wealthier; wealthier people tend to spend a higher share of their income. d. wealthier; wealthier people tend to spend a lower share of their income.

A

According to liquidity preference theory, a decrease in money demand for some reason other than a change in the price level causes a. the interest rate to fall, so aggregate demand shifts right. b. the interest rate to fall, so aggregate demand shifts left. c. the interest rate to rise, so aggregate demand shifts right. d. the interest rate to rise, so aggregate demand shifts left.

A

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

A

According to the "animal spirits" described by Keynes, when optimism reigns, households and firms a. increase spending which results in inflationary pressures. b. decrease spending which results in deflationary pressures. c. increase spending which results in deflationary pressures. d. decrease spending which results in inflationary pressures.

A

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money? a. interest rate b. money supply c. quantity of output d. price level

A

In the graph of the money market, the money supply curve is a. vertical. It shifts rightward if the Fed buys bonds. b. vertical. It shifts rightward if the Fed sells bonds. c. upward sloping. It shifts rightward if the Fed buys bonds. d..upward sloping. It shifts rightward if the Fed sells bonds.

A

Changes in the interest rate a. shift aggregate demand whether they are caused by changes in the price level or by changes in fiscal or monetary policy. b. shift aggregate demand if they are caused by changes in the price level, but not if they are caused by changes in fiscal or monetary policy. c. shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level. d. do not shift aggregate demand.

C

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well. Most economists would say that Marcus's opinion is a. Keynesian in nature, and that his view is more valid for the long run than for the short run. b. classical in nature, and that his view is more valid for the long run than for the short run. c. Keynesian in nature, and that his view is more valid for the short run than for the long run. d. classical in nature, and that his view is more valid for the short run than for the long run.

C

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

C

Suppose aggregate demand shifts to the left and policymakers want to stabilize output. What can they do? a. repeal an investment tax credit or increase the money supply b. repeal an investment tax credit or decrease the money supply c. institute an investment tax credit or increase the money supply d. institute an investment tax credit or decrease the money supply

C

When the Federal Reserve decreases the Federal Funds target rate, the lower rate is achieved through a. sales of government bonds, which reduces interest rates and causes people to hold less money. b. purchases of government bonds, which reduces interest rates and causes people to hold less money. c. purchases of government bonds, which reduces interest rates and causes people to hold more money. d. sales of government bonds, which reduces interest rates and causes people to hold more money.

C

When the interest rate decreases, the opportunity cost of holding money a. increases, so the quantity of money demanded increases. b.increases, so the quantity of money demanded decreases. c. decreases, so the quantity of money demanded increases. d. decreases, so the quantity of money demanded decreases.

C

Which of the following Fed actions would both decrease the money supply? a. buy bonds and raise the reserve requirement b. buy bonds and lower the reserve requirement c. sell bonds and raise the reserve requirement d. sell bonds and lower the reserve requirement

C

According to liquidity preference theory, the slope of the money demand curve is explained as follows: a. Interest rates rise as the Fed reduces the quantity of money demanded. b. Interest rates fall as the Fed reduces the supply of money. c. People will want to hold less money as the cost of holding it falls. d. People will want to hold more money as the cost of holding it falls.

D

If expected inflation is constant and the nominal interest rate decreases by 2 percentage points, then the real interest rate a. increases by 2 percentage points. b. increases, but by less than 2 percentage points. c. decreases, but by less than 2 percentage points. d. decreases by 2 percentage points.

D

Other things the same, which of the following responses would we expect to result from a decrease in U.S. interest rates? a. U.S. citizens decide to hold more foreign bonds. b. People choose to hold more currency. c. You decide to purchase a new oven for your cookie factory. d. All of the above are correct.

D