Module 34: How Monetary and Fiscal Policy Impact Aggregate Demand
Jason is a critic of stabilization policy. Which of the following statements would he NOT agree with?
The Fed should try to fine-tune the economy during times of economic fluctuations.
Which of the following statements is true about the Kennedy administration in the early 1960s?
The Kennedy administration made considerable use of fiscal policy to stimulate the economy.
On the graph that depicts the theory of liquidity preference, which of the following is NOT true?
The demand-for-money curve is vertical.
Refer to the Graphs. Which of the following statements is NOT true?
The nominal interest rate is held constant as we move from one point to another on either graph.
According to the theory of liquidity preference, which of the following is NOT true?
The supply of money depends on the interest rate.
Which of the following does fiscal policy not primarily affect in the long run?
aggregate demand
Which of the following is NOT an automatic stabilizer?
an increase in money supply
Which of the following events would cause the Fed to stabilize output through decreasing the money supply?
an increase in net exports
To stabilize interest rates, the Federal Reserve will respond to a decrease in money demand by
selling government bonds, which decreases the supply of money.
Refer to the Figure. A decrease in government purchases will
shift aggregate demand from AD 1 to AD 3.
If the Fed conducts open-market purchases, the money supply decreases and aggregate demand shifts right.
false
The multiplier for changes in government spending is calculated as
1/(1 - MPC).
Which of the following is an example of crowding out?
A decrease in taxes increases interest rates, causing investment to fall.
Which of the following shifts aggregate demand to the left?
A decrease in the money supply.
Suppose Jason believes that the government should follow an active stabilization policy when the economy is experiencing severe unemployment. Which of the following policies would he recommend in this case?
Decrease taxes.
Refer to the Figure. Which of the following is true?
If the current interest rate is 2 percent, people will sell more bonds, which drives interest rates up.
Sometimes during times of heightened national security, government expenditures are larger than normal. What could the Fed do to reduce the effects this spending creates on interest rates?
Increase the money supply by buying bonds.
Which of the following is true about liquidity preference theory
It is most relevant to the short run of interest rates.
In the short run, which of the following statements is true about the effects of an increase in the money supply?
It will raise the cost of borrowing.
Which of the following Fed actions would decrease the money supply?
Raising the reserve requirement
Which of the following policy actions does NOT shift the aggregate-demand curve?
a change in the price level
Which of the following events would cause the Fed to stabilize output through increasing the money supply?
an increase in taxes
Changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into a recession are called
automatic stabilizers.
A reduction in personal income taxes increases aggregate demand through an increase in private savings.
false
According to liquidity preference theory, the opportunity cost of holding money is the inflation rate.
false
During periods of expansion, automatic stabilizers cause government expenditures to rise and taxes to fall.
false
Refer to the Figure. You can explain a decrease in Y from Y1 to Y2 in the following way: A decrease in P in P2 to P1 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.
false
The interest-rate effect stems from the idea that a higher price level decreases the real value of households' money holdings.
false
The multiplier effect states that there are additional shifts in aggregate supply from fiscal policy because it increases income and thereby increases consumer spending.
false
The theory of liquidity preference only attempts to explain the nominal interest rate.
false
When the interest rate increases, the opportunity cost of holding money decreases, so the quantity of money demanded decreases.
false
Mark is having a policy debate with his cousin Gina. Gina points out that the political process is mostly responsible for the lag in implementing
fiscal policy
Steve is having a policy debate with his brother Brian. He points the fact that business firms make investment plans far in advance. This is a lag problem associated with
monetary policy.
The government builds a new recycling plant. The manager of the company hires workers and pays them an annual salary. These workers then increase their spending. The firms that sell the goods these workers buy also increase their output. This type of effect on spending illustrates the
multiplier effect
Temporary tax cuts shift the aggregate-demand curve
not as far to the right as do permanent tax cuts.
According to liquidity preference theory, an increase in money demand for some reason other than a change in the price level causes
the interest rate to rise, so aggregate demand shifts left.
The fraction of extra income that a household consumes rather than saves is called
the marginal propensity to consume.
Which of the following is an example of an automatic stabilizer?
the unemployment compensation system
If the interest rate is below the Fed's target, the Fed should sell bonds to decrease the money supply.
true
Keynes would agree with the statement that irrational waves of pessimism cause aggregate demand to be unstable.
true
The multiplier effect amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effect.
true
The tax system is the most important automatic stabilizer.
true
