ECN 222 Homework 12

Assume that there is no accelerator affect. The MPC = 3/4. The government increases both expenditures and taxes by $600. The effect of taxes on aggregate demand is 3/4 the size of that created by government expenditures alone. The crowding out effect is 1/5 as strong as the combined effect of government expenditures and taxes on aggregate demand. How much does aggregate demand shift by?

$480

In a certain economy, when income is $1000, consumer spending is $800. The value of the multiplier for this economy is 2.5. It follows that, when income is $1020, consumer spending is

$812. For this economy, an initial increase of $100 in consumer spending translates into a $250 increase in aggregate demand.

Refer to Figure 34-1. There is an excess demand for money at an interest rate of

2%

Refer to Figure 34-5. A shift of the money-demand curve from MD1 to MD2 could be a result of

All of the above are correct. (a decrease in taxes. an increase in government spending. an increase in the price level.)

A tax cut shifts aggregate demand

None of the above is necessarily correct.

Refer to Figure 34-1. Which of the following is correct?

Starting with an interest rate of 4 percent, the demand for goods and services will increase until the money market reaches a new equilibrium.

Refer to Figure 34-5. A shift of the money-demand curve from MD2 to MD1 is consistent with which of the following sets of events?

The government reduces government spending, resulting in a decrease in people's incomes.

If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, it could

buy bonds to increase the money supply.

A decrease in government spending

decreases the interest rate and so investment spending increases.

People are likely to want to hold more money if the interest rate

decreases, making the opportunity cost of holding money fall.

If expected inflation is constant, then when the nominal interest rate falls, the real interest rate

falls by the change in the nominal interest rate

Fiscal policy affects the economy

in both the short and long run.

In the short run, a decrease in the money supply causes interest rates to

increase, and aggregate demand to shift left.

If the Fed conducts open-market purchases, the money supply

increases and aggregate demand shifts right.

An increase in the MPC

increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.

Assume the MPC is 0.8. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

left by $500 billion.

According to liquidity preference theory, a decrease in the price level shifts the

money demand curve leftward, so the interest rate decreases.

The goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy.

Monetary policy and fiscal policy influence

output in the short run only.

According to classical macroeconomic theory,

output is determined by the supplies of capital and labor and the available production technology.

Refer to Figure 34-1. If the current interest rate is 2 percent,

people will sell more bonds, which drives interest rates up.

Assume the multiplier is 5 and that the crowding-out effect is $30 billion. An increase in government purchases of $20 billion will shift the aggregate-demand curve to the

right by $70 billion.

In the long run, fiscal policy influences

saving, investment, and growth; in the short run, fiscal policy primarily influences the aggregate demand for goods and services.

Refer to Figure 34-1. At an interest rate of 4 percent, there is an excess

supply of money equal to the distance between points a and b.

According to the theory of liquidity preference,

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

Refer to Figure 34-5. What is measured along the vertical axis of the graph?

the interest rate

If the Fed increases the money supply,

the interest rate decreases, which tends to raise stock prices.

In recent years, the Fed has chosen to target interest rates rather than the money supply because

the money supply is hard to measure with sufficient precision.

As the interest rate falls,

the quantity of money demanded rises, which would reduce a surplus

An decrease in taxes shifts aggregate demand

to the right. The larger the multiplier is, the farther it shifts.

If there is excess demand for money, then people will

withdraw money from interest-bearing accounts, and the interest rate will rise.