ECO 252 Chapter 21 Quiz

Other things the same, as the price level rises, a. the interest rate falls causing aggregate demand to shift. b. the interest rate rises causing a movement along a given aggregate-demand curve. c. the interest rate rises causing aggregate demand to shift. d. the interest rate falls causing a movement along a given aggregate-demand curve.

NOT C maybe B

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 rise, so aggregate demand shifts left. b. the interest rate to fall, so aggregate demand shifts right. c. the interest rate to rise, so aggregate demand shifts right. d. the interest rate to fall, so aggregate demand shifts left.

b. The interest rate to fall, so aggregate demand shifts right.

If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then a. aggregate demand falls by 2 x $40 billion. b. aggregate demand falls by 11/2 x $40 billion. c. aggregate demand falls by 11/9 x $40 billion. d. aggregate demand falls by 9/11 x $40 billion.

B. aggregate demand falls by 11/2 x $40 billion.

Which of the following is an example of crowding out? a. An increase in taxes increases interest rates, causing investment to fall. b. An increase in government spending increases interest rates, causing investment to fall. c. A decrease in the money supply increases interest rates, causing investment to fall. d. A decrease in private savings increases interest rates, causing investment to fall.

NOT a. An increase in taxes increases interest rates, causing investment to fall.

Which of the following reduces the interest rate? a. an increase in government expenditures and a decrease in the money supply b. a decrease in government expenditures and a decrease in the money supply c. a decrease in government expenditures and an increase in the money supply d. an increase in government expenditures and an increase in the money supply

NOT a. an increase in government expenditures and a decrease in the money supply

When the interest rate is above the equilibrium level, a. the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. b. people respond by buying interest-bearing bonds or by depositing money in interest-bearing bank accounts. c. bond issuers and banks respond by lowering the interest rates they offer. d. All of the above are correct.

NOT a. the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied.

According to liquidity preference theory, a. an increase in the price level reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand rightward. b. an increase in the price level increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand leftward. c. an increase in the interest rate increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand leftward. d. an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right.

NOT b

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that a. the activities of the Federal Reserve's bond traders are irrelevant if the Federal Reserve decides to target an interest rate. b. shifts of the money-supply curve cannot occur if the Federal Reserve decides to target an interest rate. c. the aggregate-demand curve will not shift in response to Federal Reserve actions if the Fed decides to target an interest rate. d. changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate.

NOT b. shifts of the money supply curve cannot occur if the fed reserve decides to target an interest rate

Refer to Figure 34-2. Assume the money market is always in equilibrium. Under the assumptions of the model, a. the quantity of goods and services demanded is higher at P2 than it is at P1. b. the quantity of money is higher at Y1 than it is at Y2. c. an increase in r from r1 to r2 is associated with a decrease in Y from Y1 to Y2. d. All of the above are correct.

NOT d maybe c

Figure 34-4. On the figure, MS represents money supply and MD represents money demand. Refer to Figure 34-4. Suppose the money-demand curve is currently MD2. If the current interest rate is r2, then a. bond issuers and banks will respond by lowering the interest rates they offer. b. in response, the money-demand curve will shift rightward from its current position to establish equilibrium in the money market. c. people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. d. there is a shortage of money.

a

Suppose foreigners find U.S. goods and services more desirable for some reason other than a change in the exchange rate. Which policies could be used to offset the resulting change in output? a. a decrease in the money supply and a decrease in government purchases. b. an increase in the money supply and an increase in government purchases. c. a decrease in the money supply and an increase in government purchases. d. an increase in the money supply and a decrease in government purchases.

a

Which of the following is likely more important for explaining the slope of the aggregate-demand curve of a small economy than it is for the United States? a. the exchange-rate effect b. the interest-rate effect c. the wealth effect d. the real-wage effect

a

Which of the following sequences best represents the crowding-out effect? a. government purchases ↑ ⇒ GDP ↑ ⇒ demand for money ↑⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ b. taxes ↑ ⇒ GDP ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑⇒ quantity of goods and services demanded ↓ c. government purchases ↓ ⇒ GDP ↓ ⇒ demand for money ↓⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↓ d. government purchases ↑ ⇒ GDP ↑ ⇒ supply of money ↓⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓

a. government purchases ↑ ⇒ GDP ↑ ⇒ demand for money ↑⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓

If the Fed conducts open-market sales, which of the following quantities increase(s)? a. interest rates, but not investment or prices b. interest rates, prices, and investment spending c. interest rates and investment, but not prices d. interest rates and prices, but not investment spending

a. interest rates, but not investment or prices

Which of the following statements is correct for the long run? a. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money. b. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level is relatively slow to adjust. c. Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money. d. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for money; the price level adjusts to balance the supply and demand for loanable funds.

a. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.

According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in a. the price level. b. the interest rate. c. the exchange rate. d. real wealth.

b

Figure 34-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. Refer to Figure 34-6. Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. The extent of crowding out, for any particular level of the price level, is a. $30 billion. b. $20 billion. c. $40 billion. d. $75 billion.

b

In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the a. assumption that the feedback effects associated with changes in government purchases become negligible after two or three rounds of spending have occurred. b. fact that the multiplier effect is represented by an infinite geometric series. c. empirical evidence that points to a value of about 3/4 for the MPC. d. assumption that increases in government purchases have no effect on consumer spending.

b

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment? a. decrease the money supply b. increase government expenditures c. increase taxes d. All of the above are correct.

b

According to liquidity preference theory, a decrease in the price level causes the interest rate to a. decrease, which decreases the quantity of goods and services demanded. b. decrease, which increases the quantity of goods and services demanded. c. increase, which decreases the quantity of goods and services demanded. d. increase, which increases the quantity of goods and services demanded.

b. decrease, which increases the quantity of goods and services demanded.

An aide to a U.S. Congressman computes the effect on aggregate demand of a $20 billion tax cut. The actual increase in aggregate demand is less than the aide expected. Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand? a. The increase in income resulted in investment rising more than the aide had anticipated. b. The aide thought the tax cut would be permanent, but the actual tax cut was temporary. c. The increase in income shifted money demand less than the aide had anticipated. d. The actual MPC was larger than the MPC the aide used to compute the multiplier.

b. The aide thought the tax cut would be permanent, but the actual tax cut was temporary.

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

b. interest rates rise and investment decreases.

Keynes argued that a. irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment. b. irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply. c. changes in business and consumer expectations generally stabilize the economy. d. All of the above are correct.

b. irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment.

Most recessions and depressions a. cause falling unemployment. b. occur with little advance warning. c. usually occur with ample advance warning. d. are accurately forecasted.

b. occur with little advance warning.

Refer to Figure 34-9. Suppose the economy is currently at point A. To restore full employment, the Federal Reserve should a. purchase government bonds, which will reduce the money supply. b. sell government bonds, which will reduce the money supply. c. purchase government bonds, which will increase the money supply. d. sell government bonds, which will increase the money supply.

b. sell government bonds, which will reduce the money supply.

According to John Maynard Keynes, a. the supply of money in a country is determined by the overall wealth of the citizens of that country. b. the interest rate adjusts to balance the supply of, and demand for, money. c. the demand for money in a country is determined entirely by that nation's central bank. d. the interest rate adjusts to balance the supply of, and demand for, goods and services.

b. the interest rate adjusts to balance the supply of, and demand for, money.

According to liquidity preference theory, if there were a surplus of money, then a. the interest rate would be above equilibrium and the quantity of money demanded would be too large for equilibrium. b. the interest rate would be above equilibrium and the quantity of money demanded would be too small for equilibrium. c. the interest rate would be below equilibrium and the quantity of money demanded would be too small for equilibrium. d. the interest rate would be below equilibrium and the quantity of money demanded would be too large for equilibrium.

b. the interest rate would be above equilibrium and the quantity of money demanded would be too small for equilibrium.

A fiscal stimulus was initiated by President Obama in response to the economic downturn of 2008-2009. At that time, the president's economists estimated the multiplier to be a. 1.6 for government purchases and 0.4 for tax cuts. b. 3.2 for government purchases and 2.0 for tax cuts. c. 1.6 for government purchases and 1.0 for tax cuts. d. 2.4 for government purchases and 1.4 for tax cuts.

c

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. decreases, but by less than 2 percentage points. c. decreases by 2 percentage points. d. increases, but by less than 2 percentage points.

c

If, at some interest rate, the quantity of money supplied is less than the quantity of money demanded, people will desire to a. buy interest-bearing assets, causing the interest rate to increase. b. buy interest-bearing assets, causing the interest rate to decrease. c. sell interest-bearing assets, causing the interest rate to increase. d. sell interest-bearing assets, causing the interest rate to decrease.

c

When the Federal Reserve increases the Federal Funds target rate, it achieves this target by a. selling government bonds. This action will increase investment and shift aggregate demand to the left. b. purchasing government bonds. This action will increase investment and shift aggregate demand to the right. c. selling government bonds. This action will reduce investment and shift aggregate demand to the left. d. purchasing government bonds. This action will reduce investment and shift aggregate demand to the right.

c

Which of the following illustrates how the investment accelerator works? a. An increase in government expenditures increases the interest rate so that SnoozeBargain Co. decides to modernize its motels. b. An increase in government expenditures decreases the interest rate so that SnoozeBargain Co. decides to modernize its motels. c. An increase in government expenditures increases aggregate spending so that SnoozeBargain Co. decides to modernize its motels. d. An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by SnoozeBargain Co. rises.

c

The Federal Funds rate is the interest rate a. the Fed charges depository institutions for short-term loans. b. interest rate on 3 month Treasury bills. c. banks charge each other for short-term loans. d. the Fed pays on deposits.

c. banks charge each other for short-term loans.

Assume the MPC is 0.72. The multiplier is a. 1.39. b. 4.53. c. 3.57. d. 2.57.

c. 3.57

When the Fed buys government bonds, the reserves of the banking system a. increase, so the money supply increases. b. decrease, so the money supply increases. c. increase, so the money supply decreases. d. decrease, so the money supply decreases.

c. increase, so the money increases

If the government cuts the tax rate, workers get to keep a. more of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left. b. less of each additional dollar they earn, so work effort increases, and aggregate supply shifts right. c. more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right. d. less of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.

c. more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.

An decrease in taxes shifts aggregate demand a. to the left. The larger the multiplier is, the farther it shifts. b. to the right. The larger the multiplier is, the less it shifts. c. to the right. The larger the multiplier is, the farther it shifts. d. to the left. The larger the multiplier is, the less it shifts.

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

An increase in government spending on goods to build or repair infrastructure a. shifts the aggregate demand curve to the right. b. has a multiplier effect. c. shifts the aggregate supply curve to the right, but this effect is likely more important in the long run. d. All of the above are correct.

d

If the Fed conducts open-market purchases, then which of the following quantities increase(s)? a. interest rates, but not investment spending b. interest rates and investment spending c. neither interest rates nor investment spending d. investment spending, but not interest rates

d

Suppose the multiplier has a value that exceeds 1, and there are no crowding out or investment accelerator effects. Which of the following would shift aggregate demand to the right by more than the increase in expenditures? a. an increase in government expenditures b. an increase in net exports c. an increase in investment spending d. All of the above are correct.

d

If the stock market booms, then a. aggregate supply increases, which the Fed could offset by purchasing the money supply. b. aggregate demand increases, which the Fed could offset by purchasing bonds. c. aggregate supply increases, which the Fed could offset by selling bonds. d. aggregate demand increases, which the Fed could offset by selling bonds.

d. aggregate demand increases, which the Fed could offset by selling government bonds.

If, at some interest rate, the quantity of money demanded is less than the quantity of money supplied, people will desire to a. sell interest-bearing assets, causing the interest rate to increase. b. sell interest-bearing assets, causing the interest rate to decrease. c. buy interest-bearing assets, causing the interest rate to increase. d. buy interest-bearing assets, causing the interest rate to decrease.

d. buy interest-bearing assets, causing the interest rate to decrease.

A surplus or shortage in the money market is eliminated by adjustments in the price level according to a. liquidity preference theory, but not classical theory. b. neither liquidity preference theory nor classical theory. c. both liquidity preference theory and classical theory. d. classical theory, but not liquidity preference theory.

d. classical theory, but not liquidity preference theory

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

d. interest rate

According to the theory of liquidity preference, an increase in the price level causes the a. interest rate and investment to fall. b. interest rate and investment to rise. c. interest rate to fall and investment to rise. d. interest rate to rise and investment to fall.

d. interest rate to rise and investment to fall.

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller? a. the interest rate falls and aggregate supply is relatively flat b. the interest rate rises and aggregate supply is relatively flat c. the interest rate falls and aggregate supply is relatively steep d. the interest rate rises and aggregate supply is relatively steep

d. the interest rate rises and aggregate supply is relatively steep