Macro Econ Chapter 21
permanent tax cuts shift the AD curve
farther to the right than do temporary tax cuts
which of the following sequences best represents the crowding-out effect?
government purchases up -> GDP up -> demand for money up -> equilibrium interest rate up -> quantity of goods and services demanded down
if households view a tax cut as temporary, then the tax cut
had less of an effect on aggregate demand than if households view it as permanent
if the fed conducts open-market sales, which of the following quantities increase(s)?
interest rates, but not investment or prices
figure 34-2 if the graphs apply to an economy such as the U.S. economy, then the slope of the AD curve is primarily attributable to the
interest-rate effect
which of the following shifts aggregate demand to the right?
none of the above is correct
figure 34-1 if the current interest rate is 2 percent
people will sell more bonds, which drives interest rates up
most economists believe that fiscal policy
primary affects aggregate demand
which of the following is an example of crowding out?
an increase in government spending increases interest rates, causing investment to fall
figure 34-2 assume the money market is always at equilibrium. under the assumptions of the model,
an increase in r from r1 to r2 is associated with a decrease in Y from Y1 to Y2
which of the following events would shift money demand to the right?
an increase in the price level, but not an increase in the interest rate
which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-demand curve?
as the price level increases, the interest rate rises, so spending falls
figure 34-9 suppose the economy is currently at point a. to restore full employment, the appropriate fiscal response
is a reduction in government purchases
the interest-rate effect
is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve
assume the MPC is 0.65. assuming only the multiplier effect matters, a decrease in government purchases of $20 billion will shift the aggregate demand curve to the
left by about $57.1 billion
a significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. the effect of that tax cut on consumer spending and aggregate demand was
likely smaller than if the cut had been permanent
changes in the interest rate bring the money market into equilibrium according to
liquidity preference theory but not classical theory
if people decide to hold less money, then
money demand decreases, there is an excess supply of money, and interest rates fall
the goal of monetary policy and fiscal policy is to
offset shifts in aggregate demand and thereby stabilize the economy
"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
our analysis of monetary polity is not fundamentally altered if the Federal Reserve decides to target an interest rate
which of the following statements is correct for the long run?
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
when the federal reserve decreases the federal funds target rate, the lower rate is achieved through
purchases of government bonds, which reduces interest rates and cause people to hold more money
if, at some interest rate, the quantity of money supplied is less than the quantity of money demanded, people will desire to
sell interest-bearing assets, causing the interest rate to increase
changes in the interest rate
shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level
tax increases
shift aggregate demand left while increases in government expenditures shift aggregate demand right
figure 34-1 which of the following is correct?
starting with a new interest rate of 4 percent, the demand for goods and services will increase until the money market reaches a new equilibrium
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
a tax cut shifts the aggregate demand curve the farthest if
the MPC is large and if the tax cut is permanent
monetary policy is determined by
the federal reserve and involves changing the money supply
according to liquidity preference theory, a decrease in money demand from some reason other than a change in the price level causes
the interest rate to fall, so aggregate demand shifts right
suppose that the federal reserve is concerned about the effects of falling stock prices on the economy. what could it do?
buy bonds to lower the interest rate
initially, the economy is in long-run equilibrium. aggregate demand then shifts leftward by $50 billion. the government wants to increase its spending in order to avoid a recession. if the crowding-out effect is always one-third as strong as the money multiplier effect, and if the MPC equals 0.6 then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?
by $30 billion
scenario 34-1 for this economy, an initial increase of $200 in net exports translates into a(n)
$800 increase in aggregate demand in the absence of the crowding-out effect
senario 34-1 Take the information as given for a small, imaginary economy: -when income is $10,000, consumption spending is $6,500. -when income is $11,000, consumption spending is $7,250. The marginal propensity to consume for this economy is
0.750
if the MPC=0.75, then the government purchases multiplier is about
4
suppose the MPC is 0.9. there are no crowding out or investment accelerator effects. if the government increases its expenditures by $30 billion, then by how much does aggregate demand shift to the right? if the government decreases taxes by $30 billion, then by how far does aggregate demand shift to the right?
$300 billion and $270 billion
in a certain economy, when income is $100, consumer spending is $60. the value of the money multiplier for this economy is 4. it follows that, when income is $101, consumer spending is
$60.75
if the MPC is 0.8 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $120 billion will eventually shift the aggregate demand curve to the right by
$600 billion
changes in the interest rate help explain
both the slope of and shifts of aggregate demand
monetary policy
can be described either in terms of the money supply or in terms of the interest rate
initially, the economy is in long-run equilibrium. the aggregate demand curve then shifts $50 billion to the left. the government wants to change its spending to offset this decrease in demand. the MPC is 0.80. suppose the effect on aggregate demand from a change in taxes is 4/5 the size of the change from government expenditures. there is no crowding out and no accelerator effect. what should the government do if it wants to offset the decrease in aggregate demand?
reduces taxes by $5.56 billion dollars and increase expenditures by $5.56 billion dollars
assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures shifts aggregate demand
right by $100 billion
figure 34-9 suppose the economy is currently at point a. to restore full employment, the federal reserve should
sell government bonds, which will reduce the money supply
an aide in 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?
the aide through the tax cut would be permanent, but the actual tax cut was temporary
figure 34-2 which of the following quantities is held constant as we move from one point to another on either graph?
the expected rate of inflation
which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate-demand curve?
with prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers
scenario 34-1 the multiplier for this economy is
4.00
if a $1,000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is
0.8 and the multiplier is 5
figure 34-2 if the money-supply curve MS on the left-hand graph were to shift to the left, this would
all of the above are correct
when the interest rate is above the equilibrium level
all of the above are correct
figure 34-2 a decrease in Y from Y1 to Y2 is explained as follows:
an increase in P from P1 to P2 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
which of the following correctly explains the crowding-out effect?
an increase in government expenditures increases the interest rate and so reduces investment spending
figure 34-2 assume the money market is always in equilibrium, and suppose r1=0.08, r2=0.12, Y1=13,000, Y2=10,000, P1=1.0, and P2=1.2. which of the following statements is correct?
if the velocity of money is 4 when r=r2, then the quantity of money is $3,000.
in the short run, open-market purchases
increase investment and real GDP, and decrease nominal interest rates
when the fed buys government bonds, the reserves of the banking system
increase, so the money supply increases
an increase in the MPC
increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand
