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Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

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Question 81

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According to the theory of liquidity preference,

A) 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.
B) 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.
C) 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.
D) 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.

E) A) and D)
F) B) and D)

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Question 82

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Figure 34-9 ​ -Refer to Figure 34-9. Suppose the multiplier is 2 and there is no crowding-out, but there is an accelerator effect. If the economy is currently at point A, then an increase in government purchases of $10 will likely increase aggregate demand to point _____ where output is $_____.

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Question 83

Multiple Choice

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Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

Figure 34-3 (a) The Money Market (b) The Aggregate Demand Curve -Refer to Figure 34-3. Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect on the slope of aggregate demand?

In which of the following cases would the quantity of money demanded be smallest?

Fiscal policy refers to the idea that aggregate demand is affected by changes in

Figure 34-12 ​ -Refer to Figure 34-12. The economy is currently at point A. Given the current situation, the Federal Reserve will _____ bonds, which causes interest rates to _____.

Suppose that consumers become pessimistic about the future health of the economy. What will happen to aggregate demand and to output? What might the president and Congress have to do to keep output stable?

An example of an automatic stabilizer is

When the Fed increases the money supply, we expect

If the Federal Reserve's goal is to stabilize aggregate demand, then in response to an increase in money demand, the Federal Reserve will _____ the money supply.

The _____ is the most important automatic stabilizer.

A severe problem that many economists have with the active use of monetary policy and fiscal policy to stabilize the economy is that, while those policies obviously work well in practice, they are not well understood on a theoretical level.

For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

If the spending multiplier is 8, then the marginal propensity to consume must be 7/8.

When the interest rate is above equilibrium, there is excess _____ of money. Households will _____ interest-earning assets, which _____ the interest rate.

During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.

Critics of stabilization policy argue that

To offset increased pessimism by households, the government may _____ government spending and/or _____ taxes.

During recessions, taxes tend to