Questions:
QUESTION 1
1. If taxes
a. increase, then consumption increases, and aggregate demand shifts rightward.
b. increase, then consumption decreases, and aggregate demand shifts leftward.
c. decrease, then consumption decreases, and aggregate demand shifts rightward.
d. decrease, then consumption increases, and aggregate demand shifts leftward.
QUESTION 2
1. In response to the sharp decline in stock prices in October 1987, the Federal Reserve
a. decreased interest rates, and the economy avoided a recession.
b. increased interest rates, and the economy avoided a recession.
c. increased interest rates, but the economy was unable to avoid a recession.
d. decreased interest rates, but the economy was unable to avoid a recession.
QUESTION 3
1. Scenario 34-2. The following facts apply to a small, imaginary economy.
• Consumption spending is $5,200 when income is $8,000.
• Consumption spending is $5,536 when income is $8,400.
Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500?
a. An economic boom overseas increases the demand for U.S. net exports by $225, and there is no crowding-out effect.
b. A stock-market boom stimulates consumer spending by $300, and there is an operative crowding-out effect.
c. A stock-market boom stimulates consumer spending by $225, and there is an operative crowding-out effect.
d. An economic boom overseas increases the demand for U.S. net exports by $300, and there is no crowding-out effect.
QUESTION 4
1. Suppose the MPC is 0.60. Assume there are no crowding out or investment accelerator effects. If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion, then by how much does aggregate demand shift to the right?
a. $300 billion and $300 billion
b. $300 billion and $180 billion
c. $500 billion and $300 billion
d. $500 billion and $500 billion
QUESTION 5
1. 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. there is a surplus of money.
b. in response, the money-demand curve will shift downward 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. bond issuers and banks will respond by lowering the interest rates they offer.
QUESTION 6
1. 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 aide thought the tax cut would be permanent, but the actual tax cut was temporary.
b. The increase in income shifted money demand less than the aide had anticipated.
c. The actual MPC was larger than the MPC the aide used to compute the multiplier.
d. The increase in income resulted in investment rising more than the aide had anticipated.
QUESTION 7
1. Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference?
a. only the nominal interest rate
b. only the interest rate on short-term government bonds
c. both the nominal interest rate and the real interest rate
d. only the interest rate on long-term bonds
QUESTION 8
1. Which of the following raises the interest rate?
a. an increase in government expenditures and a decrease in the money supply
b. an increase in government expenditures and an increase in the money supply
c. a decrease in government expenditures and a decrease in the money supply
d. a decrease in government expenditures and an increase in the money supply
QUESTION 9
1. When the Fed lowers the growth rate of the money supply, it must take into account
a. only the long-run effect on inflation.
b. only the short-run effects on inflation and production.
c. the long-run effect on inflation as well as the short-run effect on production.
d. only the short-run effect on production.
QUESTION 10
1. In a certain economy, when income is $200, consumer spending is $145. The value of the multiplier for this economy is 6.25. It follows that, when income is $230, consumer spending is
a. $166.75. For this economy, an initial impulse of $10 in consumer spending translates into a $66.75 increase in aggregate demand.
b. $166.75. For this economy, an initial impulse of $10 in consumer spending translates into a $62.50 increase in aggregate demand.
c. $170.20. For this economy, an initial impulse of $10 in consumer spending translates into a $62.50 increase in aggregate demand.
d. $170.20. For this economy, an initial impulse of $10 in consumer spending translates into a $70.20 increase in aggregate demand.
QUESTION 11
1. Which of the following claims concerning the importance of effects that explain the slope of the U.S. aggregate-demand curve is correct?
a. The exchange-rate effect is relatively small because exports and imports are a small part of real GDP.
b. The interest-rate effect is relatively small because investment spending is not very responsive to interest rate changes.
c. The wealth effect is relatively large because money holdings are a significant portion of most households' wealth.
d. None of the above is correct.
QUESTION 12
1. Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-demand curve?
a. As the price level increases, the interest rate rises, so spending falls.
b. As the money supply increases, the interest rate falls, so spending rises.
c. As the money supply increases, the interest rate rises, so spending falls.
d. As the price level increases, the interest rate falls, so spending rises.
QUESTION 13
1. A reduction in U.S net exports would shift U.S. aggregate demand
a. rightward. In an attempt to stabilize the economy, the government could cut taxes.
b. rightward. In an attempt to stabilize the economy, the government could raise taxes.
c. leftward. In an attempt to stabilize the economy, the government could raise taxes.
d. leftward. In an attempt to stabilize the economy, the government could cut taxes.
QUESTION 14
1. 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 half as strong as the multiplier effect, and if the MPC equals 0.8, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?
a. by $5 billion
b. by $20 billion
c. by $50 billion
d. by $10 billion
QUESTION 15
1. Which of the following events would shift money demand to the right?
a. a decrease in the price level
b. an increase in the interest rate
c. an increase in the price level
d. a decrease in the interest rate