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1. Both monetary policy and fiscal policy affect aggregate demand.
a.
True
b.
False
2. Monetary policy and fiscal policy are the only factors that influence aggregate demand.
a.
True
b.
False
3. Sometimes, changes in monetary policy and/or fiscal policy are intended to offset changes to aggregate demand over
which policymakers have little or no control.
a.
True
b.
False
4. For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-
rate effect.
a.
True
b.
False
5. According to the theory of liquidity preference, the interest rate adjusts to balance the supply of, and demand for,
loanable funds.
a.
True
b.
False
6. The theory of liquidity preference was developed by Irving Fisher.
a.
True
b.
False
7. An increase in the money supply decreases the equilibrium interest rate and shifts the aggregate-demand curve to the
right.
a.
True
b.
False
8. Other things the same, an increase in the price level causes the real value of the dollar to fall in the market for foreign-
currency exchange.
a.
True
b.
False
9. Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing
the interest rate.
a.
True
b.
False
10. For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the
long run.
a.
True
b.
False
11. For a country such as the U.S., the wealth effect exerts a very important influence on the slope of the aggregate-
demand curve, since U.S. wealth is large relative to wealth in most other countries.
a.
True
b.
False
12. If the inflation rate is zero, then the nominal and real interest rate are the same.
a.
True
b.
False
13. In liquidity preference theory, an increase in the interest rate, other things the same, decreases the quantity of money
demanded, but does not shift the money demand curve.
a.
True
b.
False
14. An increase in the price level shifts the money demand curve to the left, causing interest rates to increase.
a.
True
b.
False
15. An increase in the money supply shifts the aggregate-supply curve to the right.
a.
True
b.
False
16. When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases
consumption and investment demand, so the aggregate-demand curve shifts to the right.
a.
True
b.
False
17. Stock prices often rise when the Fed raises interest rates.
a.
True
b.
False
18. When the Fed announces a target for the federal funds rate, it essentially accommodates the day-to-day fluctuations in
money demand by adjusting the money supply accordingly.
a.
True
b.
False
19. An increase in the money supply decreases the interest rate in the short run.
a.
True
b.
False
20. Other things equal, the higher the price level, the higher is the real wealth of households.
a.
True
b.
False
21. The theory of liquidity preference is largely at odds with the basic ideas of supply and demand.
a.
True
b.
False
22. The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.
a.
True
b.
False
23. An essential piece of the liquidity preference theory is the demand for money.
a.
True
b.
False
24. The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.
a.
True
b.
False
25. If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the
demand for goods and services by $5 billion.
a.
True
b.
False
26. If the marginal propensity to consume is 6/7, then the multiplier is 7.
a.
True
b.
False
27. Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it
does due to an initial increase in government expenditures.
a.
True
b.
False
28. The multiplier is computed as MPC / (1 - MPC).
a.
True
b.
False
29. Permanent tax cuts have a larger impact on consumption spending than temporary ones.
a.
True
b.
False
30. Some economists, called supply-siders, argue that changes in the money supply exert a strong influence on aggregate
supply.
a.
True
b.
False
31. If the MPC is 4/5, the multiplier is 5/4.
a.
True
b.
False
32. Other things the same, an increase in taxes shifts aggregate demand to the left. In the short run this makes output fall
which makes the interest rate rise.
a.
True
b.
False
33. Government expenditures on capital goods such as roads could increase aggregate supply. Such effects on aggregate
supply are likely to matter more in the short run than in the long run.
a.
True
b.
False
34. If the spending multiplier is 8, then the marginal propensity to consume must be 7/8.
a.
True
b.
False
35. In principle, the government could increase the money supply or increase government expenditures to try to offset the
effects of a wave of pessimism about the future of the economy.
a.
True
b.
False
36. The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is
that the theory by which money and government expenditures change output is flawed.
a.
True
b.
False
37. A significant lag for monetary policy is the time it takes to for a change in the money supply to change the economy.
A significant lag for fiscal policy is the time it takes to pass legislation authorizing it.
a.
True
b.
False
38. Unemployment insurance and welfare programs work as automatic stabilizers.
a.
True
b.
False
39. Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax
cut could be larger or smaller than the tax cut.
a.
True
b.
False
40. During recessions, unemployment insurance payments tend to rise.
a.
True
b.
False
41. During recessions, the government tends to run a budget deficit.
a.
True
b.
False
42. An implication of the Employment Act of 1946 is that the government should respond to changes in the private
economy to stabilize aggregate demand.
a.
True
b.
False
43. During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.
a.
True
b.
False
44. 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.
a.
True
b.
False
45. One of President Obama’s first policy initiatives was a stimulus bill that included large increases in government
spending.
a.
True
b.
False
46. According to the IGM poll, most economists think that the benefits of ARRA exceeded the costs.
a.
True
b.
False
47. According to the IGM poll, most economists think that the crowding out effects were stronger than the stimulative
effects of ARRA.
a.
True
b.
False
48. The automatic stabilizers in the U.S. economy are sufficiently strong to prevent recessions.
a.
True
b.
False
49. Many economists oppose a constitutional amendment that would require a balanced budget for the federal government
because it would probably make the business cycle more volatile.
a.
True
b.
False
50. If the government faced a balanced budget rule, it would be forced to raise taxes or decrease spending during a
recession.
a.
True
b.
False
