Chapter 24 If speculators bid up the value of the dollar in the market for

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subject Authors N. Gregory Mankiw

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51.
Explain the logic according to liquidity preference theory by which an increase in the money
supply changes the
aggregate demand curve.
52.
How does a reduction in the money supply by the Fed make owning stocks less attractive?
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53.
Suppose that the government spends more on a missile defense program. What does this do to
aggregate demand? How is your answer affected by the presence of the multiplier, crowding-out,
taxes, and investment-accelerator
effects?
54.
Suppose that there are no crowding-out effects and the MPC is .9. By how much must the
government increase
expenditures to shift the aggregate demand curve right by $10 billion?
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55.
Suppose that the government increases expenditures by $150 billion while increasing taxes by
$150 billion. Suppose
that the MPC is .80 and that there are no crowding out or accelerator
effects. What is the combined effect of these
changes? Why is the combined change not equal to
zero?
56.
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?
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57.
Explain how unemployment insurance acts as an automatic stabilizer.
Problems
1.
The Federal Reserve sets _____ policy, while the president and Congress set _____ policy. These
two policies influence aggregate _____.
2.
Policymakers use _____ policy and _____ policy to stabilize _____ and _____ in the short run.
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3.
Changes in aggregate demand can cause fluctuations in _____ and _____ in the short run, and
only ____ in the long run.
4.
The wealth-effect notes that a _____ price level increases the real value of households’ wealth.
The larger real wealth _____ the quantity of goods and services demanded.
5.
The effect states that a lower price level reduces the amount of money people wish to hold.
When they lend
out their excess savings, the falls causing investment spending to rise and
increases the quantity of goods and
services demanded.
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6.
A decrease in the domestic _____ causes domestic goods to become less expensive relative to
foreign goods and increases net exports. The increase in net exports causes a(n) _____ in the
quantity of domestic aggregate goods and services demanded and is known as the _____ effect.
7.
An increase in households’ desired money holding causes a(n) _____ in interest rates. This causes
a(n) _____ in investment spending and aggregate demand.
8.
According to the Theory of Liquidity Preference, a fall in the _____ reduces the amount of money
that people wish to hold. As a result, falling interest rates stimulates investment spending and
aggregate _____.
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9.
The theory of _____ states that the _____ adjusts to bring money supply and money demand into
balance.
10.
When there is an excess demand for money, households will interest-bearing bonds,
causing interest rates to _____.
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8450 The Influence of Monetary and Fiscal Policy on Aggregate Demand
Figure 34-14
11.
Refer to Figure 34-14. Initial equilibrium exists at point A. A decline in prices will cause
households to _____ their desired money holdings, moving the interest rate to _____.
12.
Refer to Figure 34-14. Households’ desired money holdings are given by MD1. If the current
rate of interest is r3, then there is excess _____. Households will _____ interest-earning assets,
which causes the interest rate to _____.
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13.
The ease with which an asset can be converted into the medium of exchange is known as _____.
14.
When the money supply increases, there is an excess _____ of money. As a result, interest rates
_____ and aggregate demand _____.
15.
An open-market purchase by the Federal Reserve creates an excess _____ of money. This causes
interest rates to _____ and investment to _____. The change in investment causes aggregate
demand to shift to the _____.
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16.
Open-market purchases cause a(n) in interest rates and a(n) in real GDP in the
short run.
17.
Suppose the Federal Reserve lowers the target on the interest rate in the Federal Funds market.
The Federal Reserve will _____ the money supply and aggregate demand will _____.
18.
When the interest rate is above equilibrium, there is excess _____ of money. Households will
_____ interest-earning assets, which _____ the interest rate.
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19.
When the Federal Funds rate is above the Federal Reserve’s target, it will ____ bonds to _____
the money supply.
20.
If the Federal Reserve’s goal is to stabilize aggregate demand, then it will the money
supply in response to a stock market boom. This causes interest rates to .
21.
When the Federal Reserve conducts an open-market purchase, the money supply and
aggregate demand _____.

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