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The Influence of Monetary and Fiscal Policy on Aggregate Demand 8403
Figure 34-7
31.
Refer to Figure 34-7. The aggregate-demand curve could shift from AD1 to AD2 as a result of
a.
an increase in government purchases.
b.
a decrease in net exports.
c.
households saving a smaller fraction of their income.
d.
a decrease in the price level.
32.
Refer to Figure 34-7. If the economy is at point b, a policy to restore full employment would be
a.
an increase in the money supply.
b.
a decrease in government purchases.
c.
an increase in taxes.
d.
All of the above are correct.
33.
Refer to Figure 34-7. Which of the following is correct?
a.
A wave of optimism could move the economy from point a to point b.
b.
If aggregate demand moves from AD1 to AD2, the economy will stay at point b in both the
short run and long
run.
c.
It is possible that either fiscal or monetary policy might have caused the shift from AD1 to
AD2.
d.
All of the above are correct.
34.
Refer to Figure 34-7. Which of the following is correct?
a.
Unemployment rises as the economy moves from point a to point b.
b.
Either fiscal or monetary policy could be used to move the economy from point b to point a.
c.
If the economy is left alone, then as the economy moves from point b to long-run equilibrium,
the price level
will fall farther.
d.
All of the above are correct.
8406 The Influence of Monetary and Fiscal Policy on Aggregate Demand
Figure 34-9
35.
Refer to Figure 34-9. Suppose the economy is currently at point A. To restore full employment,
the Federal
Reserve should
a.
purchase government bonds, which will increase the money supply.
b.
purchase government bonds, which will reduce the money supply.
c.
sell government bonds, which will increase the money supply.
d.
sell government bonds, which will reduce the money supply.
36.
Refer to Figure 34-9. Suppose the economy is currently at point A. To restore full employment,
the appropriate
fiscal response
a.
requires the central bank to purchase government bonds, which will increase the money supply.
b.
is a reduction in government purchases.
c.
is a reduction in taxes.
d.
requires the central bank to sell government bonds, which will reduce the money supply.
37.
Some economists argue that
a.
monetary policy should actively be used to stabilize the economy.
b.
fiscal policy should actively be used to stabilize the economy.
c.
fiscal policy can be used to shift the AD curve.
d.
All of the above are correct.
38.
Which of the following statements generates the greatest amount of disagreement among
economists?
a.
Increases in the money supply shift aggregate demand to the right.
b.
In the long run, increases in the money supply increase prices, but not output.
c.
Recessions are associated with decreases in consumption, investment, and employment.
d.
Government should use fiscal policy to try to stabilize the economy.
39.
Critics of stabilization policy argue that
a.
there is a lag between the time policy is passed and the time policy has an impact on the
economy.
b.
the impact of policy may last longer than the problem it was designed to offset.
c.
policy can be a source of, instead of a cure for, economic fluctuations.
d.
All of the above are correct.
40.
Critics of stabilization policy argue that
a.
policy affects aggregate demand quickly, but the effects on aggregate demand are long-lived.
b.
policy affects aggregate demand with a lag, and the effects on aggregate demand are long-
lived.
c.
policy affects aggregate demand with a lag, but the effects are short-lived.
d.
policy does not affect aggregate demand.
41.
Most recessions and depressions
a.
are accurately forecasted.
b.
usually occur with ample advance warning.
c.
cause falling unemployment.
d.
occur with little advance warning.
42.
Critics of stabilization policy argue that
a.
“animal spirits” must be offset by active monetary policy.
b.
active monetary policy is necessary for steady economic growth.
c.
the lag problem ends up being a cause of economic fluctuations.
d.
active fiscal policy is required for steady economic growth.
43.
The lag problem associated with monetary policy is due mostly to
a.
the fact that business firms make investment plans far in advance.
b.
the political system of checks and balances that slows down the process of determining
monetary policy.
c.
the time it takes for changes in government spending to affect the interest rate.
d.
All of the above are correct.
44.
The lag problem associated with fiscal policy is due mostly to
a.
the fact that business firms make investment plans far in advance.
b.
the political system of checks and balances that slows down the process of implementing fiscal
policy.
c.
the time it takes for changes in government spending or taxes to affect the interest rate.
d.
All of the above are correct.
45.
When the Fed lowers the growth rate of the money supply, it must take into account
a.
only the short-run effect on production.
b.
only the short-run effects on inflation and production.
c.
only the long-run effect on inflation.
d.
the long-run effect on inflation as well as the short-run effect on production.
46.
Monetary policy affects the economy with a long lag, in part because
a.
proposals to change monetary policy must go through both the House and Senate before being
sent to the
president.
b.
monetary policy works through changes in interest rates, and the Fed does not have the ability
to change
interest rates quickly.
c.
changes in interest rates primarily influence consumption spending, and households make
consumption plans
far in advance.
d.
changes in interest rates primarily influence investment spending, and firms make investment
plans far in
advance.
47.
Macroeconomic forecasts are
a.
precise; this makes policy lags less relevant.
b.
precise; this makes policy lags more relevant.
c.
imprecise; this makes policy lags less relevant.
d.
imprecise; this makes policy lags more relevant.
48.
Opponents of active stabilization policy
a.
advocate a monetary policy designed to offset changes in the unemployment rate.
b.
argue that fiscal policy is unable to change aggregate demand or aggregate supply.
c.
believe that the political process creates lags in the implementation of fiscal policy.
d.
None of the above is correct.
49.
Opponents of active stabilization policy
a.
generally don't believe, even in theory, that fiscal policy can stabilize the economy.
b.
generally agree that fiscal policy has no impact in the long run.
c.
believe some effects of monetary policy may be long-lived.
d.
think the Fed should simply try to fine tune the economy.
50.
Automatic stabilizers
a.
increase the problems that lags cause in using fiscal policy as a stabilization tool.
b.
are changes in taxes or government spending that increase aggregate demand without requiring
policy makers
to act when the economy goes into recession.
c.
are changes in taxes or government spending that policy makers quickly agree to when the
economy goes into
recession.
d.
All of the above are correct.
51.
An example of an automatic stabilizer is
a.
unemployment benefits.
b.
a lowering of interest rates by the Fed.
c.
a decrease in money demand.
d.
a decrease in tax rates in response to a recession.
52.
Which of the following is not an automatic stabilizer?
a.
the minimum wage
b.
the unemployment compensation system
c.
the federal income tax
d.
the welfare system
53.
During recessions, taxes tend to
a.
rise and thereby increase aggregate demand.
b.
rise and thereby decrease aggregate demand.
c.
fall and thereby increase aggregate demand.
d.
fall and thereby decrease aggregate demand.
54.
Other things the same, automatic stabilizers tend to
a.
raise expenditures during expansions and recessions.
b.
lower expenditures during expansions and recessions.
c.
raise expenditures during recessions and lower expenditures during expansions.
d.
raise expenditures during expansions and lower expenditures during recessions.
55.
During periods of expansion, automatic stabilizers cause government expenditures
a.
and taxes to fall.
b.
and taxes to rise.
c.
to rise and taxes to fall.
d.
to fall and taxes to rise.
56.
During recessions, automatic stabilizers tend to make the government's budget
a.
move toward deficit.
b.
move toward surplus.
c.
move toward balance.
d.
not necessarily move the budget in any particular direction.
57.
The most important automatic stabilizer is
a.
open-market operations.
b.
the tax system.
c.
unemployment compensation.
d.
welfare benefits.
58.
The primary argument against active monetary and fiscal policy is that
a.
attempts to stabilize the economy do not constitute a proper role for government in a
democratic society.
b.
these policies affect the economy with a long lag.
c.
these policies affect the economy too quickly and with too much impact.
d.
history demonstrates that interest rates respond unpredictably to active policies, leading to
unpredictable
effects on income.
59.
Other things the same, during recessions taxes tend to
a.
rise. The rise in taxes stimulates aggregate demand.
b.
rise. The rise in taxes contracts aggregate demand.
c.
fall. The fall in taxes stimulates aggregate demand.
d.
fall. The fall in taxes contracts aggregate demand.
60.
It is likely that a constitutional amendment that required the government always to run a balanced
budget would
a.
contribute to a more stable level of output.
b.
mitigate the crowding-out effect.
c.
eliminate the economy’s automatic stabilizers.
d.
All of the above are correct.
61.
Which of the following reduces the interest rate?
a.
an increase in government expenditures and an increase in the money supply
b.
an increase in government expenditures and a decrease in the money supply
c.
a decrease in government expenditures and an increase in the money supply
d.
a decrease in government expenditures and a decrease in the money supply
62.
Suppose investment spending falls. To offset the change in output the Federal Reserve could
a.
increase the money supply. This increase would also move the price level closer to its value
before the decline
in investment spending.
b.
increase the money supply. However, this increase would move the price level farther from its
value before
the decline in investment spending.
c.
decrease the money supply. This decrease would also move the price level closer to its value
before the
decline in investment spending.
d.
decrease the money supply. However, this increase would move the price level farther from its
value before
the decline in investment spending.
63.
Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could
a.
increase the money supply. This increase would also move the price level closer to its value
before the rise in
stock prices.
b.
increase the money supply. However, this increase would move the price level farther from its
value before
the rise in stock prices.
c.
decrease the money supply. This decrease would also move the price level closer to its value
before the rise
in stock prices.
d.
decrease the money supply. However, this decrease would move the price level farther from
its value before
the rise in stock prices.
64.
Suppose foreigners find U.S. goods and services more desirable for some reason other than a
change in the
exchange rate. Which policies could be used to offset the resulting change in
output?
a.
an increase in the money supply and an increase in government purchases.
b.
an increase in the money supply and a decrease in government purchases.
c.
a decrease in the money supply and an increase in government purchases.
d.
a decrease in the money supply and a decrease in government purchases.
65.
If it were not for the automatic stabilizers in the U.S. economy,
a.
the Federal Reserve would have less reason than it has now to monitor stock prices.
b.
it would be more desirable than it is now for the Federal Reserve to target an interest rate.
c.
a strict balanced-budget rule would be more desirable than it is now.
d.
output and employment would probably be more volatile than they are now.
66.
A fiscal stimulus was initiated by President Obama in response to the economic downturn of
2008-2009. At that time, the president’s economists estimated the multiplier to be
a.
3.2 for government purchases and 2.0 for tax cuts.
b.
2.4 for government purchases and 1.4 for tax cuts.
c.
1.6 for government purchases and 1.0 for tax cuts.
d.
1.6 for government purchases and 0.4 for tax cuts.
67.
A 2009 article in The Economist noted that some studies have provided evidence indicating that
multipliers are
a.
smaller in closed economies than in open economies.
b.
larger in closed economies than in open economies.
c.
smaller in capitalist economies than in socialist economies.
d.
larger in capitalist economies than in socialist economies.
68.
A 2009 article in The Economist noted that
a.
recent research has allowed economists to estimate the values of fiscal multipliers with a great
deal of
precision.
b.
research on multipliers indicates that multipliers for permanent tax cuts tend to be smaller than
multipliers for
temporary tax cuts.
c.
most of the evidence on multipliers for government spending is based on changes in military
expenditures.
d.
All of the above are correct.
