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The Influence of Monetary and Fiscal Policy on Aggregate
Demand
Multiple Choice – Section 00: Introduction
1.
Shifts in the aggregate-demand curve can cause fluctuations in
a.
neither the level of output nor the level of prices.
b.
the level of output, but not in the level of prices.
c.
the level of prices, but not in the level of output.
d.
the level of output and in the level of prices.
2.
Fiscal policy affects the economy
a.
only in the short run.
b.
only in the long run.
c.
in both the short and long run.
d.
in neither the short nor the long run.
3.
Shifts in aggregate demand affect the price level in
a.
the short run but not in the long run.
b.
the long run but not in the short run.
c.
both the short and long run.
d.
neither the short nor long run.
4.
Monetary policy and fiscal policy influence
a.
output and prices in the short run and the long run.
b.
output and prices in the short run only.
c.
output in the short run and the long run.
d.
output in the short run only.
5.
Monetary policy is determined by
a.
the president and Congress and involves changing government spending and taxation.
b.
the president and Congress and involves changing the money supply.
c.
the Federal Reserve and involves changing government spending and taxation.
d.
the Federal Reserve and involves changing the money supply.
6.
Fiscal policy is determined by
a.
the president and Congress and involves changing government spending and taxation.
b.
the president and Congress and involves changing the money supply.
c.
the Federal Reserve and involves changing government spending and taxation.
d.
the Federal Reserve and involves changing the money supply.
7.
The goal of monetary policy and fiscal policy is to
a.
offset the shifts in aggregate demand and thereby eliminate unemployment.
b.
offset shifts in aggregate demand and thereby stabilize the economy.
c.
enhance the shifts in aggregate demand and thereby create fluctuations in output and
employment.
d.
enhance the shifts in aggregate demand and thereby increase economic growth
Multiple Choice – Section 01: How Monetary Policy Influences Aggregate Demand
1.
The interest-rate effect
a.
depends on the idea that increases in interest rates increase the quantity of money demanded.
b.
depends on the idea that increases in interest rates increase the quantity of money supplied.
c.
is the most important reason, in the case of the United States, for the downward slope of the
aggregate-
demand curve.
d.
is the least important reason, in the case of the United States, for the downward slope of the
aggregate-
demand curve.
2.
The interest-rate effect
a.
depends on the idea that decreases in interest rates increase the quantity of goods and services
demanded.
b.
depends on the idea that decreases in interest rates decrease the quantity of goods and services
demanded.
c.
is responsible for the downward slope of the money-demand curve.
d.
is the least important reason, in the case of the United States, for the downward slope of the
aggregate-
demand curve.
3.
The wealth effect stems from the idea that a higher price level
a.
increases the real value of households’ money holdings.
b.
decreases the real value of households’ money holdings.
c.
increases the real value of the domestic currency in foreign-exchange markets.
d.
decreases the real value of the domestic currency in foreign-exchange markets.
4.
The idea that a decrease in the price level raises the real value of households’ money holdings,
which increases consumer spending and the quantity of goods and services demanded is known as
a.
the interest-rate effect.
b.
the exchange-rate effect.
c.
the theory of liquidity preference.
d.
the wealth effect.
5.
With respect to their impact on aggregate demand for the U.S. economy, which of the following
represents the
correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect
from most important to least
important?
a.
wealth effect, exchange-rate effect, interest-rate effect
b.
exchange-rate effect, interest-rate effect, wealth effect
c.
interest-rate effect, wealth effect, exchange-rate effect
d.
interest-rate effect, exchange-rate effect, wealth effect
6.
For the U.S. economy, which of the following is the most important reason for the downward slope
of the
aggregate-demand curve?
a.
the wealth effect
b.
the interest-rate effect
c.
the exchange-rate effect
d.
the real-wage effect
7.
Which of the following is likely more important for explaining the slope of the aggregate-demand
curve of a small
economy than it is for the United States?
a.
the wealth effect
b.
the interest-rate effect
c.
the exchange-rate effect
d.
the real-wage effect
8.
For the U.S. economy, which of the following helps explain the slope of the aggregate-demand
curve?
a.
An increase in the price level decreases the interest rate.
b.
An increase in the price level increases the interest rate.
c.
An increase in the money supply decreases the interest rate.
d.
An increase in the money supply increases the interest rate.
9.
The wealth effect helps explain the slope of the aggregate-demand curve. This effect is
a.
relatively important in the United States because expenditures on consumer durables is very
responsive to
changes in wealth.
b.
relatively important in the United States because consumption spending is a large part of GDP.
c.
relatively unimportant in the United States because money holdings are a small part of consumer
wealth.
d.
relatively unimportant because it takes a large change in wealth to cause a significant change in
interest
rates.
10.
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.
11.
Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference?
a.
only the nominal interest rate
b.
both the nominal interest rate and the real interest rate
c.
only the interest rate on long-term bonds
d.
only the interest rate on short-term government bonds
12.
According to John Maynard Keynes,
a.
the demand for money in a country is determined entirely by that nation’s central bank.
b.
the supply of money in a country is determined by the overall wealth of the citizens of that
country.
c.
the interest rate adjusts to balance the supply of, and demand for, money.
d.
the interest rate adjusts to balance the supply of, and demand for, goods and services.
13.
According to the theory of liquidity preference,
a.
if the interest rate is below the equilibrium level, then the quantity of money people want to hold
is less than
the quantity of money the Fed has created.
b.
if the interest rate is above the equilibrium level, then the quantity of money people want to hold
is greater
than the quantity of money the Fed has created.
c.
the demand for money is represented by a downward-sloping line on a supply-and-demand
graph.
d.
All of the above are correct.
14.
According to classical macroeconomic theory,
a.
the price level is sticky in the short run and it plays only a minor role in the short-run adjustment
process.
b.
for any given level of output, the interest rate adjusts to balance the supply of, and demand for,
money.
c.
output is determined by the supplies of capital and labor and the available production
technology.
d.
All of the above are correct.
15.
According to classical macroeconomic theory,
a.
output is determined by the supplies of capital and labor and the available production
technology.
b.
for any given level of output, the interest rate adjusts to balance the supply of, and demand for,
loanable
funds.
c.
given output and the interest rate, the price level adjusts to balance the supply of, and demand
for, money.
d.
All of the above are correct.
16.
According to the liquidity preference theory, an increase in the overall price level of 10 percent
a.
increases the equilibrium interest rate, which in turn decreases the quantity of goods and
services demanded.
b.
decreases the equilibrium interest rate, which in turn increases the quantity of goods and
services demanded.
c.
increases the quantity of money supplied by 10 percent, leaving the interest rate and the
quantity of goods
and services demanded unchanged.
d.
decreases the quantity of money demanded by 10 percent, leaving the interest rate and the
quantity of goods
and services demanded unchanged.
17.
On the graph that depicts the theory of liquidity preference,
a.
the demand-for-money curve is vertical.
b.
the supply-of-money curve is vertical.
c.
the interest rate is measured along the horizontal axis.
d.
the price level is measured along the vertical axis.
18.
Using the liquidity-preference model, when the Federal Reserve decreases the money supply,
a.
the equilibrium interest rate increases.
b.
the aggregate-demand curve shifts to the right.
c.
the quantity of goods and services demanded is unchanged for a given price level.
d.
the short-run aggregate-supply curve shifts to the left.
19.
In recent years, the Federal Reserve has conducted policy by setting a target for the
a.
size of the money supply.
b.
growth rate of the money supply.
c.
federal funds rate.
d.
discount rate.
20.
While a television news reporter might state that “Today the Fed raised the federal funds rate
from 1 percent to
1.25 percent,” a more precise account of the Fed’s action would be as follows:
a.
“Today the Fed told its bond traders to conduct open-market operations in such a way that the
equilibrium federal funds rate would increase to 1.25 percent.”
b.
“Today the Fed raised the discount rate by a quarter of a percentage point, and this action will
force the
federal funds rate to rise by the same amount.”
c.
“Today the Fed took steps to increase the money supply by an amount that is sufficient to
increase the
federal funds rate to 1.25 percent.”
d.
“Today the Fed took a step toward expanding aggregate demand, and this was done by raising
the federal
funds rate to 1.25 percent.”
21.
Monetary policy
a.
must be described in terms of interest-rate targets.
b.
must be described in terms of money-supply targets.
c.
can be described either in terms of the money supply or in terms of the interest rate.
d.
cannot be accurately described in terms of the interest rate or in terms of the money supply.
22.
Which of the following is not a reason the aggregate-demand curve slopes downward? As the
price level
increases,
a.
firms may believe the relative price of their output has risen.
b.
real wealth declines.
c.
the interest rate increases.
d.
the exchange rate increases.
23.
Which of the following would not be an expected response from a decrease in the price level and
so help to explain
the slope of the aggregate-demand curve?
a.
When interest rates fall, In-and-Out Convenience Stores decides to build some new stores.
b.
The exchange rate falls, so French restaurants in Paris buy more Kansas beef.
c.
Tyler feels wealthier because of the price-level decrease and so he decides to remodel his
kitchen.
d.
With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off
workers.
24.
Liquidity preference refers directly to Keynes' theory concerning
a.
the effects of changes in money demand and supply on interest rates.
b.
the effects of changes in money demand and supply on exchange rates.
c.
the effects of wealth on expenditures.
d.
the difference between temporary and permanent changes in income.
25.
According to liquidity preference theory, equilibrium in the money market is achieved by
adjustments in
a.
the price level.
b.
the interest rate.
c.
the exchange rate.
d.
real wealth.
26.
Liquidity preference theory is most relevant to the
a.
short run and supposes that the price level adjusts to bring money supply and money demand
into balance.
b.
short run and supposes that the interest rate adjusts to bring money supply and money demand
into balance.
c.
long run and supposes that the price level adjusts to bring money supply and money demand
into balance.
d.
long run and supposes that the interest rate adjusts to bring money supply and money demand
into balance.
27.
The theory of liquidity preference is most helpful in understanding
a.
the wealth effect.
b.
the exchange-rate effect.
c.
the interest-rate effect.
d.
misperceptions theory.
28.
People choose to hold a larger quantity of money if
a.
the interest rate rises, which causes the opportunity cost of holding money to rise.
b.
the interest rate falls, which causes the opportunity cost of holding money to rise.
c.
the interest rate rises, which causes the opportunity cost of holding money to fall.
d.
the interest rate falls, which causes the opportunity cost of holding money to fall.
29.
If expected inflation is constant, then when the nominal interest rate increases, the real interest
rate
a.
increases by more than the change in the nominal interest rate.
b.
increases by the change in the nominal interest rate.
c.
decreases by the change in the nominal interest rate.
d.
decreases by more than the change in the nominal interest rate.
30.
If expected inflation is constant, then when the nominal interest rate falls, the real interest rate
a.
falls by more than the change in the nominal interest rate.
b.
falls by the change in the nominal interest rate.
c.
rises by the change in the nominal interest rate.
d.
rises by more than the change in the nominal interest rate.
31.
If expected inflation is constant and the nominal interest rate decreases by 2 percentage points,
then the real
interest rate
a.
increases by 2 percentage points.
b.
increases, but by less than 2 percentage points.
c.
decreases, but by less than 2 percentage points.
d.
decreases by 2 percentage points.
32.
The theory of liquidity preference assumes that the nominal supply of money is determined by the
a.
level of real output only.
b.
interest rate only.
c.
level of real output and by the interest rate.
d.
Federal Reserve.
33.
According to the theory of liquidity preference, money demand
a.
and the money supply are positively related to the interest rate.
b.
and the money supply are negatively related to the interest rate.
c.
is negatively related to the interest rate, while the money supply is independent of the interest
rate.
d.
is independent of the interest rate, while money supply is negatively related to the interest rate.
