The Influence of Monetary and Fiscal Policy on Aggregate Demand 8283
113. According to liquidity preference theory, an increase in the price level shifts the
a. money demand curve rightward, so the interest rate increases.
b. money demand curve rightward, so the interest rate decreases.
c. money demand curve leftward, so the interest rate decreases.
d. money demand curve leftward, so the interest rate increases.
114. According to liquidity preference theory, a decrease in the price level shifts the
a. money demand curve rightward, so the interest rate increases.
b. money demand curve rightward, so the interest rate decreases.
c. money demand curve leftward, so the interest rate decreases.
d. money demand curve leftward, so the interest rate increases.
8284 The Influence of Monetary and Fiscal Policy on Aggregate Demand
115. An increase in the U.S. interest rate
a. raises the opportunity cost of holding dollars.
b. induces households to increase consumption.
c. shifts money demand to the right.
d. leads to a depreciation of the U.S. dollar.
116. Other things the same, a decrease in the U.S. interest rate
a. induces firms to invest more.
b. shifts money demand to the left.
c. makes the U.S. dollar appreciate.
d. increases the opportunity cost of holding dollars.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8285
117. Other things the same, which of the following responses would we expect from an increase in
U.S. interest rates?
a. Your aunt puts more money in her savings account.
b. Foreign citizens decide to buy fewer U.S. bonds.
c. You decide to purchase a new oven for your cookie factory.
d. All of the above are correct.
118. Other things the same, which of the following responses would we expect to result from a
decrease in U.S. interest rates?
a. U.S. citizens decide to hold more foreign bonds.
b. People choose to hold more currency.
c. You decide to purchase a new oven for your cookie factory.
d. All of the above are correct.
8286 The Influence of Monetary and Fiscal Policy on Aggregate Demand
119. Other things equal, in the short run a lower price level leads households to
a. increase consumption and firms to buy more capital goods.
b. increase consumption and firms to buy fewer capital goods.
c. decrease consumption and firms to buy more capital goods.
d. decrease consumption and firms to buy fewer capital goods.
120. According to liquidity preference theory, an increase in the price level causes the interest rate to
a. increase, which increases the quantity of goods and services demanded.
b. increase, which decreases the quantity of goods and services demanded.
c. decrease, which increases the quantity of goods and services demanded.
d. decrease, which decreases the quantity of goods and services demanded.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8287
121. According to liquidity preference theory, a decrease in the price level causes the interest rate to
a. increase, which increases the quantity of goods and services demanded.
b. increase, which decreases the quantity of goods and services demanded.
c. decrease, which increases the quantity of goods and services demanded.
d. decrease, which decreases the quantity of goods and services demanded.
122. According to the theory of liquidity preference, an increase in the price level causes the
a. interest rate and investment to rise.
b. interest rate and investment to fall.
c. interest rate to rise and investment to fall.
d. interest rate to fall and investment to rise.
8288 The Influence of Monetary and Fiscal Policy on Aggregate Demand
123. According to the theory of liquidity preference, a decrease in the price level causes the
a. interest rate and investment to rise.
b. interest rate and investment to fall.
c. interest rate to rise and investment to fall.
d. interest rate to fall and investment to rise.
124. According to liquidity preference theory, if the price level
a. fell, the interest rate would rise, and induce investment spending to rise.
b. fell, the interest rate would fall, and induce investment spending to fall.
c. rose, the interest rate would rise, and induce investment spending to fall.
d. rose, the interest rate would fall, and induce investment spending to rise.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8289
125. The most important reason for the slope of the aggregate-demand curve is that as the price level
a. increases, interest rates increase, and investment decreases.
b. increases, interest rates decrease, and investment increases.
c. decreases, interest rates increase, and investment increases.
d. decreases, interest rates decrease, and investment decreases.
126. Which of the following properly describes the interest-rate effect that helps explain the slope of
the aggregate- demand curve?
a. As the money supply increases, the interest rate falls, so spending rises.
b. As the money supply increases, the interest rate rises, so spending falls.
c. As the price level increases, the interest rate falls, so spending rises.
d. As the price level increases, the interest rate rises, so spending falls.
8290 The Influence of Monetary and Fiscal Policy on Aggregate Demand
127. Other things the same, as the price level rises,
a. the interest rate rises causing aggregate demand to shift.
b. the interest rate rises causing a movement along a given aggregate-demand curve.
c. the interest rate falls causing aggregate demand to shift.
d. the interest rate falls causing a movement along a given aggregate-demand curve.
128. Which of the following properly describes the interest-rate effect?
a. A higher price level leads to higher money demand; higher money demand leads to higher
interest rates; a higher interest rate increases the quantity of goods and services demanded.
b. A higher price level leads to higher money demand; higher money demand leads to lower
interest rates; a higher interest rate reduces the quantity of goods and services demanded.
c. A lower price level leads to lower money demand; lower money demand leads to lower
interest rates; a lower interest rate reduces the quantity of goods and services demanded.
d. A lower price level leads to lower money demand; lower money demand leads to lower
interest rates; a lower interest rate increases the quantity of goods and services demanded.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8291
129. In the short run, an increase in the money supply causes interest rates to
a. increase, and aggregate demand to shift right.
b. increase, and aggregate demand to shift left.
c. decrease, and aggregate demand to shift right.
d. decrease, and aggregate demand to shift left.
130. An increase in the money supply will
a. increase interest rates, decreasing investment and aggregate demand.
b. reduce interest rates, increasing investment and aggregate demand.
c. reduce interest rates, decreasing investment and increasing aggregate demand.
d. increase interest rates, increasing investment and aggregate demand.
8292 The Influence of Monetary and Fiscal Policy on Aggregate Demand
131. In the short run, a decrease in the money supply causes interest rates to
a. increase, and aggregate demand to shift right.
b. increase, and aggregate demand to shift left.
c. decrease, and aggregate demand to shift right.
d. decrease, and aggregate demand to shift left.
132. If the Federal Reserve decided to raise interest rates, it could
a. buy bonds to lower the money supply.
b. buy bonds to raise the money supply.
c. sell bonds to lower the money supply.
d. sell bonds to raise the money supply.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8293
133. Which of the following shifts aggregate demand to the right?
a. an increase in the price level
b. an increase in the money supply
c. a decrease in the price level
d. a decrease in the money supply
134. Which of the following shifts aggregate demand to the left?
a. an increase in the price level
b. an increase in the money supply
c. a decrease in the price level
d. a decrease in the money supply
8294 The Influence of Monetary and Fiscal Policy on Aggregate Demand
135. Which of the following shifts aggregate demand to the right?
a. The price level rises.
b. The price level falls.
c. The money supply falls.
d. None of the above is correct.
136. Which of the following shifts aggregate demand to the right?
a. The price level rises.
b. The price level falls.
c. The Fed purchases government bonds on the open market.
d. None of the above is correct.
137. If the Fed conducts open-market sales, the money supply
a. increases and aggregate demand shifts right.
b. increases and aggregate demand shifts left.
c. decreases and aggregate demand shifts right.
d. decreases and aggregate demand shifts left.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8295
138. If the Fed conducts open-market sales, which of the following quantities increase(s)?
a. interest rates, prices, and investment spending
b. interest rates and prices, but not investment spending
c. interest rates and investment, but not prices
d. interest rates, but not investment or prices
139. If the Fed conducts open-market purchases, the money supply
a. increases and aggregate demand shifts right.
b. increases and aggregate demand shifts left.
c. decreases and aggregate demand shifts right.
d. decreases and aggregate demand shifts left.
8296 The Influence of Monetary and Fiscal Policy on Aggregate Demand
140. If the Fed conducts open-market purchases, then which of the following quantities increase(s)?
a. interest rates and investment spending
b. interest rates, but not investment spending
c. investment spending, but not interest rates
d. neither interest rates nor investment spending
141. In which of the following cases does the aggregate-demand curve shift to the right?
a. The price level rises, causing the interest rate to fall.
b. The price level falls, causing the interest rate to fall.
c. The money supply increases, causing the interest rate to fall.
d. The money supply decreases, causing the interest rate to fall.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8297
142. In the short run, open-market purchases
a. increase investment and real GDP, and decrease nominal interest rates.
b. increase real GDP and nominal interest rates, and decrease investment.
c. increase investment and nominal interest rates, and decrease real GDP.
d. decrease investment, nominal interest rates, and real GDP.
143. In the short run, open-market sales
a. increase the price level and real GDP.
b. decrease the price level and real GDP.
c. increases the price level and decreases real GDP.
d. decreases the price level and increases real GDP.
144. In recent years, the Federal Reserve has conducted policy by setting a target for
a. bank reserves.
b. the monetary growth rate.
c. the exchange rate.
d. the federal funds rate.
8298 The Influence of Monetary and Fiscal Policy on Aggregate Demand
145. The Federal Funds rate is the interest rate
a. banks charge each other for short-term loans.
b. the Fed charges depository institutions for short-term loans.
c. the Fed pays on deposits.
d. interest rate on 3 month Treasury bills.
146. In recent years, the Fed has chosen to target interest rates rather than the money supply
because
a. Congress passed a law requiring them to do so.
b. the President requested them to do so.
c. the money supply is hard to measure with sufficient precision.
d. changes in the interest rate change aggregate demand, but changes in the money supply do
not.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8299
147. The theory of liquidity preference illustrates the principle that
a. monetary policy can be described either in terms of the money supply or in terms of the
interest rate.
b. monetary policy can be described either in terms of the exchange rate or the interest rate.
c. monetary policy must be described in terms of the money supply.
d. monetary policy must be described in terms of the interest rate.
148. If the interest rate is above the Fed‘s target, the Fed should
a. buy bonds to increase the money supply.
b. buy bonds to decrease the money supply.
c. sell bonds to increase the money supply.
d. sell bonds to decrease the money supply.
8300 The Influence of Monetary and Fiscal Policy on Aggregate Demand
149. To stabilize interest rates, the Federal Reserve will respond to an increase in money demand by
a. buying government bonds, which decreases the supply of money.
b. selling government bonds, which increases the supply of money.
c. buying government bonds, which increases the supply of money.
d. selling government bonds, which decreases the supply of money.
150. If the interest rate is above the Fed‘s target, the Fed should
a. buy bonds to increase bank reserves.
b. buy bonds to decrease bank reserves.
c. sell bonds to increase bank reserves.
d. sell bonds to decrease bank reserves.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8301
151. When the Federal Reserve decreases the Federal Funds target rate, the lower rate is achieved
through
a. sales of government bonds, which reduces interest rates and causes people to hold less
money.
b. purchases of government bonds, which reduces interest rates and causes people to hold less
money.
c. purchases of government bonds, which reduces interest rates and causes people to hold more
money.
d. sales of government bonds, which reduces interest rates and causes people to hold more
money.
152. When the Federal Reserve increases the Federal Funds target rate, it achieves this target by
a. purchasing government bonds. This action will reduce investment and shift aggregate demand
to the right.
b. purchasing government bonds. This action will increase investment and shift aggregate
demand to the right.
c. selling government bonds. This action will reduce investment and shift aggregate demand to
the left.
d. selling government bonds. This action will increase investment and shift aggregate demand to
the left.
8302 The Influence of Monetary and Fiscal Policy on Aggregate Demand
153. If the interest rate is below the Fed‘s target, the Fed would
a. buy bonds to increase the money supply.
b. buy bonds to decrease the money supply.
c. sell bonds to increase the money supply.
d. sell bonds to decrease the money supply.
154. If the interest rate is below the Fed‘s target, the Fed should
a. buy bonds to increase bank reserves.
b. buy bonds to decrease bank reserves.
c. sell bonds to increase bank reserves.
d. sell bonds to decrease bank reserves.