Advertisement Upgrade to remove ads

Keynes's liquidity preference theory of the interest rate suggests that the interest rate is determined by

the supply and demand for money.

When money demand is expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the interest rate

decreases the quantity demanded of money.

When the supply and demand for money are expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level

shifts money demand to the right and increases the interest rate.

For the United States, the most important source of the downward slope of the aggregate-demand curve is

the interest-rate effect.

In the market for real output, the initial effect of an increase in the money supply is to

shift aggregate demand to the right.

The initial effect of an increase in the money supply is to

decrease the interest rate.

The long-run effect of an increase in the money supply is to

increase the price level.

Suppose a wave of investor and consumer pessimism causes a reduction in spending. If the Federal Reserve chooses to engage in activist stabilization policy, it should

increase the money supply and decrease interest rates.

The initial impact of an increase in government spending is to shift

aggregate demand to the right.

If the marginal propensity to consume (MPC ) is 0.75, the value of the multiplier is

4.

An increase in the marginal propensity to consume (MPC )

raises the value of the multiplier.

Suppose a wave of investor and consumer optimism has increased spending so that the current level of output exceeds the long-run natural rate. If policymakers choose to engage in activist stabilization policy, they should

decrease government spending, which shifts aggregate demand to the left.

When an increase in government purchases raises incomes, shifts money demand to the right, raises the interest rate, and lowers investment, we have seen a demonstration o

the crowding-out effect.

Which of the following statements regarding taxes is correct?

A permanent change in taxes has a greater effect on aggregate demand than a temporary change in taxes.

Suppose the government increases its purchases by $16 billion. If the multiplier effect exceeds the crowding-out effect, then

the aggregate-demand curve shifts to the right by more than $16 billion.

When an increase in government purchases increases the income of some people, and those people spend some of that increase in income on additional consumer goods, we have seen a demonstration of

the multiplier effect.

When an increase in government purchases causes firms to purchase additional plant and equipment, we have seen a demonstration of

the investment accelerator.

Which of the following is an automatic stabilizer?

unemployment benefits

Which of the following statements about stabilization policy istrue ?

Many economists prefer automatic stabilizers because they affect the economy with a shorter lag than activist stabilization policy.

Which of the following best describes how an increase in the money supply shifts aggregate demand?

The money supply shifts right, the interest rate falls, investment increases, and aggregate demand shifts right

An increase in the interest rate increases the quantity demanded of money because it increases the rate of return on money.

False: An increase in the interest rate decreases the quantity demanded of money because it raises the opportunity cost of holding money.

When money demand is drawn on a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level shifts money demand to the right.

True

Keynes's theory of liquidity preference suggests that the interest rate is determined by the supply and demand for money.

True

The interest-rate effect suggests that aggregate demand slopes downward because an increase in the price level shifts money demand to the right, increases the interest rate, and reduces investment.

True

An increase in the money supply shifts the money supply curve to the right, increases the interest rate, decreases investment, and shifts the aggregate-demand curve to the left.

False: An increase in the money supply decreases the interest rate, increases investment, and shifts aggregate demand to the right.

Suppose investors and consumers become pessimistic about the future and cut back on expenditures. If the Fed engages in activist stabilization policy, the policy response should be to decrease the money supply

False: The Fed should increase the money supply.

In the short run, a decision by the Fed to increase the money supply is essentially the same as a decision to decrease the interest rate target.

True

Because of the multiplier effect, an increase in government spending of $40 billion will shift the aggregate-demand curve to the right by more than $40 billion (assuming there is no crowding out)

True

If the MPC (marginal propensity to consume) is 0.80, then the value of the multiplier is 8.

False: The value of the multiplier is 5.

Crowding out occurs when an increase in government spending increases incomes, shifts money demand to the right, raises the interest rate, and reduces private investment

True

Suppose the government increases its expenditure by $10 billion. If the crowding-out effect exceeds the multiplier effect, then the aggregate-demand curve shifts to the right by more than $10 billion

False: The aggregate-demand curve shifts to the right by less than $10 billion.

Suppose investors and consumers become pessimistic about the future and cut back on expenditures. If fiscal policymakers engage in activist stabilization policy, the policy response should be to decrease government spending and increase taxes.

False: Policymakers should increase government spending and decrease taxes.

Many economists prefer automatic stabilizers because they affect the economy with a shorter lag than activist stabilization policies

True

In the short run, the interest rate is determined by the loanable-funds market, while in the long run, the interest rate is determined by money demand and money supply.

False: In the short run, the interest rate is determined by money demand and money supply, while in the long run, it is determined by the loanable-funds market.

Unemployment benefits are an example of an automatic stabilizer because when incomes fall, unemployment benefits rise

True

An increase in the money supply decreases the interest rate in the short run.

True

If the MPC is 4/5, the multiplier is 5/4

False

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.

False

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.

False

During a recession unemployment benefits rise. This rise in benefits makes aggregate demand higher than otherwise.

True

Shifts in aggregate demand affect the price level in

both the short and long run.

Changes in the interest rate help explain

both the slope of and shifts of aggregate demand

Changes in the interest rate

shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level.

Because the liquidity-preference framework focuses on the

short run, it assumes the interest rate adjusts to bring the money market to equilibrium.

According to the theory of liquidity preference, if the interest rate rises

people want to hold less money. This response is shown by moving to the left along the money demand curve.

According to the theory of liquidity preference, if output increases

people want to hold more money. This response is shown as a shift of the money demand curve.

If the Federal Reserve increases the money supply, then initially there is a

surplus in the money market, so people will want to buy bonds.

If the Federal Reserve increases the money supply, then initially people want to

buy bonds so the interest rate falls.

If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, it could

buy bonds to increase the money supply.

To decrease the interest rate the Federal Reserve could

buy bonds. The fall in the interest rate would increase investment spending.

An increase in government spending shifts aggregate demand

to the right. The larger the multiplier is, the farther it shifts.

If the MPC is 3/4 then the multiplier is

4, so a $100 increase in government spending increases aggregate demand by $400.

If the MPC is 2/3 then the multiplier is

3, so a $100 increase in government spending increases aggregate demand by $300.

When government expenditures increase, the interest rate

increases, making the change in aggregate demand smaller

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

the interest rate rises and aggregate supply is relatively steep

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

the MPC is small and changes in the interest rate have a large effect on investment

Which of the following effects results from the change in the interest rate created by an increase in government spending?

crowding out but not the investment accelerator

Which of the following are effects of an increase in government spending financed by a tax increase?

the tax increase reduces consumption; the change in the interest rate reduces residential construction

There is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct?

By itself, the change in output increases desired investment spending and by itself the change in the interest rate decreases desired investment spending.

The government increases its expenditures and increases taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

All of the above are correct.

Assume that there is no accelerator affect. The MPC = 3/4. The government increases both expenditures and taxes by $600. The effect of taxes on aggregate demand is 3/4 the size of that created by government expenditures alone. The crowding out effect is 1/5 as strong as the combined effect of government expenditures and taxes on aggregate demand. How much does aggregate demand shift by?

$480

Which of the following raises the interest rate?

an increase in government expenditures and a decrease in the money supply

Suppose investment spending falls. To offset the change in output the Federal Reserve could

increase the money supply. This increase would also move the price level closer to its value before the decline in investment spending.

Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could

decrease the money supply. This decrease would also move the price level closer to its value before the rise in stock prices.

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 decrease in the money supply and an increase in taxes

Please allow access to your computer’s microphone to use Voice Recording.

Having trouble? Click here for help.

We can’t access your microphone!

Click the icon above to update your browser permissions above and try again

Example:

Reload the page to try again!

Reload

Press Cmd-0 to reset your zoom

Press Ctrl-0 to reset your zoom

It looks like your browser might be zoomed in or out. Your browser needs to be zoomed to a normal size to record audio.

Please upgrade Flash or install Chrome
to use Voice Recording.

For more help, see our troubleshooting page.

Your microphone is muted

For help fixing this issue, see this FAQ.

Star this term

You can study starred terms together

NEW! Voice Recording

Create Set