The government spends $\$ 3$ billion to buy police cars. Explain why aggregate demand might increase by more than $\$ 3$ billion. Explain why aggregate demand might increase by less than $\$ 3$ billion.

Give an example of a government policy that acts as an automatic stabilizer. Explain why the policy has this effect.

Consider an economy described by the following equations:

$$\begin{aligned} &Y=C+I+G \\ &C=100+0.75(Y-T) \\ &I=500-50 r \\ &G=125 \\ &T=100 \end{aligned}$$

where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and r is the interest rate. If the economy were at full employment (that is, at its natural level of output), GDP would be $2,000$.

Assuming no change in monetary policy, what change in government purchases would restore full employment?

Give an example of a government policy that acts as an automatic stabilizer. Explain why the policy has this effect.

Which of the following is an example of an automatic stabilizer? When the economy goes into a recession,

a. more people become eligible for unemployment insurance benefits.

b. stock prices decline, particularly for firms in cyclical industries.

c. Congress begins hearings about a possible stimulus package.

d. the Fed changes its target for the federal funds rate.

If the central bank in the preceding question instead holds the money supply constant and allows the interest rate to adjust, the change in aggregate demand resulting from the increase in government purchases will be a. larger. b. the same. c. smaller but still positive. d. negative.

With the economy in a recession because of inadequate aggregate demand, the government increases its purchases by $1,200. Suppose the central bank adjusts the money supply to hold the interest rate constant, investment spending is fixed, and the marginal propensity to consume is 2/3. How large is the increase in aggregate demand? a.$400 b. $800 c.$1,800 d. $3,600

The Federal Reserve’s target rate for the federal funds rate a. is an extra policy tool for the central bank, in addition to and independent of the money supply. b. commits the Fed to set a particular money supply so that it hits the announced target. c. is a goal that is rarely achieved, because the Fed can determine only the money supply. d. matters to banks that borrow and lend federal funds but does not influence aggregate demand.

If the government wants to contract aggregate demand, it can ______ government purchases or _____ taxes. a. increase, increase b. increase, decrease c. decrease, increase d. decrease, decrease

If the central bank wants to expand aggregate demand, it can ______ the money supply, which would ______ the interest rate. a. increase, increase b. increase, decrease c. decrease, increase d. decrease, decrease

What might shift the aggregate-demand curve to the left? Use the model of aggregate demand and aggregate supply to trace through the effects of such a shift.

Explain the relationship among saving, investment, and net capital outflow.

If the Fed started printing large quantities of U.S. dollars, what would happen to the number of Japanese yen a dollar could buy? Why?

Explain the relationship among saving, investment, and net capital outflow .