Question 1

Which of the following shifts money demand to the left?

Accepted Answer

A)   an increase in the price level
B)   a decrease in the price level
C)   an increase in the interest rate
D)   a decrease in the interest rateE) A) and B)
F) All of the above

Question 2

Why do people primarily own or hold money?

Accepted Answer

A)   because it has a guaranteed nominal return
B)   because it can be invested for a guaranteed real return
C)   because it can be used directly to buy goods and services
D)   because it functions as a unit of accountE) B) and D)
F) B) and C)

Question 3

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

Accepted Answer

The nominal interest rate on currency is...

Question 4

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Accepted Answer

If the interest rate is above equilibriu...

Question 5

Which of the following tends to make aggregate demand shift right farther than the amount that government expenditures increase?

Accepted Answer

A)   the crowding-out effect
B)   the multiplier effect
C)   the wealth effect
D)   the investment accelerator effectE) All of the above
F) C) and D)

Question 6

Which policy would someone who wants the government to follow an active stabilization policy recommend when the economy is experiencing unemployment above the natural rate?

Accepted Answer

A)   decreasing the money supply
B)   increasing government expenditures
C)   increasing taxes
D)   reducing the government deficitE) C) and D)
F) All of the above

Question 7

How does the interest rate change when the price level falls and when the money supply falls?

Accepted Answer

A)   The interest rate rises both when the price level falls and when the money supply falls.
B)   The interest rate rises when the price level falls and falls when the money supply falls.
C)   The interest rate falls when the price level falls and rises when the money supply falls.
D)   The interest rate falls both when the price level falls and when the money supply falls.E) None of the above
F) C) and D)

Question 8

Which of the following factors mostly determines the lag problem associated with monetary policy?

Accepted Answer

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)   growth in the money supply is too slowE) A) and D)
F) A) and C)

Question 9

Which policy would stabilization policy activists support when the economy is experiencing unemployment above the natural rate?

Accepted Answer

A)   a decrease in the money supply
B)   a reduction in tax rates
C)   a decrease in government purchases
D)   an increase in taxesE) B) and D)
F) B) and C)

Question 10

Unemployment insurance and welfare programs work as automatic stabilizers.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following best defines automatic stabilizers?

Accepted Answer

A)   changes in taxes or government spending that increase the lags caused by fiscal policy
B)   changes in taxes or government spending that shift aggregate demand without requiring active policies
C)   changes in taxes or government spending that policymakers quickly agree to implement
D)   any change in taxes or government policiesE) A) and B)
F) A) and C)

Question 12

During recessions, the government tends to run a budget deficit.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following defines the government purchases multiplier?

Accepted Answer

A)   MPC + MPI
B)   1 - MPC
C)   1/MPC
D)   1/(1 - MP
C)  E) A) and B)
F) None of the above

Question 14

According to most economists, what will a cut in tax rates do?

Accepted Answer

A)   increase government tax revenue
B)   decrease significantly the hours people work
C)   have a smaller effect on the aggregate-supply curve than what supply-side economists believe
D)   increase tax revenue by increasing worker effortE) All of the above
F) A) and B)

Question 15

Which term refers to the reduction in demand that results when a fiscal expansion raises the interest rate?

Accepted Answer

A)   multiplier effect
B)   crowding-out effect
C)   accelerator effect
D)   catch-up effectE) All of the above
F) B) and C)

Question 16

How does an increase in the interest rate affect the demand for goods and services?

Accepted Answer

A)   It increases the cost of borrowing and people consume more.
B)   It decreases the cost of borrowing and people consume more.
C)   It increases the cost of borrowing and people consume less.
D)   It decreases the cost of borrowing and people consume less.E) C) and D)
F) A) and D)

Question 17

If inflation is zero, then the nominal and real interest rates are the same.

Accepted Answer

A) True 
 B)False

Question 18

The economy is in long-run equilibrium. Suppose that automatic teller machines become cheaper and more convenient to use, and as a result the demand for money falls. Other things being equal, what would we expect will happen to the price level and real GDP in the short and long run?

Accepted Answer

A)   In the short run, the price level and real GDP would rise, but in the long run they would both be unaffected.
B)   In the short run, the price level and real GDP would rise, but in the long run the price level would rise and real GDP would be unaffected.
C)   In the short run, the price level and real GDP would fall, but in the long run they would both be unaffected.
D)   In the short run, the price level and real GDP would fall, but in the long run the price level would fall and real GDP would be unaffected.E) All of the above
F) B) and D)

Question 19

Which of the following shifts money demand to the right?

Accepted Answer

A)   an increase in the price level and the interest rate
B)   an increase in the price level and a decrease in the interest rate
C)   a decrease in the interest rate but not a change in the price level
D)   an increase in the price level but not a change in the interest rateE) All of the above
F) B) and C)

Question 20

What is the effect of a stock market boom, and how could the Bank of Canada offset that effect?

Accepted Answer

A)   Aggregate demand increases, which Bank of Canada could offset by increasing the money supply.
B)   Aggregate supply increases, which Bank of Canada could offset by increasing the money supply.
C)   Aggregate demand increases, which Bank of Canada could offset by decreasing the money supply.
D)   Aggregate supply increases, which Bank of Canada could offset by decreasing the money supply.E) A) and D)
F) C) and D)

Exam 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Which term refers to the reduction in demand that results when a fiscal expansion raises the interest rate?

Correct AnswerverifiedShow Answer

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

Correct AnswerverifiedThe nominal interest rate on currency is...View AnswerShow Answer

Which policy would stabilization policy activists support when the economy is experiencing unemployment above the natural rate?

Correct AnswerverifiedShow Answer

Which of the following shifts money demand to the right?

Correct AnswerverifiedShow Answer

Which of the following factors mostly determines the lag problem associated with monetary policy?

Correct AnswerverifiedShow Answer

Which of the following shifts money demand to the left?

Correct AnswerverifiedShow Answer

Which of the following best defines automatic stabilizers?

Correct AnswerverifiedShow Answer

How does an increase in the interest rate affect the demand for goods and services?

Correct AnswerverifiedShow Answer

If inflation is zero, then the nominal and real interest rates are the same.

Correct AnswerverifiedShow Answer

The economy is in long-run equilibrium. Suppose that automatic teller machines become cheaper and more convenient to use, and as a result the demand for money falls. Other things being equal, what would we expect will happen to the price level and real GDP in the short and long run?

Correct AnswerverifiedShow Answer

Unemployment insurance and welfare programs work as automatic stabilizers.

Correct AnswerverifiedShow Answer

Which policy would someone who wants the government to follow an active stabilization policy recommend when the economy is experiencing unemployment above the natural rate?

Correct AnswerverifiedShow Answer

During recessions, the government tends to run a budget deficit.

Correct AnswerverifiedShow Answer

According to most economists, what will a cut in tax rates do?

Correct AnswerverifiedShow Answer

Why do people primarily own or hold money?

Correct AnswerverifiedShow Answer

Which of the following tends to make aggregate demand shift right farther than the amount that government expenditures increase?

Correct AnswerverifiedShow Answer

What is the effect of a stock market boom, and how could the Bank of Canada offset that effect?

Correct AnswerverifiedShow Answer

Which of the following defines the government purchases multiplier?

Correct AnswerverifiedShow Answer

How does the interest rate change when the price level falls and when the money supply falls?

Correct AnswerverifiedShow Answer

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Correct AnswerverifiedIf the interest rate is above equilibriu...View AnswerShow Answer

Correct Answer
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The nominal interest rate on currency is...
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If the interest rate is above equilibriu...
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