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| Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand |
1. The opportunity
cost of holding money is the
a. dollar cost necessary to change other assets into money.
b. time cost of accessing funds.
c. value of the goods and services a person is able to
obtain with the money.
d. interest a person could have earned by holding other
forms of wealth instead.
2. Which of the
following is the opportunity cost of money?
a. money being a means of payment
b. the trouble of having to get money out of the bank
c. the interest forgone by holding money
d. the ability to purchase things at a moment’s notice
3. When the interest
rate falls,
a. the opportunity cost of holding money rises.
b. people shift out of holding interest-yielding assets and
into holding more liquid forms of money.
c. the quantity of money people will hold decreases.
d. investment spending decreases.
4. The equilibrium
interest rate occurs in the money market where the
a. quantity of money available is zero.
b. the maximum quantity of funds has been borrowed and
loaned.
c. the money supply is equal to the money demand.
d. the quantity of money demanded is zero.
5. As the price level
increases, the money demand curve will
a. shift to the left.
b. become steeper.
c. stay in the same position.
d. shift to the right.
6. The money supply
curve is vertical because
a. real income does not influence the quantity of money
supplied.
b. the price level does not influence the level of spending.
c. only the interest rate influences the quantity of money
supplied.
d. the Federal Reserve sets the money supply.
7. The federal funds
rate is the
a. federally mandated upper limit on credit card interest
rates.
b. interest rate that banks charge to their most preferred
clients.
c. interest rate that the Fed charges member banks for loans
of reserves.
d. interest rate that banks charge for lending their excess
reserves to other banks.
8. When the Fed
increases the money supply, the interest rate
a. rises and spending increases.
b. rises and spending decreases.
c. falls and spending increases
d. falls and spending decreases.
9. In the short-run
macro model, an open-market purchase of bonds by the Fed will
a. raise the interest rate, reduce spending, and increase
output.
b. raise the interest rate, reduce spending, and decrease
output.
c. lower the interest rate, reduce spending, and decrease
output.
d. lower the interest rate, increase spending, and increase
output.
10. Open market sales
of bonds by the Federal Reserve reduce the money supply and
a. reduce aggregate expenditures.
b. increase real aggregate expenditures.
c. are helpful in monetizing the federal debt.
d. stimulate purchases of consumer durables.
11. Which of these
diagrams describes an open market sale by the Fed?
a. a
b. b
c. c
d. d
12. __________ is the
use of government expenditures and taxes to promote full employment, stable
prices, and economic growth.
a. Monetary policy
b. Incomes policy
c. Stabilization policy
d. Fiscal policy
13. The marginal
propensity to consume (MPC) is
a. the change in consumption divided by the change in
disposable income.
b. total consumption divided by total disposable income.
c. the change in disposable income divided by the change in
consumption.
d. total disposable income divided by total consumption.
14. Use this table to
determine the MPC.
Disposable Consumption
Income Spending
($ billions) ($ billions)
0 $ 100
$200 280
$400 460
$600 640
a. 0
b. .8
c. .9
d. 1.0
15. The multiplier
effect
a. tells us that a change in government spending changes
equilibrium GDP by more than the change in government spending.
b. works only for increases in investment.
c. is relevant only in situations where the MPC cannot be
determined.
d. tells us whether a change in government policy has been
effective.
16. If the marginal
propensity to consume is .5, what is the value of the multiplier?
a. 1.0
b. 1.5
c. 2.0
d. .5
17. If government
spending decreases by $500 billion and if MPC = .6,
a. equilibrium GDP will rise by $1,250 billion.
b. equilibrium GDP will fall by $500 billion.
c. equilibrium GDP will fall by $1,250 billion.
d. nothing will happen in the short run, but real output
will rise by $500 billion in the long run.
18. The crowding-out
effect occurs when increased government expenditures and the subsequent budget
deficits cause
a. the money supply to increase, which curtails loans to
consumers.
b. interest rates to increase, which reduces investment
spending.
c. inflation, which erodes the purchasing power of the
dollar.
d. the imports of goods and services to rise, and exports to
decline.
19. Which of the
following is not true for the crowding-out effect?
a. Federal budget deficits increase interest rates, which
reduces investment spending.
b. Crowding out reduces the ability of fiscal policy to
combat a recession.
c. If the government spends more on education, ceteris
paribus, households may be forced to spend less on new homes.
d. Crowding out occurs especially when the economy is in a
deep recession and people are not spending all the available money.
20. When George W.
Bush was elected, he promised sweeping decreases in income tax rates for
households. His idea with this plan was that the
a. tax cuts would lead to increased savings.
b. tax cuts would stimulate household spending, even though
they might cause minimal increases in interest rates.
c. tax cuts would stimulate household spending and at the
same time lower interest rates.
d. long-run aggregate supply curve would remain fixed while
the aggregate demand curve and interest rates increased.
21. The Employment
Act of 1946 provided that
a. the Federal Reserve should use monetary policy to
stabilize the economy.
b. the Federal Deposit Insurance Corporation should insure
bank deposits.
c. the federal government should use its spending and
taxation powers to stabilize the economy.
d. state and local governments should regulate wages and
employment in the electric and natural gas industries.
22. If the federal
government announces a tax cut, which of the following is most likely in the
short run?
a. a decrease in output, an increase in money demand, and an
increase in the interest rate
b. an increase in output, a decrease in money demand, and a
decrease in the interest rate
c. a decrease in output, a decrease in money demand, and a
decrease in the interest rate
d. an increase in output, an increase in money demand, and
an increase in the interest rate
23. Government
spending on infrastructure
a. increases aggregate demand but not aggregate supply.
b. increases productivity of private business firms and
hence aggregate supply.
c. cannot affect aggregate demand because the money does not
go to households.
d. shifts the long-run aggregate supply curve to the left.
24. The automatic
fiscal stabilizers include all of the following except
a. corporate income taxes.
b. unemployment insurance benefits.
c. the prime interest rate.
d. food stamps.
25. Unlike
discretionary fiscal policy, automatic stabilizers consist of
a. deliberate changes in government spending to counteract
recession and inflation.
b. deliberate changes in household taxes to counteract
recession and inflation.
c. deliberate changes in corporation income taxes to
counteract recession and inflation.
d. changes in government spending and tax revenues that
occur automatically as the economy fluctuates.
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