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Multiple hw6 Choice Identify the choice that best completes the statement or answers the question. 1. For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve? a. the wealth effect b. the interest-rate effect c. the exchange-rate effect d. the real-wage effect 2. According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in a. the price level. b. the interest rate. c. the exchange rate. d. real wealth. 3. According to liquidity preference theory, the money supply curve is a. upward sloping. b. downward sloping. c. vertical. d. horizontal. 4. When the Fed buys government bonds, the reserves of the banking system a. increase, so the money supply increases. b. increase, so the money supply decreases. c. decrease, so the money supply increases. d. decrease, so the money supply decreases. 5. Liquidity refers to a. the relation between the price and interest rate of an asset. b. the risk of an asset relative to its selling price. c. the ease with which an asset is converted into a medium of exchange. d. the sensitivity of investment spending to changes in the interest rate. 6. Which of the following is the most liquid asset? a. capital goods b. stocks and bonds with a low risk c. stocks and bonds with a high risk d. funds in a checking account 7. People own or hold money primarily because it a. has a guaranteed nominal return. b. serves as a store of value. c. can directly be used to buy goods and services. d. functions as a unit of account. 8. People are likely to want to hold more money if the interest rate a. increases making the opportunity cost of holding money rise. b. increases making the opportunity cost of holding money fall. c. decreases making the opportunity cost of holding money rise. d. decreases making the opportunity cost of holding money fall. 9. According to liquidity preference theory, an increase in money demand for some reason other than a change in the price level causes a. the interest rate to fall so aggregate demand shifts right. b. the interest rate to fall so aggregate demand shifts left. c. the interest rate to rise so aggregate demand shifts right. d. the interest rate to rise so aggregate demand shifts left. For the following questions, consult the diagram below: Figure 34-1 10. Refer to Figure 34-1. If the current interest rate is 2 percent, a. there is excess money supply. b. people will sell more bonds, which drives interest rates up. c. as the money market moves to equilibrium, people will buy more goods. d. All of the above are correct. 11. Refer to Figure 34-1. At an interest rate of 4 percent there is excess a. money demand equal to the distance between a and b. b. money demand equal to the distance between b and c. c. money supply equal to the distance between b and a. d. money supply equal to the distance between c and b. 12. Refer to Figure 34-1. Which of the following is correct? a. If the interest rate is 4 percent, the re is excess money demand, and the interest rate will fall. b. If the interest rate is 3 percent, there is excess money supply, and the interest rate will rise. c. If the interest rate is 4 percent, the demand for goods will rise when the money market is in its new equilibrium. d. None of the above is correct. 13. Which of the following shifts money demand to the right? 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 rate 14. 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. 15. If the Federal Reserve decided to lower 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. 16. 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. 17. 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. 18. 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. 19. If the stock market booms a. household spending increases. To offset the effects of this on the price level and real GDP, the Fed would increase the money supply. b. household spending increases. To offset the effects of this on the price level and real GDP, the Fed would decrease the money supply. c. household spending decreases. To offset the effects of this on the price level and real GDP, the Fed would increase the money supply. d. household spending decreases. To offset the effects of this on the price level and real GDP, the Fed would decrease the money supply. 20. Fiscal policy refers to the idea that aggregate demand is changed by changes in a. the money supply. b. government spending and taxes. c. trade policy. d. All of the above are correct. 21. An increase in government spending initially and primarily shifts a. aggregate demand right. b. aggregate demand left. c. aggregate supply right. d. neither aggregate demand nor aggregate supply. 22. In the short run an increase in government expenditures a. raises the price level, but not real GDP. b. raises real GDP, but not the price level. c. raises real GDP and the price level. d. raises neither real GDP nor the price level. 23. The multiplier effect is the multiplied impact on a. the money supply of a given increase in government purchases. b. tax revenues of a given increase in government purchases. c. investment of a given increase in interest rates. d. aggregate demand of a given increase in government purchases. 24. The government buys a bridge. The owner of the company that builds the bridge pays her workers. The workers increase their spending. Firms that the workers buy goods from increase their output. This type of effect on spending illustrates a. the multiplier effect. b. the crowding-out effect. c. the Fisher effect. d. None of the above is correct. 25. The positive feedback from aggregate demand to investment is called a. the investment multiplier. b. the stock-market effect. c. the investment accelerator. d. the crowding-in multiplier. 26. The marginal propensity to consume (MPC) is defined as the fraction of a. extra income that a household consumes rather than saves. b. extra income that a household either consumes or saves. c. total income that a household consumes rather than saves. d. total income that a household either consumes or saves. 27. The government-purchases multiplier is defined as a. MPC. b. 1 - MPC. c. 1/MPC. d. 1/(1 - MPC). 28. If the MPC = 3/5, then the government purchases multiplier is a. 5/3. b. 5/2. c. 5. d. 15. 29. Which of the following correctly explains the crowding-out effect? a. An increase in government expenditures decreases the interest rate and so increases investment spending. b. An increase in government expenditures increases the interest rate and so reduces investment spending. c. A decrease in government expenditures increases the interest rate and so increases investment spending. d. A decrease in government expenditures decreases the interest rate and so reduces investment spending. 30. If the MPC is 0, the multiplier is a. 0. b. 1. c. infinite. d. None of the above is correct. 31. An increase in government purchases is likely to a. decrease interest rates. b. result in a net decrease in aggregate demand. c. crowd out investment spending by business. d. decrease money demand. 32. If taxes a. increase, consumption increases, aggregate demand shifts right. b. increase, consumption decreases, aggregate dema nd shifts left. c. decrease, consumption increases, aggregate demand shifts left. d. decrease, consumption decreases, aggregate demand shifts right. 33. Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than otherwise? a. the multiplier effect b. the crowding-out effect c. the accelerator effect d. None of the above is correct. 34. If households view a tax cut as temporary, the tax cut a. has no affect on aggregate demand. b. has more of an affect on aggregate demand than if households view it as permanent. c. has the same affect as when households view the cut as permanent. d. has less of an affect on aggregate demand than if households view it as permanent. 35. Supply-side economists focus more than other economists on a. fiscal how policy affects consumption. b. the multiplier affect of fiscal policy. c. how fiscal policy affects aggregate supply. d. the money supply. 36. Supply-side economists believe that a reduction in the tax rate a. always decrease government tax revenue. b. shifts the aggregate supply curve to the right. c. provides no incentive for people to work more. d. would decrease consumption. 37. The Employment Act of 1946 states that a. the Fed should use monetary policy only to control the rate of inflation. b. the government should promote full employment and production. c. the government should periodically increase the minimum wage and unemployment insurance benefits. d. All of the above are correct. 38. Monetary policy a. can be implemented quickly and most of its impact on aggregate demand occurs very soon after policy is implemented. b. can be implemented quickly, but most of its impact on aggregate demand occurs months after policy is implemented. c. cannot be implemented quickly, but once implemented most of its impact on aggregate demand occurs very soon after policy is implemented. d. cannot be implemented quickly and most of its impact on aggregate demand occurs months after policy is implemented. 39. The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do? a. increase government expenditures or increase the money supply b. increase government expenditures or decrease the money supply c. decrease government expenditures or increase the money supply d. decrease government expenditures or decrease the money supply 40. Keynes argued that aggregate demand is a. stable, because the economy returns to long-run equilibrium. b. stable, because changes in consumption are mostly offset by changes in investment and vice versa. c. unstable, because waves of pessimism and optimism create fluctuations in aggregate demand. d. unstable, because of long and variable policy lags that worsen economic fluctuations. 41. Keynes used the term "animal spirits" to refer to a. policy makers harming the economy in the pursuit of self interest. b. arbitrary changes in attitudes of household and firms. c. mean spirited economists who believed in the classical dichotomy. d. firms' relentless efforts to maximize profits. 42. Which of the following policies would Keynes' followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium? a. decrease taxes b. increase government expenditures c. increase the money supply d. None of the above is correct. For the following questions, use the diagram below: Figure 34-2 43. Refer to Figure 34-2. Which of the following would cause the aggregate demand curve to shift from AD1 to AD2 ? a. an increase in government purchases b. a decrease in stock prices c. consumers and firms become more optimistic about the future. d. an increase in the price level 44. Refer to Figure 34-2. Which of the following is correct? a. A wave of optimism could move the economy from a to b. b. If aggregate demand moves from AD1 to AD2 the economy will stay at b in both the short and long run. c. It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2 . d. All of the above are correct. 45. In the early 1960s, the Kennedy administration made considerable use of a. fiscal policy to stimulate the economy. b. fiscal policy to slow down the economy. c. monetary policy to stimulate the economy. d. monetary policy to slow down the economy. 46. Critics of stabilization policy argue that a. there is a lag between the time policy is passed and the time policy has an impact on the economy. b. the impact of policy may last longer than the problem it was designed to offset. c. policy can be a source of, instead of a cure for, economic fluctuations. d. All of the above are correct. 47. The lag problem associated with monetary policy is due mostly to 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. All of the above are correct. 48. Opponents of active stabilization policy a. advocate a monetary policy designed to offset changes in the unemployment rate. b. argue that fiscal policy is unable to change aggregate demand or aggregate supply. c. believe that the political process creates lags in the implementation of fiscal polic y. d. None of the above is correct. 49. Automatic stabilizers a. increase the problems that lags cause in using fiscal policy as a stabilization tool. b. are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession. c. are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession. d. All of the above are correct. 50. Other things the same, automatic stabilizers tend to a. raise expenditures during expansions and recessions. b. lower expenditures during expansions and recessions. c. raise expenditures during recessions and lower expenditures during expansions. d. raise expenditures during expansions and lower expenditures during recessions. 51. During expansions, automatic stabilizers make government expenditures a. and taxes fall. b. and taxes rise. c. rise, and taxes fall. d. fall and taxes rise. 52. In the Chairmans game, what are the Feds goals or objectives a. low taxes b. low unemployment c. low inflation d. a and b e. b and c 53. In the Chairmans game, what is the Feds target and tool a. money supply, open market operations b. fed funds rate, open market operations c. open market operations, fed funds rate d. open market operations, discount rate e. reserve requirements, open market operations 54. What did the latest FOMC statement say about the economy? a. firmer economic growth, moderating inflation b. weaker economic growth, moderating inflation c. firmer economic growth, increasing inflation d. growing unemployment, growing gdp e. none of the above 55. What kinds of lags in fiscal policy does Walsh refer to as problematic? a. recognition lags - recognizing that there is a problem in the economy b. implementation lag - the time it takes to put fiscal policy in place c. impact lag - the time it takes for a policy to have an effect on the economy d. all of these e. none of these 56. Compare the lags in fiscal policy to those of monetary policy. a. fiscal: short implementation, long impact; monetary long implementation, short impact b. fiscal: long implementation, long impact; monetary: long implementation, long impact c. fiscal: long implementation, short impact; monetary: short implementation, long impact d. fiscal: short implementation, short impact; monetary: short implementation, short impact e. none of these hw6 Answer Section MULTIPLE CHOICE 1. Register to View Answer2. Register to View Answer3. Register to View Answer4. Register to View Answer5. Register to View Answer6. Register to View Answer7. Register to View Answer8. Register to View Answer9. Register to View Answer10. Register to View Answer11. Register to View Answer12. Register to View Answer13. Register to View Answer14. Register to View Answer15. Register to View Answer16. Register to View Answer17. Register to View Answer18. Register to View Answer19. Register to View Answer20. 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