Case_macro8c1_Ch12 - Chapter 12 Money, the Interest Rate,...

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Unformatted text preview: Chapter 12 Money, the Interest Rate, and Output: Analysis and Policy Principles of Macroeconomics, Case/Fair, 8e 12.1 The Links Between the Goods Market and the Money Market Multiple Choice 1 The in which the equilibrium level of aggregate output is determined is market the A . labor market. B . bond market. C . money market. D . goods market. Answer : D The in which the equilibrium level of the interest rate is determined is market the A . money market. B . goods market. C . labor market. D . services market. Answer : A A link n the money market and the goods and services market exists through betwee the impact of A . tax revenue on the government budget. B . money supply on money demand. C . income on money demand. D . income on government spending. Answer : C The two links between the goods market and the money market are A . income and the inflation rate. B . the interest rate and the unemployment rate. C . income and the interest rate. D . the inflation rate and the unemployment rate. Answer : C Which of the following is determined in the goods market? A . The equilibrium interest rate B . Money demand C . Income D . The unemployment rate Answer : C Which of the following is determined in the money market? A . The equilibrium interest rate B . Income C . Employment D . The government budget Answer : A If d investment is perfectly unresponsive to changes in the interest planne rate, the planned investment schedule A . has a negative slope. B . is horizontal. C . is vertical. D . has a positive slope. Answer : C If d investment is perfectly responsive to changes in the interest rate, planne the planned investment schedule A . has a negative slope. B . is horizontal. C . is vertical. D . has a positive slope. Answer : B The market and the goods market are linked through the impact of the money interest rate on A . government spending. B . planned investment. C . money supply. D . unplanned spending. Answer : B Which of the following equations represents equilibrium in the goods market? A . Y = Ms. B . Md = C + I + G. C . Md = Ms. D . Y = C + I + G. Answer : D Which of the following equations represents equilibrium in the money market? A . Y = C + I + G. B . Md = Ms. C . Md = C + I + G. D . None of the above Answer : B Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1 Refer Figure 12.1. If the interest rate drops from 7% to 5%, planned to investment A . causing aggregate expenditure and aggregate output to fall. increases, B . increases, causing aggregate expenditure to fall. C . causing both aggregate expenditure and aggregate output to rise. decreases, D . causing both aggregate expenditure and aggregate . output to rise. increases, Answer : D (r dec, I inc, so AE inc and Y inc) Refer Figure 12.1. If the interest rate drops from 5% to 7%, planned to investment A . causing both aggregate expenditure and aggregate output to fall. decreases, B . increases, causing aggregate expenditure to fall. C . causing both aggregate expenditure and aggregateoutput to rise. decreases, D . causing both aggregate expenditure and aggregate . output to rise. increases, Answer : A Refer to Figure 12.1. If the interest rate increases from 5% to 7%, A . aggregate expenditure increases. B . equilibrium aggregate output decreases. C . planned expenditure increases. D . None of the above Answer : B (r inc , I dec, AE dec, Y dec) Refer to Figure 12.1. If the interest rate decreases from 7% to 5%, A . aggregate expenditure increases. B . equilibrium aggregate output decreases. C . planned expenditure decreases. D . the money supply will increase. Answer : A The interest rate is determined in the A . money market and has no influence on the goods market. B . money influences the level of planned investment and thus the goods market and market. C . goods market and has no influence on the money market. D . goods influences the level of planned investment and thus the money market and market. Answer : B Output is determined in A . the goods market and also influence money demand and the interest rate. B . the money market and also influences money demand and the interest rate. C . the goods market with no influence from the money market. D . None of the above Answer : A Refer to the information provided in Table 12.1 below to answer the questions that follow. Table 12.1 A Hypothetical Investment Schedule Refer Table 12.1. If the interest rate dropped from 14% to 8%, planned to investment would ________ by $________ billion. A . increase; 60 B . increase; 40 C . decrease; 60 D . decrease; 40 Answer : A Refer Table 12.1. Suppose the expenditure multiplier is 2. An increase in to the interest rate from 8% to 10%, ceteris paribus, would A . increase planned expenditure by $40 billion. B . increase aggregate expenditure by $40 billion. C . decrease equilibrium output by $40 billion. D . decrease planned investment by $40 billion. Answer : D (wrong answer! It’s c maybe 2*20=40) Refer 12.1. Suppose the expenditure multiplier is 5. A drop in the interest to rate from 14% to 10%, ceteris paribus, would increase equilibrium Table output by $________ billion. A . 200 B . 40 C . 80 D . 100 Answer : A (I inc by 40 so deltaY=deltaI* mult= 40*5=200) Refer 12.1. Suppose the expenditure multiplier is 5 and the initial interest to rate is 12%. What is the interest rate that increases equilibrium Table output by 300 billion? A . 6% B . 8% C . 10% D . 16% Answer : A 300=5*deltaI => delta I=60 only if r dec from 12 to 6) Refer Suppose the expenditure multiplier is 5, the initial interest rate is to 10%, and the initial equilibrium output is $800 billion. What is the Table interest rate that increases equilibrium output to $900 billion? 12.1. A . 12% B . 14% C . 8% D . 16% Answer : C (since Y inc by 100 r should have dec. 100=5*delta I dlta I =20 only if decr r to 8) Refer 12.1. Suppose the expenditure multiplier is 10, and the initial to interest rate is 12%. What would be the impact on the equilibrium Table output if the interest rate fell to 8%? A . It would increase by $400 billion. B . It would decrease by $400 billion. C . It would decrease by $2,000 billion. D . It would increase by $20 billion. Answer : A Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2 Refer to Figure 12.2. The equilibrium interest rate is A . 8%. B . 7%. C . 6%. D . 2%. Answer : B Refer to Figure 12.2. If the interest rate is 8%, there is A . an excess demand for money. B . an equilibrium in the money market. C . m in the money market, but disequilibrium in the goods market. equilibriu D . an excess supply of money. Answer : D Refer to Figure 12.2. If the interest rate is 8%, A . people their funds into interest­bearing bonds and the interest rate will will shift fall. B . people want to hold more money than is being supplied, so the money supply will increase and the interest rate will not change. C . people their assets out of interest­bearing bonds and into money, and the will shift interest rate will fall. D . people hold less money than is being supplied, so the money supply will want to decrease and the interest rate will not change. Answer : A Refer to the information provided in Figure 12.3 below to answer the questions that follow. Figure 12.3 Refer to Figure 12.3. If equilibrium interest rate is 5%, there is A . a $100 billion excess demand for money if money supply is represented by B . . a $100 billion surplus if money supply is represented by C . . a $100 billion excess demand for money if money supply is represented by D . a $100 billion surplus if money supply is represented by Answer : B Refer to Figure 12.3. Which of the following is TRUE? A . At a 5% rate, a $100 billion increase in money supply lowers the interest interest rate by 1 percentage point. B . At 6% interest rate, there is a shortage of money. C . At 5% interest rate, there is a shortage of money if money supply is D . . At 4%, there is a surplus of money if money supply is Answer . : A Refer Figure 12.3. Suppose the current equilibrium interest rate is 5%, what to could make the equilibrium interest rate rise to 6%? A . The Fed sells government securities (sells Ms dec, r inc) B . An increase in the GDP (Y inc, then Md inc then r inc) C . An increase in the discount rate D . All of the above Answer : D If the Fed increases the money supply, there will be A . a surplus of money and the equilibrium interest rate will rise. B . a surplus of money and the equilibrium interest rate will fall. C . a shortage of money and the equilibrium interest rate will rise. D . a shortage of money and the equilibrium interest rate will fall. Answer : B If the Fed decreases the money supply, there will be A . a shortage of money and the equilibrium interest rate will rise. B . a shortage of money and the equilibrium interest rate will fall. C . a surplus of money and the equilibrium interest rate will rise. D . a surplus of money and the equilibrium interest rate will fall. Answer : A If GDP increases, there will be A . a shortage of money and the equilibrium interest rate will rise. B . a shortage of money and the equilibrium interest rate will fall. C . a surplus of money and the equilibrium interest rate will rise. D . a surplus of money and the equilibrium interest rate will fall. Answer : A (draw Y inc Md inc, so shortage) If GDP decreases, there will be A . a surplus of money and the equilibrium interest rate will rise. B . a surplus of money and the equilibrium interest rate will fall. C . a shortage of money and the equilibrium interest rate will rise. D . a shortage of money and the equilibrium interest rate will fall. Answer : B Which of the following statements is FALSE? A . Changes aggregate output, which take place in the goods market, shift the in money­demand curve and cause changes in the interest rate. B . With a given quantity of money supplied, lower levels of aggregate output will lead to lower equilibrium levels of the interest rate. C . With a given quantity of money supplied, higher levels of aggregate output will lead to higher equilibrium levels of the interest rate. D . The m level of the interest rate is determined exclusively in the equilibriu money market, and is not affected by changes in the goods market. Answer : D (it is A se in aggregate output causes the demand for money to ________ and the decrea interest rate to ________. A . increase; increase B . increase; decrease C . decrease; decrease D . decrease; increase Answer : C True/False 1) The interest rate affects the goods market through its impact on money demand. Answer: True F W Diff: 1 Answer: Skill: C True F T linke Diff: 2 d to h Skill: C ethe goods m and oservic nes emarke yt by the m impac at of r incom ke on ethe t dema nd for i mone s y. Answer: True F I s Diff: 2 deter n Skill: C cmined oin the m mone ey marke i t. Answer: True F T Diff: 2 Answer: Skill: C True F Mark Diff: 2 et Skill: C 1 2 . 2 C o m b i n i n g t h e G o o d s M a r k e t a n d t h e M o n e y Multip le Choice Fisc al policy affects the goods market through . changes in money supply. B . changes in taxes and money supply. C . changes in government spending and money supply. D . changes in taxes and government spending. Answer : D Fiscal policy affects the money market through its effect on A . income and money supply. B . income and money demand. C . money supply and money demand. D . money supply and income. Answer : B (cz maybe G or T change Y so Y changes Md Moneta ry policy affects the goods market through its effect on A . the interest rate and planned investment. B . the interest rate and money demand. C . income and planned investment. D . income and money demand. Answer : A (cz ms affects r affects I) Which of the following is an example of an expansionary fiscal policy? A . The Fed selling government securities in the open market (monetary) B . The federal government increasing the marginal tax rate on incomes above $200,000 (t inc Y dec) C . The federal government increasing the amount of money spent on public health programs (G inc Y inc) D . The government reducing pollution standards to allow . firms to federal produce more output Answer : C The objective of a contractionary fiscal policy is to A . reduce unemployment. B . increase growth in output. C . reduce inflation. D . Increase growth in income. Answer : C The objective of an expansionary fiscal policy is to A . reduce unemployment. B . reduce inflation. C . reduce growth in output. D . reduce growth in international trade. Answer : A A se in the money supply aimed at decreasing aggregate output is decrea referred to as A . contractionary fiscal policy. B . expansionary fiscal policy. C . expansionary monetary policy. D . contractionary monetary policy. Answer : D An example of a contractionary monetary policy is A . an increase in the required reserve ratio. B . a decrease in the discount rate. C . a reduction in the taxes banks pay on their profits. D . the Fed buying government securities in the open market. Answer : A An example of an expansionary monetary policy is A . a decrease in the required reserve ratio. B . the Fed selling bonds in the open market. C . an increase in the required reserve ratio. D . a law ceiling on the maximum interest rate that banks can pay to placing a depositors. Answer : A An intended goal of contractionary fiscal and monetary policy is A . an increase in interest rates. B . an increase in the price level. C . the equalization of the distribution of income. D . a decrease in the level of aggregate output. Answer : D Refer to the information provided in Figure 12.4 below to answer the questions that follow. Figure 12.4 Refer Figure 12.4. Planned investment could decrease from $15 million to $10 to million if A . the government increases government purchases. B . the Fed increases the money supply. C . the government reduces government purchases. D . the government increases net taxes. Answer : A (G inc Y inc Md inc r inc)!! Refer Figure 12.4. Planned investment could decrease from $18 million to $15 to million if A . the government reduces government purchases. B . the Fed buys bonds in the open market. C . the government reduces net taxes. D . firms expect their sales to decrease in the future. Answer : C (maybe decr in I means inc in r. T dec, y inc, md inc. r inc I dec) Refer Figure 12.4. Planned investment could increase from $10 million to $15 to million if A . the government increases government purchases. B . the government decreases net taxes. C . the Fed sells bonds in the open market. D . the Fed reduces the required reserve ratio. Answer : D (RR dec Ms inc r dec I inc) Refer Figure 12.4. Planned investment could decrease from $15 million to $10 to million if A . the government increases net taxes. B . the government increases government purchases. C . the Fed buys bonds in the open market. D . Both B and C Answer : B (G inc, Y inc, r inc, I dec) Refer Figure 12.4. Planned investment could decrease from $18 million to $15 to million if A . the government reduces government purchases. B . the Fed sells bonds in the open market. C . the Fed lowers the discount rate. D . B and C Answer : B Refer Figure 12.4. Planned investment could increase from $10 million to $15 to million if A . the government decreases government purchases. B . the government decreases net taxes. C . the Fed buys bonds in the open market. D . all of the above. Answer : D Which following sequence of events follows an expansionary monetary policy? of the A . r↑ ⇒ I↓ ⇒ AE↓ ⇒ Y↓. B . r↑ ⇒ I↑ ⇒ AE↓ ⇒ Y↑. C . r↓ ⇒ I↑ ⇒ AE↑ ⇒ Y↑. D . r↓ ⇒ I↓ ⇒ AE↓ ⇒ Y↓. Answer : C Which following sequence of events follows a rise in the discount rate? (Ms of the dec, r in) A . r↓ ⇒ I↓ ⇒ AE↓ ⇒ Y↑. B . r↑ ⇒ I↓ ⇒ AE↓ ⇒ Y↓. C . r↓ ⇒ I↑ ⇒ AE↑ ⇒ Y↑. D . r↑ ⇒ I↑ ⇒ AE↑ ⇒ Y↑. Answer : B Which following sequence of events follows an expansionary fiscal policy? of the A . AE↑ ⇒ Y↑ ⇒ Md↓ ⇒ r↓ ⇒ I↓ ⇒ AE↓. B . AE↑ ⇒ Y↑ ⇒ Md↑ ⇒ r↑ ⇒ I↓ ⇒ AE↓. C . AE↓ ⇒ Y↓ ⇒ Md↓ ⇒ r↓ ⇒ I↑ ⇒ AE↑. D . AE↓ ⇒ Y↑ ⇒ Md↓ ⇒ r↓ ⇒ I↓ ⇒ AE↓. Answer : B (G inc or T dec, AE inc …) Which of the following sequence of events follows an increase in net taxes? A . AE↑ ⇒ Y↑ ⇒ Md↑ ⇒ r↑ ⇒ I↑ ⇒ AE↑. B . AE↓ ⇒ Y↑ ⇒ Md↓ ⇒ r↑ ⇒ I↓ ⇒ AE↓. C . AE↑ ⇒ Y↑ ⇒ Md↓ ⇒ r↓ ⇒ I↓ ⇒ AE↓. D . AE↓ ⇒ Y↓ ⇒ Md↓ ⇒ r↓ ⇒ I↑ ⇒ AE↑. Answer : D If d investment decreases as the interest rate increases, the size of the planne government spending multiplier will be A . zero. B . larger than the government spending multiplier that would result if planned investment were independent of the interest rate. C . the same government spending multiplier that would result if planned as the investment were independent of the interest rate. D . smaller government spending multiplier that would result if planned than the investment were independent of the interest rate. Answer : D If d investment decreases as the interest rate increases, the absolute planne value of the tax multiplier will be A . the same absolute value of the tax multiplier that would result if planned as the investment were independent of the interest rate. B . larger than the absolute value of the tax multiplier that would result if planned investment were independent of the interest rate. C . smaller absolute value of the tax multiplier that would result if planned than the investment were independent of the interest rate. D . zero. Answer : C Refer to the information provided in Table 12.2 below to answer the questions that follow. Table 12.2 Assume the following: 1. For every 1% increase (decrease) in interest rate, planned investment decreases (increases) by $5 billion. 2. For every $10 billion increase (decrease) in government spending, interest rate increases (decreases) by 1%. 3. The MPC = 0.8 Refer Table 12.2. The equilibrium output in this hypothetical economy is to $________ billion. A . 500 B . 600 C . 700 D . 900 Answer : C (Y=C+I+G) Refer Table 12.2. When the government increases spending by $20 billion, the to crowding­out effect can be represented by a A . $20 billion decrease in investment. B . $10 billion decrease in investment. C . 2% decrease in the interest rate. D . 1% increase in the interest rate. Answer : B (for every 10 inc in G, I dec by 5.so for 20 we have 10) Refer Table 12.2. Taking the crowding­out effect into consideration, if the to government increases spending by $20 billion, equilibrium output A . increases by $100 billion. B . increases by $150 billion. C . decreases by $100 billion. D . increases by $50 billion. Answer : D (I think deltaY=(deltaG *mul)+ (deltaI*mult)= (20/0.2)+ (­10/0.2)= 10/0.2=50!!!!! Refer 12.2. Taking the crowding­out effect into consideration, if the to government increases spending by $30 billion, the new equilibrium Table output is A . $575 billion. B . $775 billion. C . $850 billion. D . $626 billion. Answer : B (deltaY=(30/0. 2)+(­ 15/0.2)=15/0.2 = +75 !!!! 700+75 The severity of the crowding­out effect will be reduced if A . the Fed the money supply at the same time the federal government increases increases government spending. B . the Fed the money supply at the same time the federal government increases decreases government spending. C . the Fed change the money supply when the government increases government does not spending. D . business firms become pessimistic about the future. Answer : A (cz Ms inc, r dec I inv. G in Y inc Md inc r inc so I dec If the increases the money supply at the same time the federal government Fed increases government spending, the crowding­out effect A . will not be affected. B . will be increased. C . will be reduced. D . could increase or decrease depending on the sensitivity of planned either investment to the interest rate. Answer : C The steeper the planned investment schedule (curve) A . the larger is the crowding­out effect. B . the smaller is the crowding­out effect. C . the the change in planned investment as a result of changes in the larger is interest rate. D . the the change in money demand as a result of changes in the interest smaller is rate. Answer : B The flatter the planned investment schedule (curve) A . the the change in planned investment as a result of changes in the smaller is interest rate. B . the smaller is the crowding­out effect. C . the larger is the crowding­out effect. D . the the change in money demand as a result of changes in the interest larger is rate. Answer : C If d investment does not fall when the interest rate rises, there will be planne A . a slight crowding­out effect. B . a substantial crowding­out effect. C . no crowding­out effect. D . a complete crowding­out effect. Answer : C Which following reduces the severity of the crowding­out effect whenever the of the government increases spending? A . An expansionary monetary policy B . An expansionary fiscal policy C . A contractionary monetary policy D . A contractionary fiscal policy Answer : A A te crowding­out effect occurs when the government increases spending comple and the planned investment schedule (curve) is A . upward sloping. B . downward sloping. C . vertical. D . horizontal. Answer : D There be no crowding­out effect when the government increases spending and will the planned investment schedule (curve) is A . vertical. B . downward sloping. C . upward sloping. D . horizontal. Answer : A If y increase the number of investment projects undertaken when interest firms rates fall and sharply reduce the number of investment projects sharpl undertaken when interest rates increase, then A . expansionary fiscal policy will be very effective. B . expansionary monetary policy will be very effective. C . contractionary fiscal policy will be very effective. D . contractionary monetary policy will not be very effective. Answer : B If d investment is sensitive to the interest rate, an increase in the planne interest rate causes the A . aggregate expenditure curve to shift down. B . aggregate expenditure curve to shift up. C . long­run aggregate supply curve to shift out. D . investment demand schedule to shift to the right. Answer : A Moneta ry policy can be effective only if A . the money supply reacts to changes in the interest rate. B . planned investment reacts to changes in the interest rate. C . money demand reacts to changes in the interest rate. D . government spending reacts to changes in the interest rate. Answer : B Dan, a writer for a busine ss magazine, interviewed managers at 100 large corporations. All of the managers indicated that the primary determinant of planned investment is expected sales and not the interest rate. From this information, Dan concluded that A . fiscal policy would be very effective, but monetary policy would not be very effective. B . neither ry nor contractionary monetary policy would be very effective. expansiona C . both ry and contractionary monetary policy would be very effective. expansiona D . fiscal would not be very effective, but monetary policy would be very policy effective. Answer : A Assumi investment spending depends on the interest rate, as the supply of ng money is increased, the interest rate ________ and planned investment that spending ________. A . falls; increases B . falls; decreases C . rises; decreases D . rises; increases Answer : A If the st rate is so high that it is affecting economic growth, the intere recommended policy action should be A . an expansionary fiscal policy. B . an expansionary monetary policy. C . a contractionary monetary policy. D . the demand for money should be increased. Answer : B (cz r related to monitary policy directly!!) Moneta ry policy affects the money market by A . changing the interest rate, which changes planned investment. B . directly increasing consumption, which increases aggregate output. C . changing the money supply, which changes the interest rate. D . changing of aggregate output, which changes the level of planned the level expenditure. Answer : C The primary policy response of the Congress to the recessions of 19741975 and 19801982 was A . a tax cut. B . an increase in government spending. C . an increase in the rate of growth in the money supply. D . a reduction in interest rates. Answer : A If the investment demand curve is vertical, A . both monetary and fiscal policy are ineffective. B . both monetary and fiscal policy are effective. C . monetary policy is effective, but fiscal policy is ineffective. D . monetary policy is ineffective, but fiscal policy is effective. Answer : D If the government is reducing net taxes to stimulate the economy at the same federa time the Fed is selling bonds in the open market, the effectiveness of l the expansionary fiscal policy will be A . because the Fed's actions will result in lower interest rates and increased, a reduction in the crowding­out effect. B . reduced, the Fed's actions will result in higher interest rates and an because increase in the crowding­out effect. C . because the Fed's actions will result in lower interest rates and increased, an increase in the crowding­out effect. D . reduced, the Fed's actions will result in lower interest rates and an because increase in the crowding­out effect. Answer : B If the odates a fiscal expansion by increasing the money supply so that the Fed interest rate increases only a little, the crowding­out effect will accomm A . be zero. B . increase. C . decrease, but still be positive. D . become infinitely large. Answer : C (cz Ms inc r dec I inc. G inc, r inc, I dec) Refer to the information provided in Figure 12.5 below to answer the questions that follow. Figure 12.5 Refer 12.5. As a result of an expansionary fiscal policy, the largest to crowding­out effect occurs if the planned investment schedule (curve) Figure is similar to the one in Panel ________. A . A B . B C . C D . D Answer : C (flattest) Refer 12.5. The largest impact on output as a result of an expansionary to fiscal policy would occur if the planned investment schedule (curve) Figure is similar to the one in Panel ________. A . A B . B C . C D . D Answer : B (cz I unresponsive to changes in r. so when Y inc, Md inc, r inc I donen’t decrease. So Y=C+I+G wont go down) Refer to Figure 12.5. Assume the current equilibrium output is $500 billion, the spending multiplier is 5, and the government increases purchases by $10 billion. If the new equilibrium output increases to $530 billion, most likely the planned investment schedule (curve) is similar to the one in Panel ________. A . A B . B C . C D . D Answer : A (cz deltaY=deltaG* 5 +deltaI*5=30 =>deltaI=­5 so when r inc I dec ) Refer to Figure 12.5. Assume the current equilibrium output is $500 billion, the spending multiplier is 5, and the government increased spending by $10 billion. If the new equilibrium output increased to $550 billion, most likely the planned investment schedule (curve) is similar to the one in Panel ________. A . A B . B C . C D . D Answer : B (dletaY=50=50+ dletaI*5 so deltaI=0 unresponsive to r) Refer to Figure 12.5. Assume the current equilibrium output is $500 billion, the spending multiplier is 5, and the government increased spending by $10 billion. If the new equilibrium output did not change, most likely the planned investment schedule (curve) is similar to the one in Panel ________. A . A B . B C . C D . D Answer : C Which following actions is an example of an expansionary fiscal policy? of the A . An increase in the discount rate B . A decrease in defense spending C . A sale of government securities in the open market D . A decrease in net taxes. Answer : D Which following sequence of events occurs in response to an expansionary of the fiscal policy? A . output decreases, causing money demand to decrease, causing the Aggregate interest rate to decrease and planned investment to increase. B . output decreases, causing money demand to increase, causing Aggregate interest rates to increase and planned investment to decrease. C . output increases, causing money demand to increase, causing Aggregate interest rates to increase and planned investment to decrease. D . decreases, causing the demand for money to increase, causing Aggregate interest rates to increase and planned investment to increase. output Answer : C Refer to the information provided in Figure 12.6 below to answer the questions that follow. Figure 12.6 Refer 12.6. After government purchases are reduced, the planned aggregate to expenditure function may shift from C + I + G' to C + I' + G' because Figure the reduction in output will cause A . money increase, the interest rate to decrease, and planned investment to supply to increase. B . money decrease, the interest rate to decrease, and planned investment to supply to increase. C . money decrease, the interest rate to decrease, and planned investment to demand to increase. D . money increase, the interest rate to decrease, and planned investment to demand to increase. Answer : C Refer to Figure 12.6. The initial aggregate expenditure function is given by C + I + G. A decrease in government spending shifts the aggregate expenditure function to C + I + G'. If investment does NOT depend on the interest rate, the multiplier A . is .5. B . is 1.33. C . is 2. D . cannot be determined from the information available. Answer : C ( I think at eq deltaY=400 and delta G is the increase in shift so it’s 200! So 400=M*2oo)if I depended then we should add deltaI*m Refer 12.6. If investment does NOT depend on the interest rate, the change to in government purchases that decreases income from 800 to 200 is Figure A . an increase of 300. B . a decrease of 300. C . a decrease of 600. D . cannot be determined from the information available. Answer : B (600=2*deltaG) = DECREASE!! in 300 Refer If investment DOES depend on the interest rate, the change in planned to investment that the decrease in government spending brought about so Figure that income fell from 800 to 400 rather than 200 would have been 12.6. A . an increase of 100. B . a decrease of 200. C . a decrease of 400. D . cannot be determined from the information available. Answer : A (400=deltaG*mu lt + deltaI*mul=300 *2 +dletaI*2 then deltaI=100 ) something wron with –ve signs so memo maybe don’t use ­400= … Refer to the information provided in Figure 12.7 below to answer the questions that follow. Figure 12.7 Refer to Figure 12.7. What is the multiplier in this economy? A . 2 B . 4 C . 5 D . 10 Answer : A (deltaY/deltaG =50/25!!!!) 150­100/75­50 Refer 12.7. The initial aggregate expenditures are represented by the line to AE0. If the government increases spending by $50 billion and the Figure aggregate expenditures curve shifts to AE1, we know for sure that A . there is $25 billion decline in planned investment. B . there is some crowding­out effect. C . the planned investment schedule is downward sloping. D . All of the above Answer : D (50=50*2+delta I*2 =>deltaI=­ 25 Refer 12.7. The initial aggregate expenditures are represented by the line to AE0. If the government increases spending by $50 billion and the Figure aggregate expenditures curve shifts to AE2, we know for sure that A . the interest rate does not change as a result of fiscal policy. B . planned is perfectly insensitive to changes in the interest rate. investment C . there is total crowding­out effect. D . All of the above Answer : B (200­ 100=50*2 +deltaI*2 so I doent’t depend onr) Refer 12.7. The initial aggregate expenditures are represented by the line to AE0. If the government increases spending by $50 billion and the Figure aggregate expenditures curve remains AE0, we know for sure that A . the interest rate does not change as a result of fiscal policy. B . planned is perfectly insensitive to changes in the interest rate. investment C . there is total crowding­out effect. D . All of the above Answer : C (then memo that if remains the same then it’s perfectly sensitive. Cz crowding out is when g inc I dec so here it cancelled it as if ) If depends on the interest rate, a decrease in net taxes will cause invest aggregate output to ________ than if investment doesn't depend on the ment interest rate. A . increase by more B . increase by less C . decrease by more D . decrease by less Answer : B (t dec, Y inc, r inc I dec Y dec) A decrease in the money supply aimed at decreasing aggregate output is A . an expansionary fiscal policy. B . a contractionary monetary policy. C . a contractionary fiscal policy. D . an expansionary monetary policy. Answer : B Which following is the sequence of events following a contractionary of the monetary policy? A . Money demand increases ⇒ interest rates increase ⇒ planned investment falls and aggregate output falls. B . Interest increase ⇒ planned investment decreases ⇒ aggregate output rates decreases ⇒ money demand decreases. C . Interest decrease ⇒ planned investment decreases ⇒ aggregate output rates decreases ⇒ money demand decreases. D . output falls ⇒ the demand for money falls ⇒ interest rates rises Aggregate ⇒ planned investment decreases. Answer : B Refer to the information provided in Figure 12.8 below to answer the questions that follow. Figure 12.8 Refer to is greater than interest rate . Which of the Figure Interest rate following would have caused the planned aggregate expenditure function 12.8. to shift from C + I + G to C + I' + G? A . A contractionary monetary policy B . A contractionary fiscal policy C . A decrease in the cost of capital relative to labor D . All of the above Answer : A Which following actions is an example of an expansionary monetary policy? of the A . A reduction in federal spending on education B . A purchase of government securities in the open market C . An increase in the discount rate D . An increase in income tax rates Answer : B You of the Council of Economic Advisors, and you are concerned that the are a inflation rate is too high. Which of the following policies should you member recommend? A . A decrease in the money supply B . An increase in the money supply C . A decrease in income tax rates D . An increase in government spending Answer : A The Reserve has pursued strong contractionary policies twice in recent Federa years: first in 1973­74, and again in 1979­80. The Fed's purpose in l following a tight monetary policy was to A . reduce the interest rate. B . slow the inflation rate. C . reduce the government deficit. D . reduce the level of planned investment. Answer : B (fis:G dec, Y dec, r dec .. mon:Ms dec, r inc, I dec, Ydec) The ation of monetary and fiscal policies in use at a given time is combin referred to as the A . crowding­out mix. B . policy mix. C . discretionary mix. D . package mix. Answer : B A mix that consists of a contractionary fiscal policy and an policy expansionary monetary policy would A . be neutral with respect to the composition of aggregate spending in the economy. B . lead to higher interest rates. C . favor government spending over investment spending. D . favor investment spending over government spending. Answer : D A mix that consists of an expansionary fiscal policy and a policy contractionary monetary policy would A . be neutral with respect to the composition of aggregate spending in the economy. B . favor investment spending over government purchases. C . lead to lower interest rates. D . favor government purchases over investment spending. Answer : D A mix of an expansionary fiscal policy and a contractionary monetary policy policy would cause output to ________ and interest rates to ________. A . decrease; decrease B . decrease; increase C . decrease; increase, decrease, or remain unchanged D . increase, decrease, or remain unchanged; increase Answer : D A mix of an expansionary fiscal policy and an expansionary monetary policy policy would cause output to ________ and interest rates to ________. A . increase; increase B . increase; increase, decrease, or remain unchanged C . increase, decrease, or remain unchanged; increase D . decrease; increase Answer : B The mix of a contractionary fiscal policy and a contractionary monetary policy policy would cause output to ________, and interest rates to ________. A . decrease; increase, decrease, or remain unchanged B . decrease; decrease C . decrease; increase D . increase, decrease, or remain unchanged; decrease Answer : A The that would cause the interest rate to increase and investment to policy decrease, but have an indeterminate effect on aggregate output, is a mix mix of A . expansionary fiscal policy and expansionary monetary policy. B . contractionary fiscal policy and expansionary monetary policy. C . expansionary fiscal policy and contractionary monetary policy. D . contractionary fiscal policy and contractionary monetary policy. Answer : C The that would cause the interest rate to decrease and investment to policy increase, but have an indeterminate effect on aggregate output, is a mix mix of A . contractionary fiscal policy and expansionary monetary policy. B . expansionary fiscal policy and contractionary monetary policy. C . expansionary fiscal policy and expansionary monetary policy. D . contractionary fiscal policy and contractionary monetary policy. Answer : A Betwee of 1990 and the spring of 1991, interest rates in the United States n the dropped by nearly two full percentage points. A possible explanation spring for this decrease in interest rates is A . the money increased as the economy sank into recession during the fall demand for of 1990. B . the implementation of an expansionary fiscal policy. C . a major increase in the size of the federal budget deficit. D . the tion of an expansionary monetary policy by the Federal Reserve. implementa Answer : D During of 1991, economists began to observe that lower interest rates were the not having much of an effect on investment spending plans. A possible spring explanation for this is that A . firms were expecting their sales to increase in the near future. B . the cost of capital was falling relative to the cost of labor. C . demand is very sensitive to changes in the interest rate. investment D . capital utilization rates were very low. Answer : D True/False 1) Fiscal policy affects the money market through its impact on income and money demand. Answer: True F M ffects Diff: 1 the o Skill: C ngoods emarke t t athrou r gh its yimpac t on pthe ointere l st rate i and cplann yed invest ament. Answer: True F Tases Diff: 1 in h Skill: C egover nment t purch eases nto dcause ereduct nions cin yprivat e f savin og is r know n as i the ncrowd cingr out eeffect. Answer: True F A Diff: 1 Answer: Skill: D True F I stmen Diff: 2 t does f Skill: F not pfall as l the aintere nst rate nrises, ethere dis no crowd i ingnout veffect. e Answer: True F Te Diff: 2 plann h Skill: F eed invest m ment ois to r the eintere st s rate, ethe nless s effecti i ve t fiscal i policy v. Answer: True F Tplann Diff: 2 ed h Skill: F einvest ment m is to othe r intere est rate, s the eless nthe s effecti i venes t s of i monet vary epolicy . Answer: True F I Diff: 2 Answer: Skill: F True F I Diff: 1 Answer: Skill: F True F Tansio Diff: 1 nary h Skill: F emonet ary ppolicy oand l an i expan csionar yy fiscal m policy i will, xunam biguo ously, f lead to a adecre nase in the eintere xst prate. Answer: True F W . A Diff: 2 Skill: A 12.3 Othe r Dete rmin ates of Plan ned Inve stme nt Mult iple Choi ce decrease in the interest rate. . Businesses expect their sales to decline in the future. C . Capital utilization rates increase. D . Relative to labor, capital becomes less expensive. Answer : B Which following events will lead to an increase in the level of planned of the investment? A . An increase in the interest rate. B . Businesses expect their sales to decrease in the future. C . Capital utilization rates increase. D . Relative to labor, capital becomes more expensive. Answer : C Which following events will lead to an increase in the level of planned of the investment? A . An decrease in the interest rate. B . Businesses expect their sales to increase in the future. C . Capital utilization rates increase. D . All of the above Answer : D If capital utilization rates increase, then A . investment will increase. B . investment will decrease. C . the cost of capital relative to labor will fall. D . expectations of future sales will fall. Answer : A Which following events will lead to a decrease in the level of planned of the investment? A . The cost of capital rises relative to the cost of labor. B . Businesses expect their sales to increase in the future. C . Capital utilization rates increase. D . All of the above Answer : A True/False 1) If the capital utilization rates fall, planned investment will rise. Answer: True F I Diff: 1 Answer: Skill: C True F W Diff: 2 Answer: Skill: C True F The Diff: 2 capita h Skill: C el utiliza htion i rate, gthe hhigher eplann r ed invest t ment. Answer: True F Diff: 2 Skill: C If is expensive relative to capital, firms will tend to substitute away labor from labor toward capital. A n s w e r: True F E the 1 2 . 4 A p p e n d i x M u l t i p l e C h o i c e he repr pesen ots ithe nequi tlibr ium opoin nt in the Diff: 2 LM a Skill: C ccurv . goods market for the given interest rate. . money market for the given value of aggregate output. C . goods market for the given level of government spending. D . money market for the given level of the money supply. Answer : B Refer to the information provided in Figure 12.9 below to answer the questions that follow. Figure 12.9 Refer Figure 12.9. An expansionary fiscal policy shifts the ________ curve to to the ________. A . IS; left B . LM; right C . IS; right D . LM; left Answer : C (G inc, Y inc r inc shifts right IS) Refer Figure 12.9. A contractionary monetary policy shifts the ________ to curve to the ________. A . LM; right B . IS; right C . IS; left D . LM; left Answer : D (Ms dec, r incr so shifts left LM) Refer Figure 12.9. As a result of ________, the equilibrium interest rate to increases and the equilibrium output level increases. A . an expansionary monetary policy B . a contractionary monetary policy C . an expansionary fiscal policy D . a contractionary fiscal policy Answer : C Refer Figure 12.9. As a result of ________, the equilibrium interest rate to increases and the equilibrium output level decreases. A . an expansionary monetary policy B . a contractionary monetary policy C . an expansionary fiscal policy D . a contractionary fiscal policy Answer : B Refer Figure 12.9. Which policy mix would definitely increase the to equilibrium interest rate? A . An expansionary monetary policy and an expansionary fiscal policy B . A contractionary monetary policy and a contractionary fiscal policy C . An expansionary fiscal policy and a contractionary monetary policy D . None of the above Answer : C Each point on the IS curve represents the equilibrium point in the A . goods market for the given level of government spending. B . money market for the given value of aggregate output. C . goods market for the given interest rate. D . money market for the given level of the money supply. Answer : C If the ation r = 10% and Y = $200 billion is on the IS curve, we know that combin the combination r = 10% and Y = $300 billion consists of an A . output is too high to maintain equilibrium in the goods market with an level that interest rate of 10%. B . interest is too high to maintain equilibrium in the money market with an rate that output of $300 billion. C . interest is too low to maintain equilibrium in the goods market with an rate that output of $300 billion. D . output is too low to maintain equilibrium in the goods market with an level that interest rate of 10%. Answer : A The illustrates the positive relationship between the equilibrium values curve of aggregate output and the interest rate in the money market is the that A . money demand curve. B . money supply curve. C . LM curve. D . IS curve. Answer : C If the ation r = 5% and Y = $100 billion is on the LM curve, we know that the combin combination r = 7% and Y = $100 billion consists of an A . output is too high to maintain equilibrium in the money market with an level that interest rate of 7%. B . interest is too high to maintain equilibrium in the money market with an rate that output of $100 billion. C . interest is too low to maintain equilibrium in the goods market with an rate that output of $100 billion. D . output is too low to maintain equilibrium in the goods market with an level that interest rate of 7%. Answer : B True/False 1) The IS curve shows combinations of income and interest rates consistent with equilibrium in the goods market. Answer: True F I y Diff: 2 suppl f Skill: C y t increa hses, ethen the m LM ocurve nincrea eses. Answer: True F I nt Diff: 2 spend f Skill: C ing gincrea oses, vthen ethe r LM ncurve m increa eses. Answer: True F I Diff: 2 Answer: Skill: C True F E Diff: 2 Answer: Skill: C True F Diff: 2 Skill: C ...
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This note was uploaded on 04/06/2012 for the course BUSINESS CS204, Eco taught by Professor Mr during the Spring '12 term at American University of Beirut.

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