True/False
Indicate whether the
sentence or statement is true or false.
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1.
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An increase in the interest rate increases the
quantity demanded of money because it increases the rate of return on money.
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2.
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When money demand is drawn on a graph with the
interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in
the price level shifts money demand to the right.
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3.
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Keynes's theory of liquidity preference
suggests that the interest rate is determined by the supply and demand for money.
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4.
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The interest-rate effect suggests that the
aggregate demand curve slopes downward because an increase in the price level shifts money demand to
the right, increases the interest rate, and reduces investment.
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5.
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An increase in the money supply shifts the money
supply curve to the right, increases the interest rate, decreases investment, and shifts the
aggregate demand curve to the left.
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6.
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Because of the multiplier effect, an increase in
government spending of £40 billion will shift the aggregate demand curve to the right by more
than £40 billion (assuming there is no crowding out).
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7.
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If the MPC (marginal propensity to consume) is
0.80, then the value of the multiplier is 8.
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8.
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Crowding out occurs when an increase in government
spending increases incomes, shifts money demand to the right, raises the interest rate, and reduces
private investment.
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9.
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Suppose the government increases its expenditure by
£10 billion. If the crowding-out effect exceeds the multiplier effect, then the aggregate demand
curve shifts to the right by more than £10 billion.
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10.
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Suppose investors and consumers become pessimistic
about the future and cut back on expenditures. If fiscal policymakers engage in activist
stabilization policy, the policy response should be to decrease government spending and increase
taxes.
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11.
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Many economists prefer automatic stabilizers
because they affect the economy with a shorter lag than activist stabilization
policies.
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12.
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In the short run, the interest rate is determined
by the loanable funds market, while in the long run, the interest rate is determined by money demand
and money supply.
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13.
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Unemployment benefits are an example of an
automatic stabilizer because when incomes fall, unemployment benefits rise.
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Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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14.
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Keynes's liquidity preference theory of the
interest rate suggests that the interest rate is determined by
a. | aggregate supply and aggregate
demand. | b. | the supply and demand for loanable
funds. | c. | the supply and demand for
money. | d. | the supply and demand for
labour. |
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15.
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When money demand is expressed in a graph with the
interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in
the interest rate
a. | none of these answers | b. | decreases the quantity demanded of money. | c. | increases the quantity demanded of money. | d. | decreases the demand for money. | e. | increases the demand for money. |
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16.
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When the supply and demand for money are expressed
in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal
axis, an increase in the price level
a. | shifts money demand to the right and increases the
interest rate. | b. | none of these
answers | c. | shifts money demand to the right and decreases the
interest rate. | d. | shifts money
demand to the left and increases the interest rate. | e. | shifts money demand to the left and decreases the interest
rate. |
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17.
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For the Eurozone countries, the most important
source of the downward slope of the aggregate demand curve is probably
a. | the wealth effect. | b. | none of these answers | c. | the exchange-rate
effect. | d. | the fiscal effect. | e. | the interest-rate effect. |
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18.
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In the market for real output, the initial effect
of an increase in the money supply is to
a. | shift the aggregate supply curve to the
right. | b. | shift the aggregate supply curve to the
right. | c. | shift the aggregate demand curve to the
left. | d. | shift the aggregate demand curve to the
right. |
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19.
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The initial effect of an increase in the money
supply is to
a. | increase the interest rate. | b. | increase the price level. | c. | decrease the price level. | d. | decrease the interest rate. |
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20.
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The long-run effect of an increase in the money
supply is to
a. | increase the interest rate. | b. | decrease the price level. | c. | increase the price level. | d. | decrease the interest rate. |
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21.
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Suppose a wave of investor and consumer pessimism
in the USA causes a reduction in spending. If the US Federal Reserve (which has a broader remit than
the Bank of England which is charged only with controlling inflation) chooses to engage in activist
stabilization policy, it should
a. | increase government spending and decrease
taxes. | b. | decrease the money supply. | c. | decrease government spending and increase taxes. | d. | decrease interest rates. |
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22.
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The initial impact of an increase in government
spending is to shift
a. | aggregate demand to the
right. | b. | aggregate demand to the left. | c. | aggregate supply to the right. | d. | aggregate supply to the left. |
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23.
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If the marginal propensity to consume MPC is 0.75,
the value of the multiplier is
a. | 4. | b. | 7.5. | c. | none of these
answers. | d. | 5. | e. | 0.75. |
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24.
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An increase in the marginal propensity to consume
(MPC)
a. | raises the value of the
multiplier. | b. | has no impact on
the value of the multiplier. | c. | rarely occurs
because the MPC is set by congressional legislation. | d. | lowers the value of the multiplier. |
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25.
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Suppose a wave of investor and consumer optimism
has increased spending so that the current level of output exceeds the long-run natural rate. If
policy makers choose to engage in activist stabilization policy, they should
a. | decrease government spending, which the shifts the
aggregate demand curve to the left. | b. | decrease taxes,
which shifts the aggregate demand curve to the right. | c. | decrease taxes, which shifts the aggregate demand curve to the
left. | d. | decrease government spending, which shifts the aggregate
demand curve to the right. |
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26.
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When an increase in government purchases raises
incomes, shifts money demand to the right, raises the interest rate, and lowers investment, we have
seen a demonstration of
a. | supply-side economics. | b. | none of these answers. | c. | the crowding-out
effect. | d. | the multiplier
effect. |
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27.
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Which of the following statements regarding taxes
is correct?
a. | Most economists believe that, in the short run, the
greatest impact of a change in taxes is on aggregate supply, not aggregate
demand. | b. | An increase in taxes shifts the aggregate demand curve
to the right. | c. | A decrease in
taxes shifts the aggregate supply curve to the left. | d. | A permanent change in taxes has a greater effect on aggregate demand than a
temporary change in taxes. |
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28.
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Suppose the government increases its purchases by
£16 billion. If the multiplier effect exceeds the crowding-out effect, then
a. | the aggregate supply curve shifts to the right by more
than £16 billion. | b. | the aggregate
demand curve shifts to the left by more than £16 billion. | c. | the aggregate demand curve shifts to the right by more than £16
billion. | d. | the aggregate supply curve shifts to the left by more
than £16 billion. |
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29.
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When an increase in government purchases increases
the income of some people, and those people spend some of that increase in income on additional
consumer goods, we have seen a demonstration of
a. | the multiplier effect. | b. | supply-side economics. | c. | none of these
answers. | d. | the crowding-out
effect. |
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30.
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Which of the following is an automatic
stabilizer?
a. | Spending on public schools | b. | Military spending | c. | All of these
answers are automatic stabilizers. | d. | Spending on the
space shuttle | e. | Unemployment
benefits |
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31.
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Which of the following statements about
stabilization policy is not true?
a. | The UK government has given control of interest rates, a
key tool of activist stabilization policy, to the Bank of England. | b. | Many economists prefer automatic stabilizers because they affect the economy
with a shorter lag than activist stabilization policy. | c. | None of these answers is true. | d. | Long lags enhance the ability of policy makers to fine-tune the
economy. | e. | When policy markers implement activist stabilization
policies, there is a significant risk that their policies may actually have a destabilizing
effect. |
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32.
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Which of the following best describes how an
increase in the money supply shifts the aggregate demand curve?
a. | The money supply shifts right, prices fall, spending
increases, and the aggregate demand curve shifts right. | b. | The money supply shifts right, the interest rate rises, investment decreases,
and the aggregate demand curve shifts left. | c. | The money supply
shifts right, the interest rate falls, investment increases, and the aggregate demand curve shifts
right. | d. | The money supply shifts right, prices rise, spending
falls, and the aggregate demand curve shifts left. |
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