Question 1

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

Accepted Answer

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Question 2

The multiplier effect means that aggregate demand curve will shift by a larger amount than the increase in
A)consumer spending.
B)budget revenues.
C)government spending.
D)the aggregate supply.

Accepted Answer

The multiplier effect refers to the idea that an initial increase in government spending (or any other component of aggregate demand) will lead to a larger overall increase in aggregate demand, as the increased spending creates a chain reaction of increased income and spending by other groups in the economy. This means that the aggregate demand curve will shift by a larger amount than the initial increase in government spending.

Question 3

When the government cuts personal income taxes, for instance, it increases households' take home pay.As a result
A)households will save all of this additional income, and spend little or nothing on consumer goods.
B)households will save some of this additional income, but will also spend some of it on consumer goods.
C)households will not save any of this additional income, but will spend all of it on the stock market.
D)households will neither save the additional income nor spend it on consumer goods.

Accepted Answer

When personal income taxes are cut, households have more disposable income. Some of this additional income will be saved, but households are also likely to spend some of it on consumer goods. This increased consumption can stimulate economic growth by increasing demand for goods and services.

Question 4

The response of monetary policy to a change in fiscal policy is an example of a more general phenomenon: the use of _______________ to steady aggregate demand and, as a result, production and employment.
A)macroeconomic policies
B)active stabilization policies
C)financial policies
D)Research led policies

Accepted Answer

The use of monetary policy as a response to fiscal policy is an example of an active stabilization policy, which is a type of macroeconomic policy that aims to stabilize aggregate demand and maintain production and employment levels. Financial policies and research-led policies are more specific categories within macroeconomic policies and are not necessarily related to stabilization efforts.

Question 5

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

Accepted Answer

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Question 6

The crowding out effect is caused by
A)an increase in the money supply, which increases the demand for goods and services, and thus crowds out investment.
B)an increase in government purchases, which reduces the demand for goods and services, and thus crowds out investment.
C)an increase in consumer income, which increases the demand for goods and services, and thus crowds out investment.
D)an increase in government purchases, which increases the demand for goods and services, and thus crowds out investment.

Accepted Answer

The crowding out effect is caused by an increase in government purchases, which increases the demand for goods and services, and thus crowds out investment. This is because when the government spends more money on goods and services, it creates a higher demand for these products, which can lead to an increase in prices. As a result, other buyers may be priced out of the market, including investors who may have wanted to invest in capital goods. This decrease in investment can lead to a decrease in long-term economic growth.

Question 7

When the central bank has lowered or raised interest rates, this occurs only because the central bank's bond traders are
A)conducting open market operations to ensure revenue is generated.
B)conducting open market operations to cover their positions.
C)conducting open market operations to ensure that the money supply is increased.
D)conducting open market operations to ensure that the equilibrium interest rate equals x percent.

Accepted Answer

The central bank conducts open market operations to ensure that the equilibrium interest rate equals x percent. This means that the central bank is trying to influence the interest rates in the economy by buying or selling government bonds, and this is done to achieve a particular target interest rate. This target interest rate is based on the central bank's assessment of the state of the economy, and is intended to promote economic stability and growth.

Question 8

In addition to the multiplier and crowding out effects, a tax change is a determinant of the size of the shift in the aggregate demand curve.Why would perceptions about whether the tax change is permanent or temporary affect the size of the shift?

Accepted Answer

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Question 9

Suppose that consumers become pessimistic about the future health of the economy.What will happen to aggregate demand and to output? What might a government have to do to keep output stable?

Accepted Answer

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Question 10

If asset markets are driven by the "animal spirits" of investors, then
A)those markets reflect rational behaviour.
B)those markets reflect irrational behaviour.
C)the efficient markets hypothesis is correct.
D)the stock market exhibits informational efficiency.

Accepted Answer

The term "animal spirits" implies irrational behavior, as it suggests that markets are influenced by emotions and impulses rather than rational analysis. Therefore, if asset markets are driven by animal spirits, it is likely that they reflect irrational behavior.

Question 11

Briefly discuss the theory of liquidity preference.

Accepted Answer

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Question 12

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Accepted Answer

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Question 13

Different theories of the interest rate are useful for different purposes.When thinking about the short run determinants of interest rates, it is best to keep in mind
A)the loanable funds theory.
B)the liquidity preference theory.
C)the classical economic theory.
D)the price level theory.

Accepted Answer

The question is asking about short run determinants of interest rates, and the liquidity preference theory is specifically designed to explain short term interest rate fluctuations. The loanable funds theory and classical economic theory are more focused on long-run factors that affect interest rates, while the price level theory is more focused on inflation and its relationship to interest rates.

Question 14

What is the difference between monetary policy and fiscal policy?

Accepted Answer

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Question 15

Different theories of the interest rate are useful for different purposes.When thinking about the long run determinants of interest rates, it is best to keep in mind
A)the loanable funds theory.
B)the liquidity preference theory.
C)the classical economic theory.
D)the price level theory.

Accepted Answer

The loanable funds theory is best for thinking about the long run determinants of interest rates. This theory suggests that interest rates are determined by the supply and demand for loans in the market. This includes factors such as savings rates, investment opportunities, and government policies that affect credit markets. The theory is useful for understanding long-run trends in interest rates and the factors that drive them over time.

Question 16

Use the money market to explain the interest rate effect and its relation to the slope of the aggregate demand curve.

Accepted Answer

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Question 17

In 2009, Professor Mankiw wrote an article in the New York Times suggesting negative interest rates.The logic is that consumers would spend more money.The additional spending would
A)increase aggregate demand and act as a boost to the economy.
B)decrease aggregate demand and act as a boost to the economy.
C)increase aggregate demand and slow down the economy.
D)decrease aggregate demand and slow down the economy.

Accepted Answer

Negative interest rates would incentivize consumers to spend more money because there would be a cost to holding onto cash. The increased spending would lead to an increase in aggregate demand, which would act as a boost to the economy.

Question 18

Explain how a transfer payment like the unemployment insurance benefit acts as an automatic stabilizer.

Accepted Answer

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Question 19

Suppose that the government spends more on replacing old school buildings with new ones.What does this do to aggregate demand? Please cite the presence of the multiplier effect, the crowding out effect and taxes.

Accepted Answer

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Question 20

A tax change is a determinant of the size of the shift in the aggregate demand curve.The shift in the aggregate demand curve will be affected by
A)households' perceptions about whether the tax change is on income or on goods.
B)households' perceptions about whether the tax change is local or national.
C)households' perceptions about whether the tax change is good or bad.
D)households' perceptions about whether the tax change is permanent or temporary.

Accepted Answer

The households' perceptions about whether the tax change is permanent or temporary will affect their spending behavior and, therefore, the size of the shift in the aggregate demand curve. A permanent tax change may have a larger effect on the aggregate demand curve than a temporary tax change, as households may adjust their spending and saving behavior in the long run. The other options listed do not directly impact the size of the shift in the aggregate demand curve.

Quiz 16: The Influence of Monetary and Fiscal Policy on Aggregate Demand

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

The multiplier effect means that aggregate demand curve will shift by a larger amount than the increase in

When the government cuts personal income taxes, for instance, it increases households' take home pay.As a result

The response of monetary policy to a change in fiscal policy is an example of a more general phenomenon: the use of _______________ to steady aggregate demand and, as a result, production and employment.

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

The crowding out effect is caused by

When the central bank has lowered or raised interest rates, this occurs only because the central bank's bond traders are

In addition to the multiplier and crowding out effects, a tax change is a determinant of the size of the shift in the aggregate demand curve.Why would perceptions about whether the tax change is permanent or temporary affect the size of the shift?

Suppose that consumers become pessimistic about the future health of the economy.What will happen to aggregate demand and to output? What might a government have to do to keep output stable?

If asset markets are driven by the "animal spirits" of investors, then

Briefly discuss the theory of liquidity preference.

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Different theories of the interest rate are useful for different purposes.When thinking about the short run determinants of interest rates, it is best to keep in mind

What is the difference between monetary policy and fiscal policy?

Different theories of the interest rate are useful for different purposes.When thinking about the long run determinants of interest rates, it is best to keep in mind

Use the money market to explain the interest rate effect and its relation to the slope of the aggregate demand curve.

In 2009, Professor Mankiw wrote an article in the New York Times suggesting negative interest rates.The logic is that consumers would spend more money.The additional spending would

Explain how a transfer payment like the unemployment insurance benefit acts as an automatic stabilizer.

Suppose that the government spends more on replacing old school buildings with new ones.What does this do to aggregate demand? Please cite the presence of the multiplier effect, the crowding out effect and taxes.

A tax change is a determinant of the size of the shift in the aggregate demand curve.The shift in the aggregate demand curve will be affected by