Question 1

Figure 34-9 
-Refer to Figure 34-9.Suppose the economy is currently at point A.To restore full employment,the appropriate fiscal response
A)requires the central bank to purchase government bonds,which will increase the money supply.
B)is a reduction in government purchases.
C)is a reduction in taxes.
D)requires the central bank to sell government bonds,which will reduce the money supply.

Accepted Answer

The answer of Figure 34-9 
-Refer to Figure 34-9.Suppose the...

Question 2

For the following questions,use the diagram below: Figure 34-7. -Refer to Figure 34-7.The aggregate-demand curve could shift from AD₁ to AD₂ as a result of A)an increase in government purchases. B)a decrease in net exports. C)households saving a smaller fraction of their income. D)a decrease in the price level.

Accepted Answer

The answer of For the following questions,use the diagram below:
Figure...

Question 3

Suppose households attempt to decrease their money holdings.To counter this decrease in money demand and stabilize output,the Federal Reserve will
A)increase government spending.
B)increase the money supply.
C)decrease government spending.
D)decrease the money supply.

Accepted Answer

The answer of Suppose households attempt to decrease their money...

Question 4

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

Accepted Answer

Increasing government expenditures or increasing the money supply can help stabilize output by boosting aggregate demand, counteracting the negative effects of rising oil prices.

Question 5

Critics of stabilization policy argue that
A)policy affects aggregate demand quickly,but the effects on aggregate demand are long-lived.
B)policy affects aggregate demand with a lag,and the effects on aggregate demand are long-lived.
C)policy affects aggregate demand with a lag,but the effects are short-lived.
D)policy does not affect aggregate demand.

Accepted Answer

Critics of stabilization policy argue that policy affects aggregate demand with a lag, meaning the effects are not immediately felt. However, once the effects do take hold, they are long-lived. Therefore, choice B is the most accurate statement. Choices A and C are incorrect because they have conflicting information about the length of the effects. Choice D is incorrect because stabilization policy is designed specifically to affect aggregate demand.

Question 6

Suppose aggregate demand shifts to the left and policymakers want to stabilize output.What can they do?
A)repeal an investment tax credit or increase the money supply
B)repeal an investment tax credit or decrease the money supply
C)institute an investment tax credit or increase the money supply
D)institute an investment tax credit or decrease the money supply

Accepted Answer

To stabilize output when aggregate demand shifts left, policymakers can institute an investment tax credit to encourage investment or increase the money supply to boost spending.

Question 7

Which of the following statements generates the greatest amount of disagreement among economists?
A)Increases in the money supply shift aggregate demand to the right.
B)In the long run,increases in the money supply increase prices,but not output.
C)Recessions are associated with decreases in consumption,investment,and employment.
D)Government should use fiscal policy to try to stabilize the economy.

Accepted Answer

There is significant debate among economists about the effectiveness and timing of fiscal policy interventions, with differing views on whether government intervention helps stabilize the economy or leads to inefficiencies and unintended consequences.

Question 8

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?
A)a decrease in the money supply
B)an increase in tax rates
C)an increase in government purchases
D)an increase in interest rates.

Accepted Answer

Proponents of stabilization policy would advocate for an increase in government purchases when the economy is experiencing severe unemployment. This is because an increase in government spending can lead to an increase in aggregate demand, which can in turn create more jobs and reduce unemployment. Options A, B, and D would all likely have contractionary effects on the economy and could worsen unemployment.

Question 9

Figure 34-9 
-Refer to Figure 34-9.Suppose the economy is currently at point A.To restore full employment,the Federal Reserve should
A)purchase government bonds,which will increase the money supply.
B)purchase government bonds,which will reduce the money supply.
C)sell government bonds,which will increase the money supply.
D)sell government bonds,which will reduce the money supply.

Accepted Answer

The answer of Figure 34-9 
-Refer to Figure 34-9.Suppose the...

Question 10

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending,assuming policymakers want to stabilize output?
A)increase taxes
B)increase the money supply
C)increase government expenditures
D)All of the above are correct.

Accepted Answer

Increasing taxes would help to counteract the increase in aggregate demand caused by the rise in investment spending, thus stabilizing output.

Question 11

A policy that results in slow and steady growth of the money supply is an example of
A)an "easy" monetary policy.
B)a "passive" monetary policy.
C)a "practical" monetary policy.
D)an "active" monetary policy.

Accepted Answer

A policy that results in slow and steady growth of the money supply is an example of a "passive" monetary policy where the central bank takes a hands-off approach and allows the market forces to determine the money supply. It is a more conservative approach compared to an "easy" or "active" monetary policy where the central bank actively intervenes in the market to adjust the money supply in response to economic conditions. A "practical" monetary policy is not a commonly used term in economics.

Question 12

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.

Accepted Answer

All three statements are true and are commonly cited as criticisms of stabilization policy. The time lag between policy implementation and its impact on the economy can reduce its effectiveness. Additionally, the effects of policy may continue even after the original problem has been rectified. Finally, some critics argue that policy itself can create economic fluctuations by distorting market signals and creating unintended consequences.

Question 13

For the following questions,use the diagram below: Figure 34-7. -Refer to Figure 34-7.Which of the following is correct? A)A wave of optimism could move the economy from point a to point b. B)If aggregate demand moves from AD₁ to AD₂,the economy will stay at point b in both the short run 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.

Accepted Answer

We can see from the figure that moving from AD₁ to AD₂ results in a shift from point a to point b, which means that Option A is incorrect. Option B is also incorrect because in the long run, the economy will move from point b to its potential GDP trajectory. Therefore, only Option C is correct, as both fiscal and monetary policy can influence aggregate demand and cause a shift from AD₁ to AD₂.

Question 14

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?
A)increase taxes
B)increase government expenditures
C)increase the money supply
D)All of the above are correct.

Accepted Answer

The answer of Which of the following policies would Keynes's...

Question 15

For the following questions,use the diagram below:
Figure 34-7. 
-Refer to Figure 34-7.If the economy is at point b,a policy to restore full employment would be
A)an increase in the money supply.
B)a decrease in government purchases.
C)an increase in taxes.
D)All of the above are correct.

Accepted Answer

Point b is below the full employment level of output, so to restore full employment, the economy needs to expand. One way to achieve this is by increasing the money supply, which can lead to lower interest rates and higher investment and consumption spending. Decreasing government purchases or increasing taxes could have a contractionary effect on the economy and make it more difficult to achieve full employment.

Question 16

Most recessions and depressions
A)are accurately forecasted.
B)usually occur with ample advance warning.
C)cause falling unemployment.
D)occur with little advance warning.

Accepted Answer

Most recessions and depressions occur with little advance warning. Economic indicators such as GDP, employment levels, and consumer spending can give some indication of a possible downturn, but these signals are usually imprecise and can be misleading. It is often difficult to predict the onset and severity of a recession or depression due to the complex and dynamic nature of the global economy. Therefore, most recessions and depressions come as a surprise and catch many people off guard.

Question 17

Some economists argue that
A)monetary policy should actively be used to stabilize the economy.
B)fiscal policy should actively be used to stabilize the economy.
C)fiscal policy can be used to shift the AD curve.
D)All of the above are correct.

Accepted Answer

All three statements are correct. Some economists argue that monetary policy should be used to stabilize the economy by adjusting interest rates and money supply. Others argue that fiscal policy should be used through government spending and tax policies. Additionally, fiscal policy can be used to shift the aggregate demand curve through changes in government spending or taxes.

Question 18

A reduction in U.S net exports would shift U.S.aggregate demand
A)rightward.In an attempt to stabilize the economy,the government could increase expenditures.
B)rightward.In an attempt to stabilize the economy,the government could decrease expenditures.
C)leftward.In an attempt to stabilize the economy,the government could increase expenditures.
D)leftward.In an attempt to stabilize the economy,the government could decrease expenditures.

Accepted Answer

A reduction in U.S. net exports decreases aggregate demand, shifting it leftward. To stabilize the economy, the government could increase expenditures to boost aggregate demand.

Question 19

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?
A)decrease the money supply
B)increase government expenditures
C)increase taxes
D)All of the above are correct.

Accepted Answer

When the economy is experiencing severe unemployment, an active stabilization policy would advocate for an increase in government expenditures to stimulate aggregate demand and create jobs. Decreasing the money supply or increasing taxes could have contractionary effects on the economy and worsen the unemployment situation.

Question 20

What actions could be taken to stabilize output in response to a large decrease in U.S.net exports?
A)increase taxes or increase the money supply
B)increase taxes or decrease the money supply
C)decrease taxes or increase the money supply
D)decrease taxes or decrease the money supply

Accepted Answer

If there is a large decrease in U.S. net exports, it means that the economy is experiencing a drop in foreign demand for domestically produced goods and services. This can lead to a decrease in aggregate demand and output, potentially causing a recession. To counteract this, the government can decrease taxes or increase the money supply to stimulate spending and investment in the domestic economy. Decreasing taxes puts more money in consumers' pockets, which can increase consumption, while increasing the money supply lowers interest rates and makes it easier for businesses to borrow and invest. Both of these policies can help stabilize output during a period of decreased net exports.

Quiz 21: The Influences of Monetary and Fiscal Policy on Aggregate Demand: Using Policy to Stabilize the Economy

Figure 34-9 -Refer to Figure 34-9.Suppose the economy is currently at point A.To restore full employment,the appropriate fiscal response

For the following questions,use the diagram below: Figure 34-7. -Refer to Figure 34-7.The aggregate-demand curve could shift from AD1 to AD2 as a result of

Suppose households attempt to decrease their money holdings.To counter this decrease in money demand and stabilize output,the Federal Reserve will

The price of imported oil rises.If the government wanted to stabilize output,which of the following could it do?

Critics of stabilization policy argue that

Suppose aggregate demand shifts to the left and policymakers want to stabilize output.What can they do?

Which of the following statements generates the greatest amount of disagreement among economists?

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

Figure 34-9 -Refer to Figure 34-9.Suppose the economy is currently at point A.To restore full employment,the Federal Reserve should

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending,assuming policymakers want to stabilize output?

A policy that results in slow and steady growth of the money supply is an example of

Critics of stabilization policy argue that

For the following questions,use the diagram below: Figure 34-7. -Refer to Figure 34-7.Which of the following is correct?

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

For the following questions,use the diagram below: Figure 34-7. -Refer to Figure 34-7.If the economy is at point b,a policy to restore full employment would be

Most recessions and depressions

Some economists argue that

A reduction in U.S net exports would shift U.S.aggregate demand

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?

What actions could be taken to stabilize output in response to a large decrease in U.S.net exports?