Question 1

If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by
A) increasing the money supply, which raises interest rates.
B) increasing the money supply, which lowers interest rates.
C) decreasing the money supply, which raises interest rates.
D) decreasing the money supply, which lowers interest rates.

Accepted Answer

Increasing the money supply lowers interest rates, which encourages borrowing and spending, thus stimulating aggregate demand and reducing the impact of pessimism on the price level and real GDP. Option A, on the other hand, would exacerbate the situation by raising interest rates and discouraging borrowing and spending. Option C would further reduce aggregate demand and worsen the economic outlook. Option D, decreasing the money supply, would cause interest rates to rise, making borrowing and spending more challenging, leading to a further decrease in aggregate demand.

Question 2

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

If there is a large decrease in U.S. net exports, it means that there is a decrease in demand for U.S. goods and services from foreign countries. This decrease in demand can lead to a decrease in output, which in turn can lead to unemployment and reduced economic activity. To stabilize output in this situation, the government could increase its own expenditures or increase the money supply. Increasing government expenditures would inject money into the economy, and increasing the money supply would make it easier for businesses and individuals to obtain loans and spend money, thus increasing demand and output.

Question 3

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 afterward.
D) cannot be implemented quickly and most of its impact on aggregate demand occurs months after policy is implemented.

Accepted Answer

Monetary policy can be implemented quickly, usually within a few months, but its impact on aggregate demand takes time to manifest. The lag between policy implementation and its effect on the economy is typically around six months to a year.

Question 4

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

The answer of Which of the following policy alternatives would...

Question 5

Suppose there were a large decline in net exports. If the Fed wanted to stabilize output, it could
A) buy bonds to raise interest rates.
B) buy bonds to lower interest rates.
C) sell bonds to raise interest rates.
D) sell bonds to lower interest rates.

Accepted Answer

A decline in net exports would lead to a decrease in aggregate demand, which would cause output to decrease. In order to stabilize output, the Fed would need to increase aggregate demand. Buying bonds would inject money into the economy, which would increase demand and likely lead to an increase in output. Lowering interest rates would also encourage borrowing and spending, which would further increase demand. Therefore, the best choice is to buy bonds to lower interest rates, as this would increase demand and help stabilize output.

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

When there is a leftward shift in aggregate demand, output decreases, and the economy enters a recessionary period. To stabilize output, policymakers need to increase aggregate demand. One way to do this is by instituting an investment tax credit, which will incentivize businesses to invest more, leading to an increase in aggregate demand. Another way is to increase the money supply, which will lead to lower interest rates and encourage increased borrowing and spending, also leading to an increase in aggregate demand. Therefore, choice C - institute an investment tax credit or increase the money supply - is the best option.

Question 7

Keynes argued that aggregate demand is
A) stable, because the economy tends to return to its long-run equilibrium quickly after any disturbance to aggregate demand.
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.

Accepted Answer

In his theory of economic fluctuations, Keynes argued that aggregate demand is unstable because of waves of pessimism and optimism that create fluctuations in the economy. He believed that these fluctuations were caused by changes in investor and public expectations, which can magnify small changes in spending and investment.

Question 8

In 1961, President John F. Kennedy, acting upon advice from his economists, proposed tax cuts. The advice he received
A) was opposed to the teaching of Keynes, who had taught that tax cuts were counterproductive.
B) was opposed to the teaching of Keynes, who had taught that all attempts to stabilize the economy were futile.
C) came from economists who had studied Keynes's ideas when those ideas were only a few years old.
D) came from economists who were unaware of Keynes's ideas because those ideas had not yet been widely disseminated at that time.

Accepted Answer

The question states that the economists who advised President Kennedy had studied Keynes's ideas when they were only a few years old, which suggests they were aware of and influenced by Keynes's ideas. Therefore, option C is the best choice.

Question 9

Which U.S. president, when asked why he had proposed a tax cut, responded by saying "To stimulate the economy. Don't you remember your Economics 101?"
A) Dwight D. Eisenhower
B) John F. Kennedy
C) Ronald Reagan
D) Bill Clinton

Accepted Answer

In a press conference in 1962, JFK was asked why he had proposed a tax cut. He responded by saying, "To stimulate the economy. Don't you remember your Economics 101?"

Question 10

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

The answer of The price of imported oil rises. If...

Question 11

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 raise taxes.
B) rightward. In an attempt to stabilize the economy, the government could cut taxes.
C) leftward. In an attempt to stabilize the economy, the government could raise taxes.
D) leftward. In an attempt to stabilize the economy, the government could cut taxes.

Accepted Answer

The answer of A reduction in U.S net exports would...

Question 12

Who asserted that "the Federal Reserve's job is to take away the punch bowl just as the party gets going?"
A) president George W. Bush
B) president John F. Kennedy
C) economist John Maynard Keynes
D) former chairman of the Federal Reserve System William McChesney Martin

Accepted Answer

This statement is attributed to former chairman of the Federal Reserve System William McChesney Martin, who served from 1951 to 1970. Martin famously said that the Fed's job is to "take away the punch bowl just as the party gets going" in order to prevent the economy from overheating and inflation from getting out of control. This quote has since become a classic description of the Fed's role in managing the economy.

Question 13

The Kennedy tax cut of 1964 was
A) successful in stimulating the economy.
B) designed to shift the aggregate demand curve to the right.
C) designed to shift the aggregate supply curve to the right.
D) All of the above are correct.

Accepted Answer

The answer of The Kennedy tax cut of 1964 was
A)...

Question 14

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.

Accepted Answer

The Kennedy administration used fiscal policy to stimulate the economy, specifically by increasing government spending and cutting taxes in order to boost consumer demand and investment.

Question 15

Suppose there were a large increase in net exports. If the Fed wanted to stabilize output, it could
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.

Accepted Answer

The answer of Suppose there were a large increase in...

Question 16

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could
A) buy bonds to raise interest rates.
B) buy bonds to lower interest rates.
C) sell bonds to raise interest rates.
D) sell bonds to lower interest rates.

Accepted Answer

The answer of Suppose that businesses and consumers become much...

Question 17

Keynes argued that
A) irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment.
B) irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply.
C) changes in business and consumer expectations generally stabilize the economy.
D) All of the above are correct.

Accepted Answer

Keynes believed that irrational waves of pessimism, such as a sudden loss of confidence in the economy or a significant economic shock, could lead to decreases in aggregate demand and increases in unemployment. He did not argue that irrational waves of optimism would cause decreases in aggregate demand and decreases in aggregate supply. Additionally, Keynes did not believe that changes in business and consumer expectations generally stabilize the economy, as these expectations can be influenced by a variety of factors, including speculation and herd mentality. Therefore, only option A is correct.

Question 18

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

An active stabilization policy during severe unemployment would aim to increase aggregate demand and stimulate economic growth. Increasing government expenditures (such as on infrastructure projects) would serve this purpose. Decreasing the money supply or increasing taxes would reduce aggregate demand and worsen the economic situation. Therefore, only option B is the correct choice.

Question 19

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.

Accepted Answer

Keynes used the term "animal spirits" to refer to the arbitrary and spontaneous changes in the attitudes of households and firms regarding their willingness to take risks and engage in economic activities. These changes can have significant impacts on the overall performance of the economy.

Question 20

The Kennedy tax cut of 1964 included an investment tax credit that was designed to
A) increase aggregate demand in the short run and aggregate supply in the long run.
B) increase aggregate supply in the short run and aggregate demand in the long run.
C) only increase aggregate supply in the long run.
D) only increase aggregate demand in the short run.

Accepted Answer

The answer of The Kennedy tax cut of 1964 included...

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

If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by

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

Monetary policy

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

Suppose there were a large decline in net exports. If the Fed wanted to stabilize output, it could

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

Keynes argued that aggregate demand is

In 1961, President John F. Kennedy, acting upon advice from his economists, proposed tax cuts. The advice he received

Which U.S. president, when asked why he had proposed a tax cut, responded by saying "To stimulate the economy. Don't you remember your Economics 101?"

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

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

Who asserted that "the Federal Reserve's job is to take away the punch bowl just as the party gets going?"

The Kennedy tax cut of 1964 was

In the early 1960s, the Kennedy administration made considerable use of

Suppose there were a large increase in net exports. If the Fed wanted to stabilize output, it could

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

Keynes argued that

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?

Keynes used the term "animal spirits" to refer to

The Kennedy tax cut of 1964 included an investment tax credit that was designed to