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Multiple ChoiceEdit

1. Which of the following explain the shape of the aggregate-demand curve?

  • a. wealth effect and interest-rate effect
  • b. exchange-rate effect and substitution effect
  • c. substitution effect and interest-rate effect
  • d. substitution effect and complement effect
  • e. income effect and substitution effect

2. In recent years, the Federal Reserve has conducted policy by setting a target for the

  • a. size of the money supply.
  • b. growth rate of the money supply.
  • c. federal funds rate.
  • d. discount rate.
  • e. prime rate.

3. While a television news reporter might state that “Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent,” a more precise account of the Fed’s action would be as follows:

  • a. “Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent.”
  • b. “Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount.”
  • c. “Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent.”
  • d. “Today the Fed took a step toward contracting aggregate demand, and this was done by lowering the federal funds rate to 5.25 percent.”
  • e. “Today the Fed directly lowered the equilibrium federal funds rate from 5.5 percent to 5.25 percent.”

4. If expected inflation is constant, then when the nominal interest rate increases, the real interest rate

  • a. increases by more than the change in the nominal interest rate.
  • b. increases by the change in the nominal interest rate.
  • c. decreases by the change in the nominal interest rate.
  • d. decreases by more than the change in the nominal interest rate.
  • e. does not change.

5. Which combination of the following Fed actions would increase the money supply the most?

Open-Market Action Discount Rate Reserve Requirement
A. sell increase increase
B. buy increase increase
C. buy decrease decrease
D. sell decrease decrease
E. sell decrease increase
  • a. A.
  • b. B.
  • c. C.
  • d. D.
  • e. E.

6. The opportunity cost of holding money

  • a. decreases when the interest rate increases, so people desire to hold more of it.
  • b. decreases when the interest rate increases, so people desire to hold less of it.
  • c. increases when the interest rate increases, so people desire to hold more of it.
  • d. increases when the interest rate increases, so people desire to hold less of it.
  • e. increases when the interest rate decreases, so people desire to hold less of it.
Figure 34-1

Figure 34-1








7. Refer to Figure 34-1. What is measured along the horizontal axis of the left-hand graph and the right-hand graph respectively?

  • a. nominal output and the quantity of money
  • b. real output and the quantity of money
  • c. the opportunity cost of holding money and real GDP
  • d. the quantity of money and real GDP
  • e. the interest rate and the price level

8. The interest rate falls if

  • a. either money demand or money supply shifts right.
  • b. money demand shifts right or money supply shifts left.
  • c. either money demand or money supply shifts left.
  • d. money demand shifts left or money supply shifts right.
  • e. money demand shifts right along a vertical money supply curve.

9. Other things equal, in the short run a higher price level leads households to

  • a. increase consumption, firms to buy more capital goods, and GDP to increase.
  • b. increase consumption, firms to buy fewer capital goods, and GDP to decrease.
  • c. decrease consumption, firms to buy more capital goods, and GDP to increase.
  • d. decrease consumption, firms to buy fewer capital goods, and GDP to decrease.
  • e. decrease consumption, firms to buy more capital goods, and GDP to remain the same.

10. Which of the following shifts aggregate demand to the right?

  • a. an increase in the price level
  • b. an increase in the money supply
  • c. a decrease in the price level
  • d. a decrease in the money supply
  • e. a decrease in the money supply with a decrease in the price level

11. If the Fed conducts open-market sales,

  • a. the money supply increases, aggregate demand shifts right, and GDP increases.
  • b. the money supply increases, aggregate demand shifts left, and GDP decreases.
  • c. the money supply decreases, aggregate demand shifts right, and GDP decreases.
  • d. the money supply decreases, aggregate demand shifts left, and GDP decreases.
  • e. the money supply decreases, aggregate demand shifts right, and GDP increases.

12. Suppose the MPC is 0.75. There are no crowding out or investment accelerator effects. If the government increases its expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion, then by how far does aggregate demand shift to the right?

  • a. $800 billion and $800 billion
  • b. $800 billion and $600 billion
  • c. $600 billion and $600 billion
  • d. $600 billion and $450 billion
  • e. $450 billion and $450 billion

Free ResponseEdit

1. Explain how unemployment insurance acts as an automatic stabilizer.

2. Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion. Suppose that the MPC is 0.80 and that there are no crowding out or accelerator effects. What are the combined effects of these changes? Why is the combined change not equal to zero?

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