Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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1.
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Which
of the following is not a response that would result from a decrease in the price level and so
help to explain the slope of the aggregate demand curve? a. | When interest
rates fall, Sleepwell Hotels decides to build some new hotels. | b. | The exchange
rate falls, so French restaurants in Paris buy more Iowa pork. | c. | Janet feels
wealthier because of the price drop and so she decides to remodel her
bathroom. | d. | With prices down and wages fixed by contract, Millio’s
Frozen Pizzas decides to lay off workers. | | |
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2.
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If
expected inflation is constant and the nominal interest rate increased 3 percentage points, the real
interest rate would a. | increase 3 percentage points. | b. | increase, but by
less than 3 percentage points. | c. | decrease, but by less than 3 percentage
points. | d. | decrease by 3 percentage points. | | |
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For
the following questions, consult the diagram below:
Figure 34-1
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3.
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Refer to Figure 34-1. Which of the following is correct? a. | If the interest
rate is 4 percent, there is excess money demand, and the interest rate will
fall. | b. | If the interest rate is 3 percent, there is excess money
supply, and the interest rate will rise. | c. | If the interest rate is 4 percent, the demand for goods will
rise when the money market is in its new equilibrium. | d. | None of the
above is correct. | | |
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4.
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If at
some interest rate the quantity of money demanded is greater than the quantity of money supplied,
people will desire to a. | sell interest-bearing assets causing the interest rate to
decrease. | b. | sell interest-bearing assets causing the interest rate to
increase. | c. | buy interest-bearing assets causing the interest rate to
decrease. | d. | buy interest-bearing assets causing the interest rate to
increase. | | |
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5.
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If
the interest rate increases a. | or the price level increases, people will want to hold more
money. | b. | or the price level increases, people will want to hold less
money. | c. | or the price level decreases, people will want to hold more
money. | d. | or the price level decreases, people will want to hold less
money. | | |
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6.
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In
the short run, an increase in the money supply causes interest rates to a. | increase, and
aggregate demand to shift right. | b. | increase, and aggregate demand to shift
left. | c. | decrease, and aggregate demand to shift
right. | d. | decrease, and aggregate demand to shift
left. | | |
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7.
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If
the Federal Reserve decided to lower interest rates, it could a. | buy bonds to
lower the money supply. | b. | buy bonds to raise the money supply. | c. | sell bonds to
lower the money supply. | d. | sell bonds to raise the money supply. | | |
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8.
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Open-market purchases a. | increase investment and real GDP. | b. | decrease
investment and increase real GDP. | c. | increase investment and decrease real
GDP. | d. | decrease
investment and real GDP. | | |
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9.
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When
the price level falls, the interest rate a. | rises. When the money supply falls, the interest rate
rises. | b. | rises. When the money supply falls, the interest rate
falls. | c. | falls. When the money supply falls, the interest rate
rises. | d. | falls. When the money supply falls, the interest rate
falls. | | |
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10.
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The
marginal propensity to consume (MPC) is defined as the fraction of a. | extra income
that a household consumes rather than saves. | b. | extra income
that a household either consumes or saves. | c. | total income that a household consumes rather than
saves. | d. | total income that a household either consumes or
saves. | | |
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11.
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An
aide to a U.S. Senator computes the effect on aggregate demand of a $20 billion tax cut. The actual
increase in aggregate demand is less than the aide expected. Which of the following errors in the
aide's computation would be consistent with an overestimation of the impact on aggregate
demand? a. | The actual
MPC was larger than the MPC the aide used to compute the
multiplier. | b. | The aide thought the tax cut would be permanent, but the actual
tax cut was temporary. | c. | The increase in income shifted money demand less than the aide
had anticipated. | d. | The increase in income resulted in investment rising more than
the aide had anticipated. | | |
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12.
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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. | | |
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13.
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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 | | |
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14.
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Which
of the following policies would Keynes' followers support when an increase in business optimism
shifts the aggregate demand curve away from long-run equilibrium? a. | decrease
taxes | b. | increase government expenditures | c. | increase the
money supply | d. | None of the above is correct. | | |
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15.
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In
the short run, a. | the price level
alone adjusts to balance the supply and demand for money. | b. | output responds
to changes in the aggregate demand for goods and services. | c. | changes in the
money supply cause a proportional change in the price level. | d. | increases in the
money supply shift the aggregate supply curve causing output to rise. | | |
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