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Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

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Question 61

Multiple Choice

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If a $1,000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is

A) 0.2 and the multiplier is 1.25.
B) 0.8 and the multiplier is 5.
C) 0.2 and the multiplier is 5.
D) 0.8 and the multiplier is 8.

E) A) and D)
F) B) and D)

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Question 62

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Permanent tax cuts have a larger impact on consumption spending than temporary ones.

A) True
B) False

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Question 63

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If the MPC is 0.50 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $205 billion will eventually shift the aggregate demand curve to the right by

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

If the MPC = 4/5, then the government purchases multiplier is

The theory of _____ states that the _____ adjusts to bring money supply and money demand into balance.

Last year, total income increased $1,000 and consumption increased $800. An increase in government spending equal to $10 would cause output to increase by $_____ because the multiplier is ______.

Scenario 34-1. Take the following information as given for a small economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. -Refer to Scenario 34-1. The multiplier for this economy is

In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

Scenario 34-2. The following facts apply to a small economy. • Consumption spending is $6,720 when income is $8,000. • Consumption spending is $7,040 when income is $8,500. -Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500?

_____ are changes in fiscal policy that stimulate aggregate demand when the economy goes into recession without policymakers having to take any deliberate action.

Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate-demand curve?

​According to the IGM poll, most economists think that the crowding out effects were stronger than the stimulative effects of ARRA.

The automatic stabilizers in the U.S. economy are sufficiently strong to prevent recessions.​

An increase in households' desired money holding causes a(n) _____ in interest rates. This causes a(n) _____ in investment spending and aggregate demand.

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

Suppose the Federal Reserve lowers the target on the interest rate in the Federal Funds market. The Federal Reserve will _____ the money supply and aggregate demand will _____.

According to liquidity preference theory, if the price level decreases, then

Changes in aggregate demand can cause fluctuations in _____ and _____ in the short run, and only ____ in the long run.

Scenario 34-1. Take the following information as given for a small economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. -Refer to Scenario 34-1. For this economy, an initial increase of $200 in net exports translates into a(n)