Econ - 201: Chapter 8

Which policy tools could be used to deal with an autonomous decrease in aggregate demand?

The government could offset the drop in consumer spending with spending of its own.

According to supporters of rational expectations, which of the following explains why increases in government spending do not cause output to rise?

Consumers recognize that government spending today will have to be paid for by an increase in taxes tomorrow.

"Bad deflation" refers to the process in which

prices and output fall.

According to classical economists, what happens to prices and output in the long run if there is an autonomous decline in aggregate demand?

Prices fall, and output returns to the full-employment level of output.

Fiscal and monetary policies are often useful in pulling an economy out of a recession.

true

Which of the following policies should be used to stimulate the economy?

Buying government securities

Which of the following factors would cause aggregate demand to fall?

All of the above

A decrease in consumer confidence

A decrease in investor confidence

A decrease in demand by foreigners

An example of fiscal policy is

raising taxes.

A supply shock will shift the short-run aggregate supply curve __________ and create __________.

inward; excess demand

Which of the following statements regarding the long-run aggregate supply (LRAS) curve is true?

Increased immigration can shift the LRAS curve outward.

What was the effect on prices and output when oil prices rose in the 1970s?

The short-run aggregate supply curve shifted to the left, output declined, and prices rose.

What would happen if the government decided to reduce inflation by cutting government spending during a period of stagflation?

Unemployment would rise while output and prices would fall.

Which of the following factors would not cause the equilibrium level of output to increase?

Increases in the money supply

What would happen if the government cut taxes to stimulate aggregate demand during a period of stagflation?

Prices, output, and employment would all rise.

In the short run, what happens to the level of output and the level of prices as a result of a technological improvement?

Prices fall, and output rises.

Demand-driven deflation is often referred to as bad deflation.

true

According to the crowding-out effect, an increase in government spending will

increase interest rates.

What effect does expansionary fiscal policy have on aggregate demand?

It shifts the aggregate demand curve outward.

Increasing government spending is an example of

expansionary fiscal policy.

Which of the following is not a tool of fiscal policy?

Private investment

Which of the following does not represent a form of expansionary fiscal policy?

Increasing the money supply

The phenomenon of crowding out occurs when

increases in government spending raise the interest rate and crowd out investment spending.

What would be the effect of an increase in government spending of $50 million?

GDP would increase by more than $50 million.

Which of the following will occur if the U.S. government purchases Treasury bills?

The national debt declines.

In the early 1990s, the budget deficit was high, but interest rates were lower than in the 1980s. Which of the following best explains the reason this occurred?

Foreign savings increased, offsetting the effects of the budget deficit.

The government can buy back Treasury bills and increase the supply of loanable funds when tax revenue exceeds government spending.

true

The federal budget deficit increased substantially under which of the following administrations?

The Reagan Administration

Which of the following forms of savings can mitigate the effects of crowding out?

Household savings

Which of the following statements is true?

The government finances its debt by issuing Treasury bills.

If government spending exceeds government revenues, the government runs a deficit, which it can pay for by

issuing Treasury bills.

How is investment spending affected by an increase in the budget deficit?

Investment spending is crowded out by the increase in the budget deficit.

The implementation of fiscal policy might be delayed because of constituent-supported programs that are difficult to retract.

true

The theory of implementing fiscal policy always works in practice.

false

The time between the realization of economic conditions and the implementation of fiscal policy is called the _____________ lag.

administrative

The fact that it may take months to actually distribute government spending once that spending has been approved is known as the

operational lag.

Which of the following will not occur during a recession?

Prices rise.

The "recognition lag" refers to the fact that

it takes a while before policymakers recognize that aggregate demand has shifted inward.

Which of the following is one of the factors that makes the use of fiscal policy difficult?

Once programs have been established, it is difficult to cut spending.

Which of the following represents an automatic stabilizer?

Unemployment insurance

Automatic stabilizers control

the fluctuations of the business cycle.

Which of the following does not occur as a result of automatic stabilizers?

Increases in income cause greater increases in consumer spending than they otherwise would.

What effect would a decrease in aggregate demand have on output, given the presence of automatic stabilizers?

Output would fall but by less than it would without stabilizers.

How does the tax system act as an automatic stabilizer?

When income rises, people move into higher tax brackets, reducing somewhat the amount of money available for consumption.

Which of the following represents an aim of automatic stabilizers?

To reduce consumer spending in a boom in order to avoid overheating the economy

The volatile fluctuations of the business cycle occur because of the multiplier effect.

true

Which of the following statements is false?

Keynesians believe that prices and wages adjust quickly to new economic conditions.

What is the likely effect of an increase in government spending if prices and wages are very flexible?

Prices will rise, and output will remain unchanged.

Suppose the government purchased a $10 million satellite. New Keynesian economists predict that

prices would be slow to adjust and create profit opportunities for suppliers.

What is the effect on prices and output if people recognize that an increase in government spending will have to be paid for by an increase in taxes?

Prices and output will not change.

New classical economists believe that the rationality of people who save in preparation for higher future taxes shifts the aggregate demand curve outward.

false

According to the new classical view of economics, when the aggregate demand curve shifts outward,

prices and output automatically adjust to the long-run equilibrium.

According to the new classical view of the macroeconomy, what might be the effect on output of an increase in aggregate demand?

Output remains unchanged, and prices rise.

According to new Keynesians, fiscal policy can have an effect on output because of which of the following factors?

Wages are sticky.

Which political party has supported the idea of the Laffer curve?

The Republican Party

The curve that illustrates the relationship between tax revenue and tax rates is called the

Laffer curve.

How much tax revenues would be collected if total income were $4 trillion and the tax rate were zero?

None of the above

Which of the following factors could induce a supply-side response?

All of the above

Increases in the tax rate

Decreases in the tax rate

Changes in regulations

Consider the Laffer curve below. If t* is the point of maximum tax revenue, people will tend to work harder at a tax rate of t2 than at a tax rate of t1.

false

Supply-side economists hold the belief that decreasing the tax rate can

decrease prices and increase output.

According to economist Arthur Laffer, tax revenues would increase if the tax rate were lowered, because

all of the above.

income would rise because the lower tax rate would motivate people to work more, offsetting the decline in the tax rate.

very high tax rates discourage people from working, reducing the level of income and tax revenues.

as the tax rate rises from zero, tax revenues first rise and then fall.

Which of the following statements must be true if the Gross Domestic Product is greater than the money supply?

The velocity of money is greater than one.

The quantity theory of money can explain

moderate inflation, hyperinflation, and deflation.

The widely held belief that when the central bank creates money, prices rise is called

the quantity theory of money.

Assume the velocity of money is held constant. According to the classical view of money,

changes in the money supply will only affect prices.

What is the long-run effect on the real economy of an increase in the money supply?

Prices rise, and the level of output returns to its equilibrium level.

Which of the following correctly expresses the quantity theory of money?

money × velocity = price level × real output

Increasing the money supply in an expanding economy will most likely cause

an increase in the price level.

What do most economists believe is the short-run effect on the real economy when the money supply increases?

Output increases, because interest rates fall.

Suppose the U.S. economy is experiencing a recession. Increasing the money supply will provoke an expansion in the short run.

true

If the money supply increases by 10% and real GDP increases by 3%, prices will increase by

less than 10%.

In the quantity theory of money, velocity means

the rate at which the money supply turns over.

What is the effect on interest rates and the money supply when the Fed lowers the reserve requirement?

Interest rates fall, and the money supply increases.

Contractionary monetary policy will cause prices and output to decrease in the short-run.

true

Suppose that the Fed lowers the required reserve ratio. Which of the following events will most likely occur?

The new long-run equilibrium at full employment will be at a higher aggregate price level.

Which of the following tools can the Federal Reserve use to lower interest rates?

Buying Treasury bills

What is the long-run effect on the short-run aggregate supply (SRAS) curve when the money supply increases?

The SRAS curve shifts inward as expectations catch up with actual movements in the price level.

In the short run, what is the effect on prices and output when the money supply increases?

Aggregate demand rises, pushing up prices and output.

Which of the following statements about the long-run effect of an increase in the money supply is true?

As a result of lower interest rates, businesses may invest more, but the increase in the price level may reduce spending by foreigners and consumers.

Based on the graph below, which of the following can we conclude about the economy?

A supply shock has probably occurred.

The graph below shows an example of "bad deflation."

false

What is the short-term effect of expanding the money supply?

The aggregate demand curve shifts outward.

Which of the following best describes stagflation?

Prices rise and output decreases.

Which of the following factors can cause a decline in aggregate demand?

A decrease in consumer spending

Which of the following represents a way in which the Fed can expand the money supply?

Lowering the discount rate

What is meant by the expression "In the long run, we're all dead"?

Deviations from long-run equilibrium can have significant consequences on people's lives.

Based on the graph below, which of the following monetary policies should the Fed implement to restore long-run equilibrium?

Buy Treasury securities

The use of monetary policy as a means to prevent the crowding out that might occur from expansionary policy is a short-run strategy.

true

Which of the following chains of events explains how government spending crowds out investment spending?

Government spending increases, raising output, raising prices, raising the demand for money, raising interest rates, lowering investment.

The long-run effect of increasing the money supply is

an increase in the aggregate price level with no change in real output.

What is the long-run effect of monetary policy accommodation by the Federal Reserve?

Inflation

Which of following policy measures could prevent "crowding out" in the short run?

An increase in the money supply by the Federal Reserve

In the short run, when the government increases its spending, the demand for money

rises, because income rises as a result of the increase in aggregate demand.

In the long run, what is the effect of an increase in the money supply?

Inflation

Which of the following statements is not consistent with the monetarists' views of the economy?

Monetary policy should be used to stimulate demand.

Which of the following statements is not consistent with the new Keynesians' views of the economy?

The money supply should be kept stable.

According to the new Keynesians, which of the following does not explain why output can rise above the full-employment level in the short run?

Expectations are fully rational.

Which of the following best describes how Keynesians view the effect of monetary policy on the economy?

Monetary policy can cause the economy to expand.

According to monetarists, what is the effect of an increase in the money supply?

Output remains constant, and prices rise.

What is the mechanism by which the economy returns to the full-employment level of output following an increase in aggregate demand?

The increase in the price level causes the short-run supply curve to shift to the left.

New Keynesian and monetarist economists agree that the growth rate of the money supply should be set at a rate that reflects real output.

false