Multiple Choice Questions
1. If the central bank wants to expand aggregate demand, it can ________ the money supply, which would ________ the interest rate.
a. Increase, increase
b. Increase, decrease
c. Decrease, increase
d. Decrease, decrease
2. If the government wants to contract aggregate demand, it can ________ government purchases or ________ taxes.
a. Increase, increase
b. Increase, decrease
c. Decrease, increase
d. Decrease, decrease
3. The Federal Reserve's target rate for the federal funds rate
a. Is an extra policy tool for the central bank, in addition to and independent of the money supply.
b. Commits the Fed to set a particular money supply so that it hits the announced target.
c. Is a goal that is rarely achieved, because the Fed can determine only the money supply.
d. Matters to banks that borrow and lend federal funds but does not influence aggregate demand.
4. With the economy in a recession because of inadequate aggregate demand, the government increases its purchases by $1,200. Suppose the central bank adjusts the money supply to hold the interest rate constant, investment spending is fixed, and the marginal Propensity to consume is 2/3. How large is the increase in aggregate demand?
a. $400
b. $800
c. $1,800
d. $3,600
5. If the central bank in the preceding question instead holds the money supply constant and allows the interest rate to adjust, the change in aggregate demand resulting from the increase in government purchases will be
a. Larger.
b. The same.
c. Smaller but still positive.
d. Negative.
6. Which of the following is an example of an automatic stabilizer? When the economy goes into a recession,
a. More people become eligible for unemployment insurance benefits.
b. Stock prices decline, particularly for firms in cyclical industries.
c. Congress begins hearings about a possible stimulus package.
d. The Federal Reserve changes its target for the federal funds rate.