1. Of the following statements, which explain why the crowding-out effect indicates government spending increases that are financed by the sale of Treasury bonds to the public will not necessarily exert a robust expansionary impact on aggregate demand? (Two answers are correct, please list all correct answers):

a. As government spending increases, incomes and taxes will also expand. The higher taxes will reduce both aggregate demand and output.

b. The sale of bonds to the public reduces the money supply, which will offset the expansionary impact of the increased government spending.

c. The sale of U.S. bonds to the public will drive up interest rates and appreciate the dollar, thereby reducing exports and aggregate demand.

d. The question is based on a false premise. The crowding-out effect indicates that the Treasury selling bonds to the public is very effective at stimulating demand.

e. The sale of U.S. bonds to the public will drive up interest rates, thereby retarding private investment and aggregate demand.

2. Tax rates that produce revenues equal to government expenditures when an economy operates at its long-run capacity will (more than one answer is correct, please list all correct answers):

a. also lead to a balanced budget during a recession.

b. lead to a budget deficit during a recession unless Congress cuts expenditures.

c. lead to a budget surplus during an expansion unless Congress increases expenditures.

d. lead to a budget deficit during an expansion.

e. lead to a balanced budget during an expansion or recession if Congress changes spending to offset the change in tax revenues.

3. According to the new classical theory, a $200 billion increase in government expenditures financed by a $200 billion increase in the budget deficit will (more than one answer is correct):

a. have little or no effect on real or nominal interest rates.

b. cause real output to expand.

c. exert little impact on real output because higher real interest rates will crowd out private spending.

d. have no or limited effects on interest rates or real output.

e. be largely offset by a reduction in private spending because individuals will anticipate higher future taxes and save more.

4. If the rate of inflation has been 6 percent per year for several years and the growth rate of the money supply was 8 percent per year during this time, an increase in the growth rate of the money supply to 10 percent per year will cause the expected inflation rate for the next period to be (two answers are correct):

a. equal to 6 percent under the rational expectations hypothesis.

b. lower than 6 percent under the rational expectations hypothesis.

c. equal to 6 percent under the adaptive expectations hypothesis.

d. higher than 6 percent under the rational expectations hypothesis.

5. If depositors suddenly move a substantial portion of their money from non-interest earning checking accounts into interest-earning savings accounts, how will the money supply measures be affected?

a. The size of M1 will become smaller, but M2 will be unchanged.

b. The size of M1 will increase, but M2 will decrease.

c. Both M1 and M2 will decrease in size.

d. The size of M1 will decrease, but M2 could either get larger or get smaller.

e. M1 will increase in size, but M2 will be unchanged.

6. I. Activist demand-side fiscal policy affects the disposable income of households, which will influence consumption spending and, in turn, cause the long-run aggregate supply (LRAS) curve to increase and shift to the right.

II. Fiscal policy can affect long-run aggregate supply through changes in marginal tax rates, which influence the relative attractiveness of productive activities in comparison with leisure and tax avoidance.

a. I is true; II is false.

b. I is false; II is true.

c. Both I and II are true.

d. Both I and II are false.

Use the following graph to answer the next question.

7. Which of the following will most likely be favored by a traditional Keynesian economist if the economy is operating at Point a? (More than one answer is correct).

a. a tax increase to balance the budget.

b. tax cuts or tax rebates with possible budget deficits.

c. continuation of the current tax and expenditure policies (dependence on the economy's self-correcting mechanism to restore full employment).

d. expansionary fiscal policy.

e. increased government spending with possible budget deficits.

8. Mr. Johnson deposits $1,000 of cash (currency) at First Merit Bank. Later that same day, Mrs. McDonald negotiates a loan for $700 at the same bank. In what direction and by what amount has the money supply changed?

a. decreased by $700.

b. increased by $1,000.

c. increased by $300.

d. increased by $700.

e. increased by $1,700.

9. The U.S. economy weakened during the latter half of 2000 and fell into a recession beginning in March 2001. At the time, the federal budget was running a substantial surplus. The newly elected George Bush administration advocated a tax cut that was enacted in July of 2001. According to the Keynesian view, this tax cut:

a. was highly inappropriate because it reduced the size of the budget surplus.

b. was highly appropriate because it would stimulate aggregate demand and thereby shorten the recession.

c. was not very important because the "demand stimulus effects" would be largely offset by additional borrowing and higher interest rates.

d. was not very important because the "demand stimulus effects" would be largely offset by the expectation of higher taxes in the future.

10. Drawing on her account at First National Bank, Joyce writes a check to Janet, who deposits the check in her checking account at Chase Bank. Once the check has cleared, which of the following would have occurred to bank reserves and the M1 money supply? (Two answers are correct)

a. Bank reserves at First National would have decreased, and bank reserves at Chase would have increased.

b. Total bank reserves would have increased; there would have been no change in M1.

c. There would have been no change in total bank reserves; but M1 would have increased.

d. There would have been no changes in total bank reserves and no changes in total M1.

e. Bank reserves at Chase Bank would have decreased, and bank reserves at First National would have increased.

11. If debit cards become more widely used by consumers and businesses, which of the following is likely to happen? (Two answers are correct.)

a. Currency holdings will fall, and the M1 money supply will fall.

b. The amount of currency held by the public will most likely decrease.

c. More money will be held as currency and more money will be held in bank accounts, which will increase the reserves of banks and decrease M1 unless the Fed takes offsetting actions.

d. The money supply will be unaffected because debit card expenditures are considered the equivalent of cash.

e. Less money will be held as currency and more money will be held in bank accounts, which will increase the reserves of banks and increase M1 unless the Fed takes offsetting actions.

12. When the Federal Reserve sells government bonds to the public, it directly:

a. reduces the reserves of the commercial banking system and increases the money supply.

b. increases the reserves of the commercial banking system, while increasing the money supply.

c. decreases the reserves of the commercial banking system, while not directly changing the supply of money.

d. increases the stock of money without affecting the reserves of the commercial banking system.

e. decreases the reserves of the commercial banking system, which decreases the money supply.

13. Suppose the Fed buys $100 million of U.S. government treasury securities to the public. How will this affect the money supply and the national debt?

a. The money supply will decrease; the national debt will be unaffected.

b. The money supply will increase; the national debt will decrease.

c. The money supply will increase; the national debt will be unaffected.

d. The money supply will increase; the national debt could either increase or decrease.

14. Assume the reserve requirement is 4 percent. First National Bank has vault cash and deposits with the Fed of $50 million, loans and securities of $270 million, and checking deposits of $320 million. First National Bank is in a position to make:

a. no additional loans.

b. up to $37.2 million of additional loans.

c. up to $270 million of additional loans.

d. up to $10.8 million of additional loans.

e. up to $50 million of additional loans.

15. Savings and loans finance fixed-rate, long-term, 30-year home mortgages with short-term savings deposits. Is this risky?

a. Yes, because an increase in nominal interest rates will push up costs far more than revenues, and decrease profits.

b. Yes, because an increase in nominal interest rates will increase interest income far less than interest expense, and decrease profits.

c. No; if nominal interest rates rise, income and costs will increase by similar amounts, leaving profits unchanged.

d. No; neither income nor costs will be affected by changes in nominal interest rates, and profits would not be affected.

e. Both A and B are correct.

16. Large corporations work just as hard to controls its unnecessary cash and demand-deposit balances as it does to keep down unnecessary inventories of goods. This is because:

a. holding unnecessary cash and demand deposits leads to an increase in the money supply, a known cause of inflation.

b. of the opportunity cost when funds are held in the form of cash and non-interest-earning demand deposits.

c. holding unnecessary cash and demand deposits leads to a decrease in the money supply, a known cause of recession.

d. cost is incurred in terms of decreased flexibility when funds are held in the form of cash and demand deposits.

17. Most monetarist economists object to the use of discretionary monetary policy as an effective stabilization policy tool because:

a. it would require the money supply to grow at a rate equal to the economy's long-run rate of economic growth.

b. they do not believe that changes in the money stock affect output or prices.

c. they believe that there are lengthy and variable time lags between when a change in monetary policy is instituted and when the change exerts its primary impact on output and prices.

d. they believe monetary policy can stimulate aggregate demand, but monetary policy cannot control inflation.

18. When the Federal Reserve unexpectedly decreases the money supply, it will cause a decrease in aggregate demand because:

a. real interest rates will rise, slowing business investment and consumer purchases.

b. the dollar will appreciate on the foreign exchange market, leading to an decrease in net exports.

c. higher nominal interest rates will tend to decrease asset prices (such as the prices of homes), which decreases wealth and thereby decreases current consumption.

d. all of the above are true.

e. both a and b are true

19. If the goal of policy makers was to consistently use both monetary and fiscal policy to help reduce a high rate of inflation, which of the following policy approaches would be most appropriate?

a. a larger budget deficit, the purchase of securities in the open market, and a higher discount rate.

b. a government budget surplus, the sale of securities in the open market, and a higher discount rate.

c. a larger government budget deficit, the sale of securities in the open market, and a lower discount rate.

d. a government budget surplus, the purchase of securities in the open market, and a lower discount rate.

20. Other things constant, according to the supply-side theory of economics, a reduction in marginal tax rates will tend to increase long-run aggregate supply (LRAS) primarily because the lower tax rates will increase:

a. disposable income, which will induce an increase in consumption.

b. business optimism, which will induce additional investment expenditures and lead to an increase in aggregate supply.

c. savings, which will lead to lower interest rates, an increase in consumption, and an increase in aggregate supply.

d. the relative attractiveness of productive activity in comparison with leisure and tax avoidance, thereby increasing long-run aggregate supply.

e. All of the above are true.

21. If the central bank wants to implement expansionary monetary policy to increase output, the Federal Reserve should (more than one answer is correct):

a. sell government bonds, which will decrease the money supply; this will cause interest rates to rise and aggregate demand to fall.

b. buy government bonds, which will increase the money supply; this will cause interest rates to fall and aggregate demand to rise.

c. increase the discount rate, which will increase the market rate of interest and cause aggregate demand to fall.

d. lower the reserve requirement.

e. decrease the target federal funds rate, which will lower the market rate of interest and cause aggregate demand to rise.

22. Other things constant, which of the following would cause the M2 money supply to increase? (Two answers are correct.)

a. An increase in the quantity of U.S. currency held overseas.

b. A shift of funds from the stock market into money market mutual funds because of an increase in concerns about the riskiness of the stock market.

c. A shift of funds from non-interest-earning checking accounts to money market mutual funds.

d. A decrease in the general public's holdings of currency outside of banks and an increase in checking account deposits held at commercial banks by an equal amount.

e. A shift of funds from interest-bearing checking accounts into currency holdings.

23. Equilibrium in the loanable funds market is initially present at a stable inflation rate of 2 percent and a nominal interest rate of 5 percent. If a shift to expansionary monetary policy eventually leads to actual and expected inflation of 4 percent:

a. both the nominal and real interest rates will rise by two percent.

b. the nominal interest rate will rise to 7 percent, and the real interest rate will increase to 5 percent.

c. the nominal interest rate will rise to 7 percent, but the real interest rate won't change.

d. the nominal interest rate will rise to 9 percent.

24. Suppose the Federal Reserve moves towards expansionary monetary policy and lowers the discount rate and the target federal funds rate, and as a result decision makers anticipate a higher future rate of inflation. The most likely result is:

a. a reduction in both short-term and long-term nominal interest rates.

b. lower short-term nominal interest rates but higher long-term nominal interest rates.

c. higher short-term nominal interest rates but lower long-term nominal interest rates.

d. an increase in both short-term and long-term nominal interest rates.

25. Which of the following is a major area of disagreement between nonactivists and activists?

a. Nonactivists believe discretionary macroeconomic policy can be applied in a manner that will lead to greater economic stability than would result from inflexible rules. Activists disagree.

b. Activists believe monetary policy is more potent than fiscal policy. Nonactivists disagree.

c. Activists believe changes in monetary and fiscal policy exert their effects instantaneously. Nonactivists think they work only with a substantial lag.

d. Nonactivists believe stable policies within the framework of policy rules will result in less instability than discretionary policy changes. Activists disagree.

e. both a and d are correct.

26. Which of the following is true?

a. An unanticipated shift to a more contractionary monetary policy will temporarily decrease output growth and employment.

b. Once decision makers come to anticipate the inflationary side effects, expansionary monetary policy will not stimulate output and employment.

c. The primary effect of persistent growth of the money supply at a sustained and rapid rate will be inflation.

d. All of the above are true.

e. Both a and c are true; b is false.

Use the following graph to answer the next question.

27. Suppose that the economy is currently operating at SRAS and AD2(the AD curve on the right). To combat inflation, the Fed institutes restrictive monetary policy. Suppose that by the time the policy impacts the economy, AD has already moved to AD1 (the AD curve on the left). Which of the following would be true?

a. The policy would cause the economy to fall further into a recession than it would have if the Fed had not undertaken the policy.

b. The policy will help by preventing the recession from becoming worse.

c. The policy would cause the economy to go into an economic boom.

d. This is a trick question; the impact of monetary policy is felt immediately by the economy.

Use the following graph to answer the next two questions.

28. The intersection of AD₁and SRAS₁indicate the initial conditions in the goods and services market with the current level of output, Y1, being the full employment level. The short- and long-run effects of the Fed unexpectedly shifting to a more contractionary monetary policy will be

a. short-run impact, P₂and Y₂; long-run impact, P₂and Y₂.

b. short-run impact, P₃and Y₁; long-run impact, P₃and Y₁.

c. short-run impact, P₂and Y₂; long-run impact, P₁and Y₁.

d. short-run impact, P₂and Y₂; long-run impact, P₃and Y₁.

29. The intersection of AD2and SRAS2indicate the initial conditions in the goods and services market with the current level of output, Y1, being the full employment level. The short- and long-run effects of the Fed shifting to a more expansionary monetary policy when it is fully anticipated will be

a. short-run impact at the intersection of AD1and SRAS2; long-run impact, P1and Y₁.

b. short-run impact, P₁and Y₁; long-run impact, P₁and Y₁.

c. short-run impact, P₃and Y₁; long-run impact, P₁and Y₁.

d. short-run impact, P₃and Y₁; long-run impact, P₃and Y₁.

30. Economic theory suggests that political entrepreneurs will (two answers are correct):

a. use expansionary monetary and fiscal policy more often than contractionary monetary and fiscal policy.

b. use monetary policy to reduce unemployment and fiscal policy to deal with inflation.

c. use monetary and fiscal policies to win elections; good politics may sometimes conflict with sound stabilization policy.

d. tend to follow tight monetary and fiscal policies since the political process is biased against inflation.

31. Under conditions of very high inflation but full employment, a new chairperson is appointed to the Federal Reserve. To bring the rate of inflation down, he or she decides to cut the growth rate of the money supply substantially.

a. If the policy is announced and is fully anticipated, it will bring the rate of inflation down without affecting real GDP.

b. If the policy is unanticipated, the economy will go through a short-run contraction.

c. He has followed the wrong policy; the money supply growth should have been increased to lower the inflation rate.

d. Both a and b are correct.

32. Which of the following factors substantially reduces the effectiveness of discretionary changes in tax rates or government expenditures as a stabilization tool?

a. Since it takes time for fiscal policy to work and since the future is difficult to forecast, it is difficult to time fiscal policy changes correctly.

b. Even though computer models have enhanced our forecasting ability, policy makers at the Federal Reserve have been reluctant to utilize information supplied by the models.

c. When fiscal policy is altered, the Fed generally shifts monetary policy in a manner that offsets the impact of the fiscal action.

d. Changes in government expenditures and taxes are always offset by equal changes in private spending.

33. Under the adaptive expectations hypothesis, which of the following is the effect of a shift to a more expansionary monetary policy?

a. In the short run, the real rate of output will be unaffected, but in the long run, it will decrease.

b. In the short run, the real rate of output will increase, but in the long run it will be unchanged.

c. There will be a permanent decrease in the real rate of output, but the inflation rate will be lower.

d. In the short run, the impact on the real rate of output is uncertain but in the long run output will decrease.

e. In the short run, the real rate of output will decrease, but in the long run it will be unchanged.

34. Analysis of the Great Depression indicates that (two answers are correct):

a. monetary and fiscal policies were highly contractionary during the 1930s.

b. even though monetary policy was expansionary, restrictive fiscal policy dominated during the 1930s.

c. a reduction in tax rates could not prevent the economic downturn from spiraling into a depression.

d. the severity of the economic decline, if not its onset, was the result of perverse monetary and fiscal policies.

35. The Department of the Treasury finances a budget deficit by selling bonds to the public. The money supply will:

a. increase because the demand deposits of the Treasury will increase.

b. decrease because the demand deposits of the public will decrease.

c. decrease because the money in the hands of the Fed will increase.

d. remain unchanged as long as the government spends what is borrowed.

36. Starting from an initial long-run equilibrium, under the rational expectations hypothesis, an anticipated shift to a more contractionary monetary policy will:

a. increase the rate of inflation but will not change real output in the short run.

b. increase real output and the rate of inflation in the short run, but not the long run.

c. increase real output and the rate of inflation in both the long run and the short run.

d. increase real output and the rate of inflation in the long run but not the short run.

e. decrease the rate of inflation, but will not change real output in the short run.

37. Assume that the government switches to a more expansionary monetary policy. Compared to the short-run effects predicted by the rational expectations hypothesis, the adaptive expectations hypothesis predicts:

a. a higher price level and lower real output.

b. a lower price level and higher real output.

c. a lower price level and lower real output.

d. no difference in the price level or real output.

Business Economics Homework 6-15-2020 1. Of the following statements, which explain why the crowding-out effect indicates government spending increases that are financed by the sale of Treasury bonds to the public will not necessarily exert a robust expansionary impact on aggregate demand? (Two answers are correct, please list all correct answers): a. As government spending increases, incomes and taxes will also expand. The higher taxes will reduce both aggregate demand and output. b. The sale of bonds to the public reduces the money supply, which will offset the expansionary impact of the increased government spending. c. The sale of U.S. bonds to the public will drive up interest rates and appreciate the dollar, thereby reducing exports and aggregate demand. d. The question is based on a false premise. The crowding-out effect indicates that the Treasury selling bonds to the public is very effective at stimulating demand. e. The sale of U.S. bonds to the public will drive up interest rates, thereby retarding private investment and aggregate demand. 2. Tax rates that produce revenues equal to government expenditures when an economy operates at its long-run capacity will (more than one answer is correct, please list all correct answers): a. also lead to a balanced budget during a recession. b. lead to a budget deficit during a recession unless Congress cuts expenditures. c. lead to a budget surplus during an expansion unless Congress increases expenditures. d. lead to a budget deficit during an expansion. e. lead to a balanced budget during an expansion or recession if Congress changes spending to offset the change in tax revenues. 3. According to the new classical theory, a $200 billion increase in government expenditures financed by a $200 billion increase in the budget deficit will (more than one answer is correct): a. have little or no effect on real or nominal interest rates. b. cause real output to expand. c. exert little impact on real output because higher real interest rates will crowd out private spending. d. have no or limited effects on interest rates or real output. e. be largely offset by a reduction in private spending because individuals will anticipate higher future taxes and save more. 4. If the rate of inflation has been 6 percent per year for several years and the growth rate of the money supply was 8 percent per year during this time, an increase in the growth rate of the money supply to 10 percent per year will cause the expected inflation rate for the next period to be (two answers are correct): a. equal to 6 percent under the rational expectations hypothesis. b. lower than 6 percent under the rational expectations hypothesis. c. equal to 6 percent under the adaptive expectations hypothesis. d. higher than 6 percent under the rational expectations hypothesis. 5. If depositors suddenly move a substantial portion of their money from non-interest earning checking accounts into interestearning savings accounts, how will the money supply measures be affected? a. The size of M1 will become smaller, but M2 will be unchanged. b. The size of M1 will increase, but M2 will decrease. c. Both M1 and M2 will decrease in size. d. The size of M1 will decrease, but M2 could either get larger or get smaller. e. M1 will increase in size, but M2 will be unchanged. 6. I. Activist demand-side fiscal policy affects the disposable income of households, which will influence consumption spending and, in turn, cause the long-run aggregate supply (LRAS) curve to increase and shift to the right. II. Fiscal policy can affect long-run aggregate supply through changes in marginal tax rates, which influence the relative attractiveness of productive activities in comparison with leisure and tax avoidance. a. I is true; II is false. b. I is false; II is true. c. Both I and II are true. d. Both I and II are false. Use the following graph to answer the next question. 7. Which of the following will most likely be favored by a traditional Keynesian economist if the economy is operating at Point a? (More than one answer is correct). a. a tax increase to balance the budget. b. tax cuts or tax rebates with possible budget deficits. c. continuation of the current tax and expenditure policies (dependence on the economy's self-correcting mechanism to restore full employment). d. expansionary fiscal policy. e. increased government spending with possible budget deficits. 8. Mr. Johnson deposits $1,000 of cash (currency) at First Merit Bank. Later that same day, Mrs. McDonald negotiates a loan for $700 at the same bank. In what direction and by what amount has the money supply changed? a. decreased by $700. b. increased by $1,000. c. increased by $300. d. increased by $700. e. increased by $1,700. 9. The U.S. economy weakened during the latter half of 2000 and fell into a recession beginning in March 2001. At the time, the federal budget was running a substantial surplus. The newly elected George Bush administration advocated a tax cut that was enacted in July of 2001. According to the Keynesian view, this tax cut: a. was highly inappropriate because it reduced the size of the budget surplus. b. was highly appropriate because it would stimulate aggregate demand and thereby shorten the recession. c. was not very important because the "demand stimulus effects" would be largely offset by additional borrowing and higher interest rates. d. was not very important because the "demand stimulus effects" would be largely offset by the expectation of higher taxes in the future. 10. Drawing on her account at First National Bank, Joyce writes a check to Janet, who deposits the check in her checking account at Chase Bank. Once the check has cleared, which of the following would have occurred to bank reserves and the M1 money supply? (Two answers are correct) a. Bank reserves at First National would have decreased, and bank reserves at Chase would have increased. b. Total bank reserves would have increased; there would have been no change in M1. c. There would have been no change in total bank reserves; but M1 would have increased. d. There would have been no changes in total bank reserves and no changes in total M1. e. Bank reserves at Chase Bank would have decreased, and bank reserves at First National would have increased. 11. If debit cards become more widely used by consumers and businesses, which of the following is likely to happen? (Two answers are correct.) a. Currency holdings will fall, and the M1 money supply will fall. b. The amount of currency held by the public will most likely decrease. c. More money will be held as currency and more money will be held in bank accounts, which will increase the reserves of banks and decrease M1 unless the Fed takes offsetting actions. d. The money supply will be unaffected because debit card expenditures are considered the equivalent of cash. e. Less money will be held as currency and more money will be held in bank accounts, which will increase the reserves of banks and increase M1 unless the Fed takes offsetting actions. 12. When the Federal Reserve sells government bonds to the public, it directly: a. reduces the reserves of the commercial banking system and increases the money supply. b. increases the reserves of the commercial banking system, while increasing the money supply. c. decreases the reserves of the commercial banking system, while not directly changing the supply of money. d. increases the stock of money without affecting the reserves of the commercial banking system. e. decreases the reserves of the commercial banking system, which decreases the money supply. 13. Suppose the Fed buys $100 million of U.S. government treasury securities to the public. How will this affect the money supply and the national debt? a. The money supply will decrease; the national debt will be unaffected. b. The money supply will increase; the national debt will decrease. c. The money supply will increase; the national debt will be unaffected. d. The money supply will increase; the national debt could either increase or decrease. 14. Assume the reserve requirement is 4 percent. First National Bank has vault cash and deposits with the Fed of $50 million, loans and securities of $270 million, and checking deposits of $320 million. First National Bank is in a position to make: a. no additional loans. b. up to $37.2 million of additional loans. c. up to $270 million of additional loans. d. up to $10.8 million of additional loans. e. up to $50 million of additional loans. 15. Savings and loans finance fixed-rate, long-term, 30-year home mortgages with short-term savings deposits. Is this risky? a. Yes, because an increase in nominal interest rates will push up costs far more than revenues, and decrease profits. b. Yes, because an increase in nominal interest rates will increase interest income far less than interest expense, and decrease profits. c. No; if nominal interest rates rise, income and costs will increase by similar amounts, leaving profits unchanged. d. No; neither income nor costs will be affected by changes in nominal interest rates, and profits would not be affected. e. Both A and B are correct. 16. Large corporations work just as hard to controls its unnecessary cash and demand-deposit balances as it does to keep down unnecessary inventories of goods. This is because: a. holding unnecessary cash and demand deposits leads to an increase in the money supply, a known cause of inflation. b. of the opportunity cost when funds are held in the form of cash and non-interest-earning demand deposits. c. holding unnecessary cash and demand deposits leads to a decrease in the money supply, a known cause of recession. d. cost is incurred in terms of decreased flexibility when funds are held in the form of cash and demand deposits. 17. Most monetarist economists object to the use of discretionary monetary policy as an effective stabilization policy tool because: a. it would require the money supply to grow at a rate equal to the economy's long-run rate of economic growth. b. they do not believe that changes in the money stock affect output or prices. c. they believe that there are lengthy and variable time lags between when a change in monetary policy is instituted and when the change exerts its primary impact on output and prices. d. they believe monetary policy can stimulate aggregate demand, but monetary policy cannot control inflation. 18. When the Federal Reserve unexpectedly decreases the money supply, it will cause a decrease in aggregate demand because: a. real interest rates will rise, slowing business investment and consumer purchases. b. the dollar will appreciate on the foreign exchange market, leading to an decrease in net exports. c. higher nominal interest rates will tend to decrease asset prices (such as the prices of homes), which decreases wealth and thereby decreases current consumption. d. all of the above are true. e. both a and b are true 19. If the goal of policy makers was to consistently use both monetary and fiscal policy to help reduce a high rate of inflation, which of the following policy approaches would be most appropriate? a. a larger budget deficit, the purchase of securities in the open market, and a higher discount rate. b. a government budget surplus, the sale of securities in the open market, and a higher discount rate. c. a larger government budget deficit, the sale of securities in the open market, and a lower discount rate. d. a government budget surplus, the purchase of securities in the open market, and a lower discount rate. 20. Other things constant, according to the supply-side theory of economics, a reduction in marginal tax rates will tend to increase long-run aggregate supply (LRAS) primarily because the lower tax rates will increase: a. disposable income, which will induce an increase in consumption. b. business optimism, which will induce additional investment expenditures and lead to an increase in aggregate supply. c. savings, which will lead to lower interest rates, an increase in consumption, and an increase in aggregate supply. d. the relative attractiveness of productive activity in comparison with leisure and tax avoidance, thereby increasing long-run aggregate supply. e. All of the above are true. 21. If the central bank wants to implement expansionary monetary policy to increase output, the Federal Reserve should (more than one answer is correct): a. sell government bonds, which will decrease the money supply; this will cause interest rates to rise and aggregate demand to fall. b. buy government bonds, which will increase the money supply; this will cause interest rates to fall and aggregate demand to rise. c. increase the discount rate, which will increase the market rate of interest and cause aggregate demand to fall. d. lower the reserve requirement. e. decrease the target federal funds rate, which will lower the market rate of interest and cause aggregate demand to rise. 22. Other things constant, which of the following would cause the M2 money supply to increase? (Two answers are correct.) a. An increase in the quantity of U.S. currency held overseas. b. A shift of funds from the stock market into money market mutual funds because of an increase in concerns about the riskiness of the stock market. c. A shift of funds from non-interest-earning checking accounts to money market mutual funds. d. A decrease in the general public's holdings of currency outside of banks and an increase in checking account deposits held at commercial banks by an equal amount. e. A shift of funds from interest-bearing checking accounts into currency holdings. 23. Equilibrium in the loanable funds market is initially present at a stable inflation rate of 2 percent and a nominal interest rate of 5 percent. If a shift to expansionary monetary policy eventually leads to actual and expected inflation of 4 percent: a. both the nominal and real interest rates will rise by two percent. b. the nominal interest rate will rise to 7 percent, and the real interest rate will increase to 5 percent. c. the nominal interest rate will rise to 7 percent, but the real interest rate won't change. d. the nominal interest rate will rise to 9 percent. 24. Suppose the Federal Reserve moves towards expansionary monetary policy and lowers the discount rate and the target federal funds rate, and as a result decision makers anticipate a higher future rate of inflation. The most likely result is: a. a reduction in both short-term and long-term nominal interest rates. b. lower short-term nominal interest rates but higher long-term nominal interest rates. c. higher short-term nominal interest rates but lower long-term nominal interest rates. d. an increase in both short-term and long-term nominal interest rates. 25. Which of the following is a major area of disagreement between nonactivists and activists? a. Nonactivists believe discretionary macroeconomic policy can be applied in a manner that will lead to greater economic stability than would result from inflexible rules. Activists disagree. b. Activists believe monetary policy is more potent than fiscal policy. Nonactivists disagree. c. Activists believe changes in monetary and fiscal policy exert their effects instantaneously. Nonactivists think they work only with a substantial lag. d. Nonactivists believe stable policies within the framework of policy rules will result in less instability than discretionary policy changes. Activists disagree. e. both a and d are correct. 26. Which of the following is true? a. An unanticipated shift to a more contractionary monetary policy will temporarily decrease output growth and employment. b. Once decision makers come to anticipate the inflationary side effects, expansionary monetary policy will not stimulate output and employment. c. The primary effect of persistent growth of the money supply at a sustained and rapid rate will be inflation. d. All of the above are true. e. Both a and c are true; b is false. Use the following graph to answer the next question. 27. Suppose that the economy is currently operating at SRAS and AD2 (the AD curve on the right). To combat inflation, the Fed institutes restrictive monetary policy. Suppose that by the time the policy impacts the economy, AD has already moved to AD 1 (the AD curve on the left). Which of the following would be true? a. The policy would cause the economy to fall further into a recession than it would have if the Fed had not undertaken the policy. b. The policy will help by preventing the recession from becoming worse. c. The policy would cause the economy to go into an economic boom. d. This is a trick question; the impact of monetary policy is felt immediately by the economy. Use the following graph to answer the next two questions. 28. The intersection of AD1 and SRAS1 indicate the initial conditions in the goods and services market with the current level of output, Y1, being the full employment level. The short- and long-run effects of the Fed unexpectedly shifting to a more contractionary monetary policy will be a. short-run impact, P2 and Y2; long-run impact, P2 and Y2. b. short-run impact, P3 and Y1; long-run impact, P3 and Y1. c. short-run impact, P2 and Y2; long-run impact, P1 and Y1. d. short-run impact, P2 and Y2; long-run impact, P3 and Y1. 29. The intersection of AD2 and SRAS2 indicate the initial conditions in the goods and services market with the current level of output, Y1, being the full employment level. The short- and long-run effects of the Fed shifting to a more expansionary monetary policy when it is fully anticipated will be a. short-run impact at the intersection of AD1 and SRAS2; long-run impact, P1 and Y1. b. short-run impact, P1 and Y1; long-run impact, P1 and Y1. c. short-run impact, P3 and Y1; long-run impact, P1 and Y1. d. short-run impact, P3 and Y1; long-run impact, P3 and Y1. 30. Economic theory suggests that political entrepreneurs will (two answers are correct): a. use expansionary monetary and fiscal policy more often than contractionary monetary and fiscal policy. b. use monetary policy to reduce unemployment and fiscal policy to deal with inflation. c. use monetary and fiscal policies to win elections; good politics may sometimes conflict with sound stabilization policy. d. tend to follow tight monetary and fiscal policies since the political process is biased against inflation. 31. Under conditions of very high inflation but full employment, a new chairperson is appointed to the Federal Reserve. To bring the rate of inflation down, he or she decides to cut the growth rate of the money supply substantially. a. If the policy is announced and is fully anticipated, it will bring the rate of inflation down without affecting real GDP. b. If the policy is unanticipated, the economy will go through a short-run contraction. c. He has followed the wrong policy; the money supply growth should have been increased to lower the inflation rate. d. Both a and b are correct. 32. Which of the following factors substantially reduces the effectiveness of discretionary changes in tax rates or government expenditures as a stabilization tool? a. Since it takes time for fiscal policy to work and since the future is difficult to forecast, it is difficult to time fiscal policy changes correctly. b. Even though computer models have enhanced our forecasting ability, policy makers at the Federal Reserve have been reluctant to utilize information supplied by the models. c. When fiscal policy is altered, the Fed generally shifts monetary policy in a manner that offsets the impact of the fiscal action. d. Changes in government expenditures and taxes are always offset by equal changes in private spending. 33. Under the adaptive expectations hypothesis, which of the following is the effect of a shift to a more expansionary monetary policy? a. In the short run, the real rate of output will be unaffected, but in the long run, it will decrease. b. In the short run, the real rate of output will increase, but in the long run it will be unchanged. c. There will be a permanent decrease in the real rate of output, but the inflation rate will be lower. d. In the short run, the impact on the real rate of output is uncertain but in the long run output will decrease. e. In the short run, the real rate of output will decrease, but in the long run it will be unchanged. 34. Analysis of the Great Depression indicates that (two answers are correct): a. monetary and fiscal policies were highly contractionary during the 1930s. b. even though monetary policy was expansionary, restrictive fiscal policy dominated during the 1930s. c. a reduction in tax rates could not prevent the economic downturn from spiraling into a depression. d. the severity of the economic decline, if not its onset, was the result of perverse monetary and fiscal policies. 35. The Department of the Treasury finances a budget deficit by selling bonds to the public. The money supply will: a. increase because the demand deposits of the Treasury will increase. b. decrease because the demand deposits of the public will decrease. c. decrease because the money in the hands of the Fed will increase. d. remain unchanged as long as the government spends what is borrowed. 36. Starting from an initial long-run equilibrium, under the rational expectations hypothesis, an anticipated shift to a more contractionary monetary policy will: a. increase the rate of inflation but will not change real output in the short run. b. increase real output and the rate of inflation in the short run, but not the long run. c. increase real output and the rate of inflation in both the long run and the short run. d. increase real output and the rate of inflation in the long run but not the short run. e. decrease the rate of inflation, but will not change real output in the short run. 37. Assume that the government switches to a more expansionary monetary policy. Compared to the short-run effects predicted by the rational expectations hypothesis, the adaptive expectations hypothesis predicts: a. a higher price level and lower real output. b. a lower price level and higher real output. c. a lower price level and lower real output. d. no difference in the price level or real output