1. Suppose a computer virus disables the nation's automatic teller machines, making withdrawals from bank accounts less convenient. As a result, people want to keep more cash on hand, increasing the demand for money. Assume the Fed does not change the money supply. According to the theory of liquidity preference, the interest rate (falls, rises) , which causes aggregate demand to (fall, rise) . If instead the Fed wants to stabilize aggregate demand, it should (increase, decrease) the money supply by (buying, selling) government bonds. 2. 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.
3. 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.
4. Consider two policies: a tax cut that will last for only one year and a tax cut that is expected to be permanent. The (permenant, temporary) policy will stimulate greater spending by consumers.
The (permenant, temporary) policy will have the greater impact on aggregate demand.
5. In the early 1980s, new legislation allowed banks to pay interest on checking deposits, which they could not do previously.
If we define money to include checking deposits, this legislation (increases, decrease) money demand.
If the Federal Reserve had maintained a constant money supply in the face of this change, this would have (increased, decreased) the interest rate, and (decreased, increased) aggregate demand and aggregate output. To have maintained a constant market interest rate (the interest rate on nonmonetary assets) in the face of this change, the Federal Reserve would have had to ( increase, decrease) the money supply. As a result, aggregate demand and output would have (decreased, remained unaffected, increased).
6.In which of the following circumstances is expansionary fiscal policy more likely to lead to a short-run increase in investment?
A. When the investment accelerator is large
B. When the investment accelerator is small
C. When the interest rate sensitivity is small
D. When the interest rate sensitivity is large