Chapter 34 Problem Set #1

Fiscal policy affects the economy

• only in the short run.

• only in the long run.

• in both the short and long run.

• in neither the short nor long run.

Which of the following is not a reason the aggregate demand curve slopes downward? As the price level increases

• firms may believe the relative price of their output has risen.

• real wealth declines.

• the interest rate increases.

• the exchange rate increases.

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

• the wealth effect

• the interest-rate effect

• the exchange-rate effect

• the real-wage effect

Which of the following is likely more important for explaining the slope of the aggregate demand curve of a small economy than it is for the United States?

• the wealth effect

• the interest-rate effect

• the exchange-rate effect

• the real-wage effect

Which of the following is not a response that would result from a decrease in the price level and so help to explain the slope of the aggregate demand curve?

• When interest rates fall, Sleepwell Hotels decides to build some new hotels.

• The exchange rate falls, so French restaurants in Paris buy more Iowa pork.

• Janet feels wealthier because of the price drop and so she decides to remodel her bathroom.

• With prices down and wages fixed by contract, Millio’s Frozen Pizzas decides to lay off workers.

Liquidity preference refers directly to Keynes' theory concerning

• the effects of changes in money demand and supply on interest rates.

• the effects of changes in money demand and supply on exchange rates.

• the effects of wealth on expenditures.

• the difference between temporary and permanent changes in income.

Liquidity preference theory is most relevant to the

• short run and supposes that the price level adjusts to bring money supply and money demand into balance.

• short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

• long run and supposes that the price level adjusts to bring money supply and money demand into balance.

• long run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

If expected inflation is constant, then when the nominal interest rate increases, the real interest rate

• increases by more than the change in the nominal interest rate.

• increases by the change in the nominal interest rate.

• decreases by the change in the nominal interest rate.

• decreases by more than the change in the nominal interest rate.

If expected inflation is constant and the nominal interest rate increased 3 percentage points, the real interest rate would

• increase 3 percentage points.

• increase, but by less than 3 percentage points.

• decrease, but by less than 3 percentage points.

• decrease by 3 percentage points.

According to liquidity preference theory, the money supply curve would shift if the Fed

• engaged in open-market transactions.

• changed the discount rate.

• changed the reserve requirement.

• did any of the above.