Question: According to liquidity preference theory, an increase in money demand for some reason other than a change in the price level causes

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Question: A reduction in personal income taxes increases aggregate demand through an increase in private savings.

Answer: False

When the government cuts personal income taxes, it increases households’ take-home pay. Households will save some of this additional income, but they will also spend some of it on consumer goods. Because a tax cut increases consumer spending, it shifts the aggregate-demand curve to the right.

Question: Which of the following events would cause the Fed to stabilize output through decreasing the money supply?

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Question: Jason is a critic of stabilization policy. Which of the following statements would he NOT agree with?

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Question: Refer to the Figure. A decrease in government purchases will

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Question: If the Fed conducts open-market purchases, the money supply decreases and aggregate demand shifts right.

Answer: False

If the Fed buys government bonds in open-market operations, it will increase the money supply. This reduces the equilibrium interest rate which raises the quantity of goods and services demanded at a given price level. Therefore, the aggregate-demand curve also shifts to the right.

Question: Which of the following is NOT an automatic stabilizer?

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Question: Which of the following does fiscal policy not primarily affect in the long run?

Answer: Aggregate demand

In the long-run, fiscal policy influences saving, investment, and growth. In the short run, it affects primarily aggregate demand.

Question: Assume the MPC is 0.6. Assume there is a multiplier effect and that the crowding-out effect is $10 billion. An increase in government purchases of $20 billion will shift aggregate demand to the

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Question: According to liquidity preference theory, which of the following is NOT true?

Answer: