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Economics 101 Practice Test: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Monetary and fiscal policies can both influence aggregate demand (AD), which is the total demand for goods and services in an economy. Monetary policy affects the money supply, interest rates, and inflation, while fiscal policy affects government spending and tax policy.  Monetary policy can: Stabilize the financial system, Keep credit flowing, Ease financing conditions, Lower interest rates, and Engage in open market operations (OMO) to purchase securities.  Fiscal policy can: Increase spending, Reduce tax, and Protect firms and households through transfers and loan guarantees.  An... Show more
Economics 101 Practice Test: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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25 Questions

1. Suppose that net exports fall. Which of the following policies is most likely to stabilize the economy?
2. Which of the following illustrates how the investment accelerator works?
3. Which of the following correctly explains the crowding-out effect?
4. When the Fed decreases the money supply we expect interest rates
5. According to liquidity preference theory, an increase in the price level causes the interest rate to
6. Critics of using fiscal and monetary policies to solve economic problems believe that
7. According to liquidity preference theory, which of the following shifts the money demand curve to the left?
8. When the interest rate decreases, the opportunity cost of holding money
9. With the interest rate on the vertical axis, an increase in the price level shifts money
10. If the government increases its expenditures the price level
11. Investment tax credits are designed to
12. According to the crowding-out effect, an increase in government purchases causes interest rates to
13. Permanent tax cuts shift the AD curve
14. In early January 2000 the Fed announced that it would cut interest rates one-half percentage point. To do this requires the Fed to
15. According to liquidity preference theory, if there is an excess supply of money, people will deposit
16. Which of the following actions is inconsistent with the Employment Act of 1946?
17. The most important automatic stabilizer is
18. In the short run, a decrease in the money supply causes interest rates to
19. If the stock market crashes, aggregate demand
20. Liquidity preference theory is most relevant to the
21. If the government wanted to stabilize the economy when it was in recession it would
22. Assume the money market is initially in equilibrium. If the price level increases, according to liquidity preference theory there is an excess
23. Of the effects that help explain why the U.S. aggregate demand curve slopes downward the
24. If the interest rate is above the Fed’s target, the Fed should
25. In the last quarter of 1999 German real GDP grew at a very low rate. Some economists attributed the low growth to monetary policy that by itself would have decreased real GDP. If they are correct, we should observe that the German money supply

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