SOLVED

26.2Â Â Monetary Policy, Fiscal Policy, and Crowding Out 1) Which of the following is a key assumption leading to the Monetarist view that government deficits crowd out private investment? A) Money demand is sensitive to the interest rate. B) The aggregate supply curve is horizontal. C) Technology is fixed. D) Investment is sensitive to the interest rate. 2) Partial crowding out implies that a government deficit financed by selling bonds to the non-bank public will A) have no effect on aggregate demand. B) reduce aggregate demand. C) increase aggregate demand. D) reduce aggregate demand in the short run but cause demand to increase in the long run. 3) Complete crowding out implies that a government deficit financed by selling bonds to the nonblank public will A) have no effect on aggregate demand. B) reduce aggregate demand. C) increase aggregate demand. D) reduce aggregate demand in the short run but cause demand to increase in the long run. 4) The essence of the monetarists view on crowding out is that higher government spending which is not financed by new money creation simply A) reduces private spending by an equal amount. B) decreases the demand for money. C) increases investment. D) increases aggregate demand in the in the long run. 5) Monetarists argue that government deficits financed by monetary expansion cause(s) A) velocity to increase. B) aggregate demand to increase. C) aggregate demand to decrease. D) no change in aggregate demand or aggregate supply. 6) The “wealth effect” of lower interest rates is that bond prices are __________ so people respond to this by __________ consumption and thus __________ aggregate demand. A) increased; increasing; increasing B) increased; increasing; decreasing C) lowered; increasing; increasing D) lowered; increasing; decreasing 7) “Crowding out” occurs as an expansionary fiscal policy __________ interest rates, thus __________ investment spending. A) raises; increasing B) raises; decreasing C) lowers; increasing D) lowers; decreasing 8) What method of financing government spending leads to the least crowding-out? A) Money creation B) Taxation C) Selling bonds to the public D) Selling government assets, like national parks