Question 1

As the MPC gets close to 1,what does the value of the multiplier approach?

Accepted Answer

A) 0 
B) 1 
C) 10 
D) infinity 
A) 0 
B) 1 
C) 10 
D) infinity

Question 2

Which of the following properly describes the interest-rate effect?

Accepted Answer

A) As the money supply increases, the interest rate falls, so spending rises. 
B) As the money supply increases, the interest rate rises, so spending falls. 
C) As the price level increases, the interest rate falls, so spending rises. 
D) As the price level increases, the interest rate rises, so spending falls. 
A) As the money supply increases, the interest rate falls, so spending rises. 
B) As the money supply increases, the interest rate rises, so spending falls. 
C) As the price level increases, the interest rate falls, so spending rises. 
D) As the price level increases, the interest rate rises, so spending falls.

Question 3

If expected inflation is constant and the nominal interest rate increases,how does the real interest rate change?

Accepted Answer

A) It increases by more than the change in the nominal interest rate. 
B) It increases by the change in the nominal interest rate. 
C) It decreases by the change in the nominal interest rate. 
D) It decreases by more than the change in the nominal interest rate. 
A) It increases by more than the change in the nominal interest rate. 
B) It increases by the change in the nominal interest rate. 
C) It decreases by the change in the nominal interest rate. 
D) It decreases by more than the change in the nominal interest rate.

Question 4

According to liquidity-preference theory,if the price level increases,in which direction does the demand curve shift,and how does the interest rate change?

Accepted Answer

A) The demand curve shifts right, so the interest rate increases. 
B) The demand curve shifts right, so the interest rate decreases. 
C) The demand curve shifts left, so the interest rate decreases. 
D) The demand curve shifts left, so the interest rate increases. 
A) The demand curve shifts right, so the interest rate increases. 
B) The demand curve shifts right, so the interest rate decreases. 
C) The demand curve shifts left, so the interest rate decreases. 
D) The demand curve shifts left, so the interest rate increases.

Question 5

For the most part,fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following correctly explains the crowding-out effect?

Accepted Answer

A) An increase in government expenditures decreases the interest rate and so increases investment spending. 
B) An increase in government expenditures increases the interest rate and so reduces investment spending. 
C) A decrease in government expenditures increases the interest rate and so increases investment spending. 
D) A decrease in government expenditures decreases the interest rate and so reduces investment spending. 
A) An increase in government expenditures decreases the interest rate and so increases investment spending. 
B) An increase in government expenditures increases the interest rate and so reduces investment spending. 
C) A decrease in government expenditures increases the interest rate and so increases investment spending. 
D) A decrease in government expenditures decreases the interest rate and so reduces investment spending.

Question 7

The federal government decides to stimulate the economy and increases government expenditure on new infrastructure projects by $40 billion.The marginal propensity to consume is MPC = 3/4 and the marginal propensity to import is MPI = 1/5.Suppose the crowding-out effect is twice the amount of government spending.
a. In a closed economy, what is the increase in output caused by the stimulus package of $40 billion?
b. What is the increase in output if the economy is open?

Accepted Answer

a.If the economy is closed,output increa

Question 8

How does the multiplier change when the MPC increases,and what is the effect on aggregate demand?

Accepted Answer

A) Higher MPC increases the multiplier so that changes in government expenditures have a larger effect on aggregate demand. 
B) Higher MPC increases the multiplier so that changes in government expenditures have a smaller effect on aggregate demand. 
C) Higher MPC decreases the multiplier so that changes in government expenditures have a larger effect on aggregate demand. 
D) Higher MPC decreases the multiplier so that changes in government expenditures have a smaller effect on aggregate demand. 
A) Higher MPC increases the multiplier so that changes in government expenditures have a larger effect on aggregate demand. 
B) Higher MPC increases the multiplier so that changes in government expenditures have a smaller effect on aggregate demand. 
C) Higher MPC decreases the multiplier so that changes in government expenditures have a larger effect on aggregate demand. 
D) Higher MPC decreases the multiplier so that changes in government expenditures have a smaller effect on aggregate demand.

Question 9

In the long run,which of the following determines the level of output?

Accepted Answer

A) the money supply 
B) the price level 
C) supply-side factors 
D) policies aimed at stabilizing the economy 
A) the money supply 
B) the price level 
C) supply-side factors 
D) policies aimed at stabilizing the economy

Question 10

The most important lag for monetary policy is the time it takes to formulate policy,while the most important lag for fiscal policy is the time it takes for the economy to respond to changes in government spending.

Accepted Answer

A) True 
 B)False

Question 11

When the interest rate decreases,what happens to the opportunity cost of holding money and the quantity of money demanded?

Accepted Answer

A) The opportunity cost of holding money increases, so the quantity of money demanded increases. 
B) The opportunity cost of holding money increases, so the quantity of money demanded decreases. 
C) The opportunity cost of holding money decreases, so the quantity of money demanded increases. 
D) The opportunity cost of holding money decreases, so the quantity of money demanded decreases. 
A) The opportunity cost of holding money increases, so the quantity of money demanded increases. 
B) The opportunity cost of holding money increases, so the quantity of money demanded decreases. 
C) The opportunity cost of holding money decreases, so the quantity of money demanded increases. 
D) The opportunity cost of holding money decreases, so the quantity of money demanded decreases.

Question 12

The liquidity-preference theory assumes that the interest rate adjusts to balance the money demand and supply,where the money supply is arbitrarily determined by the central bank.However,we have previously learned that the central bank controls the money supply precisely by changing the interest rate.How do you reconcile the liquidity-preference theory with using the interest rate as a monetary policy tool?

Accepted Answer

When the Bank of Canada chooses the bank

Question 13

Assuming the crowding-out effect but no multiplier or investment-accelerator effects,what is the effect of a $500 billion increase in government expenditures on the aggregate demand or supply?

Accepted Answer

A) It shifts the aggregate demand right by more than $500 billion. 
B) It shifts the aggregate demand right by less than $500 billion. 
C) It shifts the aggregate supply left by more than $500 billion. 
D) It shifts the aggregate supply left by less than $500 billion. 
A) It shifts the aggregate demand right by more than $500 billion. 
B) It shifts the aggregate demand right by less than $500 billion. 
C) It shifts the aggregate supply left by more than $500 billion. 
D) It shifts the aggregate supply left by less than $500 billion.

Question 14

If there is excess money supply,what will people do and what happens to the interest rate?

Accepted Answer

A) People will deposit more into interest-bearing accounts, and the interest rate will fall. 
B) People will deposit more into interest-bearing accounts, and the interest rate will rise. 
C) People will withdraw money from interest-bearing accounts, and the interest rate will fall. 
D) People will withdraw money from interest-bearing accounts, and the interest rate will rise. 
A) People will deposit more into interest-bearing accounts, and the interest rate will fall. 
B) People will deposit more into interest-bearing accounts, and the interest rate will rise. 
C) People will withdraw money from interest-bearing accounts, and the interest rate will fall. 
D) People will withdraw money from interest-bearing accounts, and the interest rate will rise.

Question 15

If the stock market crashes,what would be the effect on aggregate demand and how could the Bank of Canada offset those effects?

Accepted Answer

A) aggregate demand increases; by increasing the money supply 
B) aggregate demand increases; by decreasing the money supply 
C) aggregate demand decreases; by increasing the money supply 
D) aggregate demand decreases; by decreasing the money supply 
A) aggregate demand increases; by increasing the money supply 
B) aggregate demand increases; by decreasing the money supply 
C) aggregate demand decreases; by increasing the money supply 
D) aggregate demand decreases; by decreasing the money supply

Question 16

During expansions,what do automatic stabilizers make government expenditures and taxes do?

Accepted Answer

A) They make government expenditures and taxes fall. 
B) They make government expenditures and taxes rise. 
C) They make government expenditures rise and taxes fall. 
D) They make government expenditures fall and taxes rise. 
A) They make government expenditures and taxes fall. 
B) They make government expenditures and taxes rise. 
C) They make government expenditures rise and taxes fall. 
D) They make government expenditures fall and taxes rise.

Question 17

Assuming the multiplier effect but no crowding-out or investment-accelerator effects,what is the effect of a $300 billion increase in government expenditures on the aggregate demand?

Accepted Answer

A) It shifts the aggregate demand right by more than $300 billion. 
B) It shifts the aggregate demand right by less than $300 billion. 
C) It shifts the aggregate demand left by more than $300 billion 
D) It shifts the aggregate demand left by less than $300 billion. 
A) It shifts the aggregate demand right by more than $300 billion. 
B) It shifts the aggregate demand right by less than $300 billion. 
C) It shifts the aggregate demand left by more than $300 billion 
D) It shifts the aggregate demand left by less than $300 billion.

Question 18

How does a stock market boom affect household spending,and how would the Bank of Canada offset the effects on the price level and real GDP?

Accepted Answer

A) Household spending increases; the Bank of Canada would increase the money supply. 
B) Household spending increases; the Bank of Canada would decrease the money supply. 
C) Household spending decreases; the Bank of Canada would increase the money supply. 
D) Household spending decreases; the Bank of Canada would decrease the money supply. 
A) Household spending increases; the Bank of Canada would increase the money supply. 
B) Household spending increases; the Bank of Canada would decrease the money supply. 
C) Household spending decreases; the Bank of Canada would increase the money supply. 
D) Household spending decreases; the Bank of Canada would decrease the money supply.

Question 19

What does liquidity refer to?

Accepted Answer

A) the relation between the price and interest rate of an asset 
B) the risk of an asset relative to its selling price 
C) the ease with which an asset is converted into a medium of exchange 
D) the sensitivity of investment spending to changes in the interest rate 
A) the relation between the price and interest rate of an asset 
B) the risk of an asset relative to its selling price 
C) the ease with which an asset is converted into a medium of exchange 
D) the sensitivity of investment spending to changes in the interest rate

Question 20

If the federal government cuts spending to balance the federal budget,how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?

Accepted Answer

A) by increasing the money supply 
B) by decreasing the money supply 
C) by raising taxes 
D) by cutting expenditures 
A) by increasing the money supply 
B) by decreasing the money supply 
C) by raising taxes 
D) by cutting expenditures

As the MPC gets close to 1,what does the value of the multiplier approach?

Which of the following properly describes the interest-rate effect?

If expected inflation is constant and the nominal interest rate increases,how does the real interest rate change?

According to liquidity-preference theory,if the price level increases,in which direction does the demand curve shift,and how does the interest rate change?

For the most part,fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

Which of the following correctly explains the crowding-out effect?

How does the multiplier change when the MPC increases,and what is the effect on aggregate demand?

In the long run,which of the following determines the level of output?

The most important lag for monetary policy is the time it takes to formulate policy,while the most important lag for fiscal policy is the time it takes for the economy to respond to changes in government spending.

When the interest rate decreases,what happens to the opportunity cost of holding money and the quantity of money demanded?

Assuming the crowding-out effect but no multiplier or investment-accelerator effects,what is the effect of a $500 billion increase in government expenditures on the aggregate demand or supply?

If there is excess money supply,what will people do and what happens to the interest rate?

If the stock market crashes,what would be the effect on aggregate demand and how could the Bank of Canada offset those effects?

During expansions,what do automatic stabilizers make government expenditures and taxes do?

Assuming the multiplier effect but no crowding-out or investment-accelerator effects,what is the effect of a $300 billion increase in government expenditures on the aggregate demand?

How does a stock market boom affect household spending,and how would the Bank of Canada offset the effects on the price level and real GDP?

What does liquidity refer to?

If the federal government cuts spending to balance the federal budget,how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains from Trade

The Market Forces of Supply and Demand (PART 1)

The Market Forces of Supply and Demand (PART 2)

Measuring a Nation's Income

Measuring the Cost of Living

Production and Growth

Saving,Investment,and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Tradeoff between Inflation and Unemployment

Five Debates over Macroeconomic Policy

Filters

Exam 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand

As the MPC gets close to 1,what does the value of the multiplier approach?

Which of the following properly describes the interest-rate effect?

If expected inflation is constant and the nominal interest rate increases,how does the real interest rate change?

According to liquidity-preference theory,if the price level increases,in which direction does the demand curve shift,and how does the interest rate change?

For the most part,fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

Which of the following correctly explains the crowding-out effect?

How does the multiplier change when the MPC increases,and what is the effect on aggregate demand?

In the long run,which of the following determines the level of output?

The most important lag for monetary policy is the time it takes to formulate policy,while the most important lag for fiscal policy is the time it takes for the economy to respond to changes in government spending.

When the interest rate decreases,what happens to the opportunity cost of holding money and the quantity of money demanded?

Assuming the crowding-out effect but no multiplier or investment-accelerator effects,what is the effect of a $500 billion increase in government expenditures on the aggregate demand or supply?

If there is excess money supply,what will people do and what happens to the interest rate?

If the stock market crashes,what would be the effect on aggregate demand and how could the Bank of Canada offset those effects?

During expansions,what do automatic stabilizers make government expenditures and taxes do?

Assuming the multiplier effect but no crowding-out or investment-accelerator effects,what is the effect of a $300 billion increase in government expenditures on the aggregate demand?

How does a stock market boom affect household spending,and how would the Bank of Canada offset the effects on the price level and real GDP?

What does liquidity refer to?

If the federal government cuts spending to balance the federal budget,how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains from Trade

The Market Forces of Supply and Demand (PART 1)

The Market Forces of Supply and Demand (PART 2)

Measuring a Nation's Income

Measuring the Cost of Living

Production and Growth

Saving,Investment,and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Tradeoff between Inflation and Unemployment

Five Debates over Macroeconomic Policy

Filters