Question 1

Which theory is the most appropriate to analyze the effects of interest rate changes in the short run?

Accepted Answer

A) the aggregate-demand and aggregate-supply theory 
B) the classical theory 
C) the liquidity-preference theory 
D) the purchasing-power parity theory 
A) the aggregate-demand and aggregate-supply theory 
B) the classical theory 
C) the liquidity-preference theory 
D) the purchasing-power parity theory

Question 2

Which of the following statements do economists NOT agree on?

Accepted Answer

A) Increases in the money supply shift aggregate demand to the right. 
B) In the long run, increases in the money supply increase prices, but not output. 
C) Recessions are associated with decreases in consumption, investment, and employment. 
D) Government should use fiscal policy to try and stabilize the economy. 
A) Increases in the money supply shift aggregate demand to the right. 
B) In the long run, increases in the money supply increase prices, but not output. 
C) Recessions are associated with decreases in consumption, investment, and employment. 
D) Government should use fiscal policy to try and stabilize the economy.

Question 3

Suppose that the government spends more on a missile defence program.What does this do to aggregate demand? How is your answer affected by the presence of the multiplier,crowding-out,and investment-accelerator effects?

Accepted Answer

The increase in expenditures means that

Question 4

What is the effect of a stock market boom,and how could the Bank of Canada offset that effect?

Accepted Answer

A) Aggregate demand increases, which Bank of Canada could offset by increasing the money supply. 
B) Aggregate supply increases, which Bank of Canada could offset by increasing the money supply. 
C) Aggregate demand increases, which Bank of Canada could offset by decreasing the money supply. 
D) Aggregate supply increases, which Bank of Canada could offset by decreasing the money supply. 
A) Aggregate demand increases, which Bank of Canada could offset by increasing the money supply. 
B) Aggregate supply increases, which Bank of Canada could offset by increasing the money supply. 
C) Aggregate demand increases, which Bank of Canada could offset by decreasing the money supply. 
D) Aggregate supply increases, which Bank of Canada could offset by decreasing the money supply.

Question 5

Assume the money market is initially in equilibrium.If the price level decreases,according to liquidity-preference theory,what is in excess and for how long?

Accepted Answer

A) The supply of money is in excess until the interest rate increases. 
B) The supply of money is in excess until the interest rate decreases. 
C) The demand for money is in excess until the interest rate increases. 
D) The demand for money is in excess until the interest rate decreases. 
A) The supply of money is in excess until the interest rate increases. 
B) The supply of money is in excess until the interest rate decreases. 
C) The demand for money is in excess until the interest rate increases. 
D) The demand for money is in excess until the interest rate decreases.

Question 6

How do tax cuts and government expenditure affect aggregate demand?

Accepted Answer

A) Both shift aggregate demand right. 
B) Both shift aggregate demand left. 
C) Tax cuts shift aggregate demand right; government expenditure shifts aggregate demand left. 
D) Tax cuts shift aggregate demand left; government expenditure shifts aggregate demand right. 
A) Both shift aggregate demand right. 
B) Both shift aggregate demand left. 
C) Tax cuts shift aggregate demand right; government expenditure shifts aggregate demand left. 
D) Tax cuts shift aggregate demand left; government expenditure shifts aggregate demand right.

Question 7

If the Bank of Canada allows the exchange rate to vary freely,which of the following effects will an expansionary fiscal policy have?

Accepted Answer

A) It will cause a large and permanent rightward shift of the AD curve. 
B) It will cause a large and permanent leftward shift of the AD curve. 
C) It will have no permanent effect on the position of the AD curve, but it will cause interest rates to permanently increase. 
D) It will have no permanent effect on either the position of the AD curve or the interest rate. 
A) It will cause a large and permanent rightward shift of the AD curve. 
B) It will cause a large and permanent leftward shift of the AD curve. 
C) It will have no permanent effect on the position of the AD curve, but it will cause interest rates to permanently increase. 
D) It will have no permanent effect on either the position of the AD curve or the interest rate.

Question 8

If expected inflation is constant and the nominal interest rate increased 5 percentage points,what would happen to the real interest rate?

Accepted Answer

A) It would increase 5 percentage points. 
B) It would increase, but by fewer than 5 percentage points. 
C) It would decrease, but by fewer than 5 percentage points. 
D) It would decrease by 5 percentage points. 
A) It would increase 5 percentage points. 
B) It would increase, but by fewer than 5 percentage points. 
C) It would decrease, but by fewer than 5 percentage points. 
D) It would decrease by 5 percentage points.

Question 9

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Accepted Answer

A) True 
 B)False

Question 10

What did Keynes argue about aggregate demand?

Accepted Answer

A) Aggregate demand is stable because the economy returns to long-run equilibrium. 
B) Aggregate demand is stable because changes in consumption are mostly offset by changes in investment and vice versa. 
C) Aggregate demand is unstable because waves of pessimism and optimism create fluctuations in aggregate demand. 
D) Aggregate demand is unstable, because seasonal variations create fluctuations in aggregate demand. 
A) Aggregate demand is stable because the economy returns to long-run equilibrium. 
B) Aggregate demand is stable because changes in consumption are mostly offset by changes in investment and vice versa. 
C) Aggregate demand is unstable because waves of pessimism and optimism create fluctuations in aggregate demand. 
D) Aggregate demand is unstable, because seasonal variations create fluctuations in aggregate demand.

Question 11

Assume that the MPC is 0.8.Assume that the total crowding-out effect is $25 billion.How will an increase in government purchases of $9 billion shift the AD curve?

Accepted Answer

A) It will shift the AD curve right by $25 billion. 
B) It will shift the AD curve left by $25 billion. 
C) It will shift the AD curve right by $20 billion. 
D) It will shift the AD curve left by $20 billion 
A) It will shift the AD curve right by $25 billion. 
B) It will shift the AD curve left by $25 billion. 
C) It will shift the AD curve right by $20 billion. 
D) It will shift the AD curve left by $20 billion

Question 12

What is the main reason the aggregate-demand curve slopes downward?

Accepted Answer

A) As the price level increases, interest rates increase, and investment decreases. 
B) As the price level increases, interest rates decrease, and investment increases. 
C) As the price level decreases, interest rates increase, and investment increases. 
D) As the price level decreases, interest rates decrease, and investment decreases. 
A) As the price level increases, interest rates increase, and investment decreases. 
B) As the price level increases, interest rates decrease, and investment increases. 
C) As the price level decreases, interest rates increase, and investment increases. 
D) As the price level decreases, interest rates decrease, and investment decreases.

Question 13

When a central bank sets a target for the interest rate,it commits itself to which of the following?

Accepted Answer

A) revealing its target to the public 
B) adjusting the demand for money in order to make the equilibrium in the money market hit that target 
C) adjusting the money supply in order to meet the interest-rate target 
D) having to make open-market sales 
A) revealing its target to the public 
B) adjusting the demand for money in order to make the equilibrium in the money market hit that target 
C) adjusting the money supply in order to meet the interest-rate target 
D) having to make open-market sales

Question 14

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve to the right away from long-run equilibrium?

Accepted Answer

A) decreasing taxes 
B) decreasing the interest rate 
C) increasing the money supply 
D) increasing taxes 
A) decreasing taxes 
B) decreasing the interest rate 
C) increasing the money supply 
D) increasing taxes

Question 15

Stock prices often rise when the Bank of Canada raises interest rates.

Accepted Answer

A) True 
 B)False

Question 16

What is the difference between the effects of fiscal policy and the effects of monetary policy?

Accepted Answer

A) Monetary policy can affect long-term growth while fiscal policy cannot. 
B) Fiscal policy can affect the short-term price level while monetary policy cannot. 
C) Fiscal policy can affect long-term growth while monetary policy cannot. 
D) Monetary policy can affect the short-term level of output while fiscal policy cannot. 
A) Monetary policy can affect long-term growth while fiscal policy cannot. 
B) Fiscal policy can affect the short-term price level while monetary policy cannot. 
C) Fiscal policy can affect long-term growth while monetary policy cannot. 
D) Monetary policy can affect the short-term level of output while fiscal policy cannot.

Question 17

Suppose the closed economy is in long-run equilibrium.Advances in technology shift the long-run aggregate-supply curve $75 billion to the right.Optimistic investors have shifted the aggregate-demand curve $150 billion to the right.In order to stabilize the price level at its original value,the government wants to reduce its spending.If the crowding-out effect is always half of the multiplier effect,and if the MPC equals 0.8,by how much must the government cut its spending?

Accepted Answer

A) $4 billion 
B) $30 billion 
C) $75 billion 
D) $150 billion 
A) $4 billion 
B) $30 billion 
C) $75 billion 
D) $150 billion

Question 18

What is the variable that balances the money demand and supply in the liquidity-preference and the classical theories?

Accepted Answer

A) the interest rate in both theories 
B) the price level in both theories 
C) the interest rate in the liquidity-preference theory and the price level in the classical theory 
D) the price level in the liquidity-preference theory and the interest rate in the classical theory 
A) the interest rate in both theories 
B) the price level in both theories 
C) the interest rate in the liquidity-preference theory and the price level in the classical theory 
D) the price level in the liquidity-preference theory and the interest rate in the classical theory

Question 19

According to liquidity-preference theory,if the quantity of money demanded is greater than the quantity supplied,what will happen to the interest rate and the quantity of money demanded?

Accepted Answer

A) The interest rate will increase, and the quantity of money demanded will decrease. 
B) The interest rate will increase, and the quantity of money demanded will increase. 
C) The interest rate will decrease, and the quantity of money demanded will decrease. 
D) The interest rate will decrease, and the quantity of money demanded will increase. 
A) The interest rate will increase, and the quantity of money demanded will decrease. 
B) The interest rate will increase, and the quantity of money demanded will increase. 
C) The interest rate will decrease, and the quantity of money demanded will decrease. 
D) The interest rate will decrease, and the quantity of money demanded will increase.

Question 20

According to the theory of liquidity preference,what does a decrease in the price level cause the interest rate and investment to do?

Accepted Answer

A) It causes both the interest rate and investment to rise. 
B) It causes both the interest rate and investment to fall. 
C) It causes the interest rate to rise and investment to fall. 
D) It causes the interest rate to fall and investment to rise. 
A) It causes both the interest rate and investment to rise. 
B) It causes both the interest rate and investment to fall. 
C) It causes the interest rate to rise and investment to fall. 
D) It causes the interest rate to fall and investment to rise.

Which theory is the most appropriate to analyze the effects of interest rate changes in the short run?

Which of the following statements do economists NOT agree on?

Suppose that the government spends more on a missile defence program.What does this do to aggregate demand? How is your answer affected by the presence of the multiplier,crowding-out,and investment-accelerator effects?

What is the effect of a stock market boom,and how could the Bank of Canada offset that effect?

Assume the money market is initially in equilibrium.If the price level decreases,according to liquidity-preference theory,what is in excess and for how long?

How do tax cuts and government expenditure affect aggregate demand?

If the Bank of Canada allows the exchange rate to vary freely,which of the following effects will an expansionary fiscal policy have?

If expected inflation is constant and the nominal interest rate increased 5 percentage points,what would happen to the real interest rate?

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

What did Keynes argue about aggregate demand?

Assume that the MPC is 0.8.Assume that the total crowding-out effect is $25 billion.How will an increase in government purchases of $9 billion shift the AD curve?

What is the main reason the aggregate-demand curve slopes downward?

When a central bank sets a target for the interest rate,it commits itself to which of the following?

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve to the right away from long-run equilibrium?

Stock prices often rise when the Bank of Canada raises interest rates.

What is the difference between the effects of fiscal policy and the effects of monetary policy?

What is the variable that balances the money demand and supply in the liquidity-preference and the classical theories?

According to liquidity-preference theory,if the quantity of money demanded is greater than the quantity supplied,what will happen to the interest rate and the quantity of money demanded?

According to the theory of liquidity preference,what does a decrease in the price level cause the interest rate and investment to do?

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

Which theory is the most appropriate to analyze the effects of interest rate changes in the short run?

Which of the following statements do economists NOT agree on?

Suppose that the government spends more on a missile defence program.What does this do to aggregate demand? How is your answer affected by the presence of the multiplier,crowding-out,and investment-accelerator effects?

What is the effect of a stock market boom,and how could the Bank of Canada offset that effect?

Assume the money market is initially in equilibrium.If the price level decreases,according to liquidity-preference theory,what is in excess and for how long?

How do tax cuts and government expenditure affect aggregate demand?

If the Bank of Canada allows the exchange rate to vary freely,which of the following effects will an expansionary fiscal policy have?

If expected inflation is constant and the nominal interest rate increased 5 percentage points,what would happen to the real interest rate?

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

What did Keynes argue about aggregate demand?

Assume that the MPC is 0.8.Assume that the total crowding-out effect is $25 billion.How will an increase in government purchases of $9 billion shift the AD curve?

What is the main reason the aggregate-demand curve slopes downward?

When a central bank sets a target for the interest rate,it commits itself to which of the following?

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve to the right away from long-run equilibrium?

Stock prices often rise when the Bank of Canada raises interest rates.

What is the difference between the effects of fiscal policy and the effects of monetary policy?

What is the variable that balances the money demand and supply in the liquidity-preference and the classical theories?

According to liquidity-preference theory,if the quantity of money demanded is greater than the quantity supplied,what will happen to the interest rate and the quantity of money demanded?

According to the theory of liquidity preference,what does a decrease in the price level cause the interest rate and investment to do?

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