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

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 crowding-out effect, how do the interest rate and investment spending change when government spending increases?

Suppose the closed economy is in long-run equilibrium. Technological change shifts the long-run aggregate-supply curve $80 billion to the right. At the same time, government purchases increase by $40 billion. If the MPC equals 0.75 and the crowding-out effect is $70 billion, what would we expect to happen in the long-run to real GDP and the price level?

In the short run, a decrease in the money supply causes interest rates and aggregate demand to do what?

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

If the Bank of Canada conducts open-market purchases, how do the money supply and the aggregate demand change?

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

Which statement is consistent with the short-run economic theories studied?

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

Assume that the MPC is 0.8. Assume that there is a multiplier effect and that the total crowding-out effect is $8 billion. How will an increase in government purchases of $10 billion shift aggregate demand?

In the long run, what determines the level of output?

What do supply-side economists believe a reduction in the tax rate will cause?

Which statement describes the interest-rate effect?

According to which theory do changes in the interest rate bring the money market into equilibrium?

In a small open economy with a flexible exchange rate, what does a monetary injection by the Bank of Canada cause?

Which statement do opponents of active stabilization policy believe?

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.

In a small open economy with a flexible exchange rate, what does a monetary injection cause?

The multiplier is equal to MPC/(1 - MPC).

In liquidity-preference theory, an increase in the interest rate decreases the quantity of money demanded, but does not shift the money-demand curve.