Question 1

Which 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 2

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 3

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 4

If households view a tax cut as being temporary, how does the tax cut affect aggregate demand?

Accepted Answer

A)  It has no effect on aggregate demand. 
B)  It has a stronger effect on aggregate demand than if households view the cut as permanent. 
C)  It has the same effect on aggregate demand than if households view the cut as permanent. 
D)  It has a weaker effect on aggregate demand than if households view the cut as permanent. 
A)  It has no effect on aggregate demand. 
B)  It has a stronger effect on aggregate demand than if households view the cut as permanent. 
C)  It has the same effect on aggregate demand than if households view the cut as permanent. 
D)  It has a weaker effect on aggregate demand than if households view the cut as permanent.

Question 5

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.

Question 6

If there are automatic stabilizers but no deliberate action by policymakers, how would government expenditures and taxes change as output falls?

Accepted Answer

A)  Both government expenditures and taxes fall. 
B)  Both government expenditures and taxes rise. 
C)  Government expenditures rise and taxes fall. 
D)  Government expenditures fall and taxes rise. 
A)  Both government expenditures and taxes fall. 
B)  Both government expenditures and taxes rise. 
C)  Government expenditures rise and taxes fall. 
D)  Government expenditures fall and taxes rise.

Question 7

Which of the following shifts aggregate demand to the left?

Accepted Answer

A)  an increase in the price level 
B)  an increase in the money supply 
C)  a decrease in the price level 
D)  a decrease in the money supply 
A)  an increase in the price level 
B)  an increase in the money supply 
C)  a decrease in the price level 
D)  a decrease in the money supply

Question 8

What is the difference between monetary policy and fiscal policy?

Accepted Answer

The Bank of Canada conducts monetary pol

Question 9

Compare the classical model of money market with the liquidity preference model.
a. Are they consistent with each other?
b. Draw the classical money-demand curve in a Price-Quantity-of-money diagram.
c. How does your money-demand curve shift when income, Y, increases?
d. Use your classical money-demand diagram to derive an aggregate-demand curve.

Accepted Answer

a. Both models use a money-demand and a

Question 10

When the Bank of Canada decreases the money supply, what do we expect to happen to interest rates and stock prices?

Accepted Answer

A)  Interest rates and stock prices both rise. 
B)  Interest rates and stock prices both fall. 
C)  Interest rates rise and stock prices fall. 
D)  Interest rates fall and stock prices rise. 
A)  Interest rates and stock prices both rise. 
B)  Interest rates and stock prices both fall. 
C)  Interest rates rise and stock prices fall. 
D)  Interest rates fall and stock prices rise.

Question 11

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 12

Assume the money market is initially in equilibrium. If the price level increases, 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 13

Which of Keynes's theories does liquidity preference refer to?

Accepted Answer

A)  the effects of changes in money demand and supply on interest rates 
B)  the effects of changes in money demand and supply on exchange rates 
C)  the effects of changes in money demand and supply on expenditure 
D)  the effects of changes in money demand and supply on real wealth 
A)  the effects of changes in money demand and supply on interest rates 
B)  the effects of changes in money demand and supply on exchange rates 
C)  the effects of changes in money demand and supply on expenditure 
D)  the effects of changes in money demand and supply on real wealth

Question 14

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

Question 15

Which statement best describes the interest-rate effect?

Accepted Answer

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

Question 16

What are the effects of a change in taxes on consumption and aggregate demand?

Accepted Answer

A)  If taxes increase, consumption increases and aggregate demand shifts right. 
B)  If taxes increase, consumption decreases and aggregate demand shifts left. 
C)  If taxes decrease, consumption increases and aggregate demand shifts left. 
D)  If taxes decrease, consumption decreases and aggregate demand shifts right. 
A)  If taxes increase, consumption increases and aggregate demand shifts right. 
B)  If taxes increase, consumption decreases and aggregate demand shifts left. 
C)  If taxes decrease, consumption increases and aggregate demand shifts left. 
D)  If taxes decrease, consumption decreases and aggregate demand shifts right.

Question 17

When the Bank of Canada increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand so the aggregate-demand curve shifts to the right.

Accepted Answer

A) True 
 B)False

Question 18

If the Bank of Canada maintains a fixed exchange rate, which effect will an expansionary fiscal policy have?

Accepted Answer

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

Question 19

How do the multiplier effect and the crowding-out effect change the consequences of an increase in government spending?

Accepted Answer

A)  They both amplify the consequences. 
B)  They both diminish the consequences. 
C)  The multiplier effect diminishes the consequences, while the crowding-out effect amplifies the consequences. 
D)  The multiplier effect amplifies the consequences, while the crowding-out effect diminishes the consequences. 
A)  They both amplify the consequences. 
B)  They both diminish the consequences. 
C)  The multiplier effect diminishes the consequences, while the crowding-out effect amplifies the consequences. 
D)  The multiplier effect amplifies the consequences, while the crowding-out effect diminishes the consequences.

Question 20

According to the crowding-out effect, how does a decrease in government spending affect the interest rate and investment spending?

Accepted Answer

A)  It increases the interest rate and so increases investment spending. 
B)  It increases the interest rate and so decreases investment spending. 
C)  It decreases the interest rate and so increases investment spending. 
D)  It decreases the interest rate and so decreases investment spending. 
A)  It increases the interest rate and so increases investment spending. 
B)  It increases the interest rate and so decreases investment spending. 
C)  It decreases the interest rate and so increases investment spending. 
D)  It decreases the interest rate and so decreases investment spending.

Which statements do economists NOT agree on?

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

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

If households view a tax cut as being temporary, how does the tax cut affect aggregate demand?

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

If there are automatic stabilizers but no deliberate action by policymakers, how would government expenditures and taxes change as output falls?

Which of the following shifts aggregate demand to the left?

What is the difference between monetary policy and fiscal policy?

When the Bank of Canada decreases the money supply, what do we expect to happen to interest rates and stock prices?

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

Which of Keynes's theories does liquidity preference 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?

Which statement best describes the interest-rate effect?

What are the effects of a change in taxes on consumption and aggregate demand?

When the Bank of Canada increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand so the aggregate-demand curve shifts to the right.

If the Bank of Canada maintains a fixed exchange rate, which effect will an expansionary fiscal policy have?

How do the multiplier effect and the crowding-out effect change the consequences of an increase in government spending?

According to the crowding-out effect, how does a decrease in government spending affect the interest rate and investment spending?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations 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

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

Which statements do economists NOT agree on?

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

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

If households view a tax cut as being temporary, how does the tax cut affect aggregate demand?

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

If there are automatic stabilizers but no deliberate action by policymakers, how would government expenditures and taxes change as output falls?

Which of the following shifts aggregate demand to the left?

What is the difference between monetary policy and fiscal policy?

When the Bank of Canada decreases the money supply, what do we expect to happen to interest rates and stock prices?

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

Which of Keynes's theories does liquidity preference 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?

Which statement best describes the interest-rate effect?

What are the effects of a change in taxes on consumption and aggregate demand?

When the Bank of Canada increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand so the aggregate-demand curve shifts to the right.

If the Bank of Canada maintains a fixed exchange rate, which effect will an expansionary fiscal policy have?

How do the multiplier effect and the crowding-out effect change the consequences of an increase in government spending?

According to the crowding-out effect, how does a decrease in government spending affect the interest rate and investment spending?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations 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