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

Suppose that there are no crowding-out effects and the MPC is 0.8. By how much must the government increase expenditures to shift the aggregate-demand curve right by $10 billion?

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

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

In this question, we try to find out whether using the bank rate as a monetary policy tool is consistent with the liquidity-preference theory. Theoretically, when the Bank of Canada changes the bank rate and implicitly the money supply, the market interest rate would change to become equal to the bank rate AND to equate the new money supply with the money demand. But is this double role of the market interest rate possible? Let us give an example and see what happens. Assume the money demand curve is MD=150 - 15r, and the money supply curve is MS = 100 - 10R, where r is the market interest rate and R is the bank rate announced by the Bank of Canada. a) Show that, for a given value of bank rate R, the equilibrium market rate is different from R. What does this example show? b) Given the money demand equation MD=150 - 15r, find a money supply equation such that, for any value of R, the equilibrium market interest rate r is equal to R. c) For the money supply equation MS = 100 - 10R and a given bank rate R, show how the market could balance at the market interest rate r = R (show what the Bank of Canada should do to balance the money market). d) What have we learned from this exercise?

If the MPC = 0.8, what is the government purchases multiplier?

Figure 15-2 -Refer to the Figure 15-2. Which of the following can happen in a closed economy?

Which of the following shifts money demand to the right?

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

What is the most important automatic stabilizer?

According to most economists, what does fiscal policy affect?

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

Which reason for the downward slope of the aggregate demand curve would likely be more important for a small closed economy?

In a small open economy with perfect capital mobility, if exchange rates are fixed, how could aggregate demand be increased?

Assuming no crowding-out, investment-accelerator, or multiplier effects, how will a $100 billion increase in government expenditures shift aggregate demand?

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?

Which of the following best defines the marginal propensity to consume (MPC)?

Which statement is consistent with the supply-side theories?

In principle, the government could increase the money supply or government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

If the MPC is 0, what is the multiplier?

What is characteristic of aggregate demand in Canada?