Question 1

In the short run, what effect does an increase in the money supply have on interest rates and aggregate demand?

Accepted Answer

A)  It causes interest rates to increase and aggregate demand to shift right. 
B)  It causes interest rates to increase and aggregate demand to shift left. 
C)  It causes interest rates to decrease and aggregate demand to shift right. 
D)  It causes interest rates to decrease and aggregate demand to shift left. 
A)  It causes interest rates to increase and aggregate demand to shift right. 
B)  It causes interest rates to increase and aggregate demand to shift left. 
C)  It causes interest rates to decrease and aggregate demand to shift right. 
D)  It causes interest rates to decrease and aggregate demand to shift left.

Question 2

What do supply-side economists focus more on than other economists?

Accepted Answer

A)  how fiscal policy affects consumption 
B)  the multiplier effect of fiscal policy 
C)  how fiscal policy affects aggregate supply 
D)  the accelerator and exchange-rate effects 
A)  how fiscal policy affects consumption 
B)  the multiplier effect of fiscal policy 
C)  how fiscal policy affects aggregate supply 
D)  the accelerator and exchange-rate effects

Question 3

In a small open economy with perfect capital mobility, if the exchange rate is flexible, what would be the effect of an expansionary monetary policy?

Accepted Answer

A)  It would cause the domestic interest rate to increase permanently. 
B)  It would cause the domestic interest rate to decrease permanently. 
C)  It would cause the domestic interest rate to increase temporarily. 
D)  It would cause the domestic interest rate to decrease temporarily. 
A)  It would cause the domestic interest rate to increase permanently. 
B)  It would cause the domestic interest rate to decrease permanently. 
C)  It would cause the domestic interest rate to increase temporarily. 
D)  It would cause the domestic interest rate to decrease temporarily.

Question 4

How does an automatic stabilizer interfere with fiscal policy? Discuss possible positive and negative effects.

Accepted Answer

Automatic stabilizers are countercyclica

Question 5

If at some interest rate the quantity of money demanded is greater than the quantity of money supplied, what will people desire to do and what will happen to the interest rate?

Accepted Answer

A)  People will sell interest-bearing assets, causing the interest rate to decrease. 
B)  People will sell interest-bearing assets, causing the interest rate to increase. 
C)  People will buy interest-bearing assets, causing the interest rate to decrease. 
D)  People will buy interest-bearing assets, causing the interest rate to increase. 
A)  People will sell interest-bearing assets, causing the interest rate to decrease. 
B)  People will sell interest-bearing assets, causing the interest rate to increase. 
C)  People will buy interest-bearing assets, causing the interest rate to decrease. 
D)  People will buy interest-bearing assets, causing the interest rate to increase.

Question 6

Assume that the MPC is 0.8. Assuming that only the multiplier effect matters, how will a decrease in government purchases of $150 billion shift the aggregate demand curve?

Accepted Answer

A)  It will shift the aggregate demand curve left by $120 billion. 
B)  It will shift the aggregate demand curve left by $150 billion. 
C)  It will shift the aggregate demand curve right by $150 billion. 
D)  It will shift the aggregate demand curve left by $750 billion. 
A)  It will shift the aggregate demand curve left by $120 billion. 
B)  It will shift the aggregate demand curve left by $150 billion. 
C)  It will shift the aggregate demand curve right by $150 billion. 
D)  It will shift the aggregate demand curve left by $750 billion.

Question 7

Which statement is NOT a reason the aggregate-demand curve slopes downward?

Accepted Answer

A)  As the price level increases, real wages decline. 
B)  As the price level increases, real wealth declines. 
C)  As the price level increases, the interest rate increases. 
D)  As the price level increases, the exchange rate increases. 
A)  As the price level increases, real wages decline. 
B)  As the price level increases, real wealth declines. 
C)  As the price level increases, the interest rate increases. 
D)  As the price level increases, the exchange rate increases.

Question 8

According to liquidity-preference theory, what action taken by the Bank of Canada would shift the money-supply curve?

Accepted Answer

A)  if the Bank of Canada engaged in arbitrage 
B)  if the Bank of Canada changed the inflation rate 
C)  if the Bank of Canada changed the exchange rate 
D)  if the Bank of Canada engaged in open-market transactions 
A)  if the Bank of Canada engaged in arbitrage 
B)  if the Bank of Canada changed the inflation rate 
C)  if the Bank of Canada changed the exchange rate 
D)  if the Bank of Canada engaged in open-market transactions

Question 9

Which of the following is NOT an automatic stabilizer?

Accepted Answer

A)  the minimum wage 
B)  the employment insurance benefits 
C)  the federal income tax 
D)  the welfare system 
A)  the minimum wage 
B)  the employment insurance benefits 
C)  the federal income tax 
D)  the welfare system

Question 10

Assuming the multiplier effect but no crowding-out or investment-accelerator effects, what is the effect of a $400 billion increase in government expenditures on the aggregate demand?

Accepted Answer

A)  It shifts the aggregate demand right by more than $400 billion. 
B)  It shifts the aggregate demand right by less than $400 billion. 
C)  It shifts the aggregate demand left by more than $400 billion 
D)  It shifts the aggregate demand left by less than $400 billion. 
A)  It shifts the aggregate demand right by more than $400 billion. 
B)  It shifts the aggregate demand right by less than $400 billion. 
C)  It shifts the aggregate demand left by more than $400 billion 
D)  It shifts the aggregate demand left by less than $400 billion.

Question 11

How does a monetary injection by the Bank of Canada affect interest rates and aggregate demand?

Accepted Answer

A)  It increases interest rates and increases aggregate demand. 
B)  It increases interest rates and decreases aggregate demand. 
C)  It decreases interest rates and decreases aggregate demand. 
D)  It decreases interest rates and increases aggregate demand. 
A)  It increases interest rates and increases aggregate demand. 
B)  It increases interest rates and decreases aggregate demand. 
C)  It decreases interest rates and decreases aggregate demand. 
D)  It decreases interest rates and increases aggregate demand.

Question 12

Suppose the closed economy is in long-run equilibrium. Immigration of skilled workers shifts the long-run aggregate supply curve $60 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 $160 billion, what would we expect to happen in the long-run to real GDP and the price level?

Accepted Answer

A)  Both real GDP and the price level would be higher. 
B)  Both real GDP and the price level would be lower. 
C)  Real GDP would be higher, but the price level would be lower. 
D)  Real GDP would be higher, but the price level would be the same. 
A)  Both real GDP and the price level would be higher. 
B)  Both real GDP and the price level would be lower. 
C)  Real GDP would be higher, but the price level would be lower. 
D)  Real GDP would be higher, but the price level would be the same.

Question 13

If the Bank of Canada chooses to prevent any change in the exchange rate when government spending increases, what is most likely to happen?

Accepted Answer

A)  crowding-out effects 
B)  no crowding-out effects 
C)  no increase in the demand for goods and services 
D)  a decrease in aggregate demand 
A)  crowding-out effects 
B)  no crowding-out effects 
C)  no increase in the demand for goods and services 
D)  a decrease in aggregate demand

Question 14

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 15

Figure 15-2
  
-Refer to the Figure 15-2. If the closed economy is at point b, the best policy to restore full employment is which of the following?

Accepted Answer

A)  increasing the money supply 
B)  decreasing government purchases 
C)  increasing taxes 
D)  selling Canadian dollars 
A)  increasing the money supply 
B)  decreasing government purchases 
C)  increasing taxes 
D)  selling Canadian dollars

Question 16

How does a reduction in the money supply by the Bank of Canada make owning stocks less attractive?

Accepted Answer

The reduction in the money supply raises

Question 17

This question considers how an economy changes over time and how the aggregate demand and supply model treats the time dimension of an economy.
a) How do the aggregate-demand and aggregate-supply curves shift over time?
b) Related to point a, identify and discuss the limitations to the simple, "static" aggregate-demand and aggregate-supply model. What are the consequences of predicting phenomena that have a time dimension (remember the 'short-run' and 'long-run' distinction) using an essentially static model?
c) How could the static model be changed to better incorporate the time dimension of the economic variables it tries to explain?

Accepted Answer

a)In the long run, an economy's output g

Question 18

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 and the government should actively stimulate aggregate demand when production is at less than its full employment level. 
D)  Aggregate demand is unstable and economies should be left to deal with short-run fluctuations on their own. 
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 and the government should actively stimulate aggregate demand when production is at less than its full employment level. 
D)  Aggregate demand is unstable and economies should be left to deal with short-run fluctuations on their own.

Question 19

Which of the following defines the government purchases multiplier?

Accepted Answer

A)  1/MPC+ MPI 
B)  1/(1 - MP
C)  
C)  MPC/(1 - MP
C)  
D)  (1 - MP
C) /MPC 
A)  1/MPC+ MPI 
B)  1/(1 - MP
C)  
C)  MPC/(1 - MP
C)  
D)  (1 - MP
C) /MPC

Question 20

Figure 15-1
  
-Refer to the Figure 15-1. At which interest rate is there an excess money demand?

Accepted Answer

A)  2 percent 
B)  3 percent 
C)  4 percent 
D)  5 percent 
A)  2 percent 
B)  3 percent 
C)  4 percent 
D)  5 percent

In the short run, what effect does an increase in the money supply have on interest rates and aggregate demand?

What do supply-side economists focus more on than other economists?

In a small open economy with perfect capital mobility, if the exchange rate is flexible, what would be the effect of an expansionary monetary policy?

How does an automatic stabilizer interfere with fiscal policy? Discuss possible positive and negative effects.

If at some interest rate the quantity of money demanded is greater than the quantity of money supplied, what will people desire to do and what will happen to the interest rate?

Assume that the MPC is 0.8. Assuming that only the multiplier effect matters, how will a decrease in government purchases of $150 billion shift the aggregate demand curve?

Which statement is NOT a reason the aggregate-demand curve slopes downward?

According to liquidity-preference theory, what action taken by the Bank of Canada would shift the money-supply curve?

Which of the following is NOT an automatic stabilizer?

Assuming the multiplier effect but no crowding-out or investment-accelerator effects, what is the effect of a $400 billion increase in government expenditures on the aggregate demand?

How does a monetary injection by the Bank of Canada affect interest rates and aggregate demand?

If the Bank of Canada chooses to prevent any change in the exchange rate when government spending increases, what is most likely to happen?

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.

Figure 15-2 -Refer to the Figure 15-2. If the closed economy is at point b, the best policy to restore full employment is which of the following?

How does a reduction in the money supply by the Bank of Canada make owning stocks less attractive?

What did Keynes argue about aggregate demand?

Which of the following defines the government purchases multiplier?

Figure 15-1 -Refer to the Figure 15-1. At which interest rate is there an excess money demand?

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

In the short run, what effect does an increase in the money supply have on interest rates and aggregate demand?

What do supply-side economists focus more on than other economists?

In a small open economy with perfect capital mobility, if the exchange rate is flexible, what would be the effect of an expansionary monetary policy?

How does an automatic stabilizer interfere with fiscal policy? Discuss possible positive and negative effects.

If at some interest rate the quantity of money demanded is greater than the quantity of money supplied, what will people desire to do and what will happen to the interest rate?

Assume that the MPC is 0.8. Assuming that only the multiplier effect matters, how will a decrease in government purchases of $150 billion shift the aggregate demand curve?

Which statement is NOT a reason the aggregate-demand curve slopes downward?

According to liquidity-preference theory, what action taken by the Bank of Canada would shift the money-supply curve?

Which of the following is NOT an automatic stabilizer?

Assuming the multiplier effect but no crowding-out or investment-accelerator effects, what is the effect of a $400 billion increase in government expenditures on the aggregate demand?

How does a monetary injection by the Bank of Canada affect interest rates and aggregate demand?

If the Bank of Canada chooses to prevent any change in the exchange rate when government spending increases, what is most likely to happen?

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.

Figure 15-2 -Refer to the Figure 15-2. If the closed economy is at point b, the best policy to restore full employment is which of the following?

How does a reduction in the money supply by the Bank of Canada make owning stocks less attractive?

What did Keynes argue about aggregate demand?

Which of the following defines the government purchases multiplier?

Figure 15-1 -Refer to the Figure 15-1. At which interest rate is there an excess money demand?

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