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

Consider the income-expenditure identity in a closed economy, Y = C + I + G. Suppose consumption is always a fraction MPC of income, C = MPC×Y.?a. Show that income Y is equal to (I + G)/(1 - MPC).?b. Show that an increase in G by an amount ÄG increases income by ÄG/(1 - MPC) when investment is considered constant with respect to Y. What is the ratio 1/(1 - MPC) called?

When the Bank of Canada lowers the growth rate of the money supply, what must it take into account?

Which statement best explains the crowding-out effect?

According to the theory of liquidity preference, how is the money supply affected by the interest rate?

According to supply-side theories, what happens if the government cuts the tax rate?

According to liquidity-preference theory, other things being equal, what does a higher price level lead households to do in the short run?

Which of the following shifts aggregate demand to the right?

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

If there is crowding out, which of the following might decrease as government expenditures increase?

During expansions, what do automatic stabilizers make government expenditures and taxes do?

According to the liquidity-preference theory, equilibrium in the money market is achieved by adjustments in which of the following?

When the government reduces taxes, all other things being equal, what will decrease?

In a small open economy with perfect capital mobility, if the Bank of Canada chooses to fix the value of the Canadian dollar, what will a contractionary monetary policy do?

How do open-market sales affect the price level and real GDP?

Suppose the economy is in long-run equilibrium. Parliament passes regulations that make it more costly to conduct business, so the long-run aggregate-supply curve shifts $80 billion to the left. At the same time, government purchases increase by $60 billion. If the MPC equals 0.8 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?

Figure 15-2 -Refer to the Figure 15-2. In a closed economy, what would cause the aggregate demand curve to shift from AD to AD*?

The federal government decides to stimulate the economy and increases government expenditure on new infrastructure projects by $20 billion. The marginal propensity to consume is MPC = 75 and the marginal propensity to import is MPI = .20. Suppose the crowding-out effect is twice the amount of government spending. a. In a closed economy, what is the increase in output caused by the stimulus package of $20 billion? b. What is the increase in output if the economy is open?

According to liquidity-preference theory, if the price level increases, in which direction does the demand curve shift, and how does the interest rate change?

When the Bank of Canada buys government bonds, how do the reserves of the banking system change and what happens to the money supply?

Assume that the MPC is 0.8. Assume that the total crowding-out effect is $20 billion. How will an increase in government purchases of $9 billion shift the AD curve?