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

Which of the following policies would someone who wants the government to follow an active stabilization policy recommend when the economy is experiencing unemployment above the natural rate?

What does liquidity refer to?

How does a stock market boom affect household spending, and how would the Bank of Canada offset the effects on the price level and real GDP?

Which of the following shifts aggregate demand right?

Suppose that the government spends more on a missile defence program. What does this do to aggregate demand? How is your answer affected by the presence of the multiplier, crowding-out, and investment-accelerator effects?

Suppose the federal government decides to stimulate the economy and increases government expenditure on new infrastructure projects worth $40 billion. The marginal propensity to consume is MPC = 2/3 and the marginal propensity to import is MPI = 1/5. Suppose also that 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 $40 billion? b.What is the increase in output if the economy is open?

In the long run, which of the following do changes in the money supply affect?

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

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

If the MPC = 0.9, what is the government purchases multiplier?

Assume that the MPC is 0.8. Assume that there is a multiplier effect and that the total crowding-out effect is $7 billion. How will an increase in government purchases of $8 billion shift aggregate demand?

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

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

Which of the following correctly explains the crowding-out effect?

When the government reduces taxes, which of the following decrease, everything else being the same?

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

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.

A decrease in government spending initially and primarily shifts which curve in what direction?

Which of the following is the most liquid asset?

Let x be the marginal propensity to consume, MPC. The principle of spending multiplier involves calculating the infinite sum 1 + x + x² + x³+… Show that this sum is equal to 1/(1 - x).