Question 1

If the multiplier is 6, what is the MPC?

Accepted Answer

A) 1/6 
B) 1/2 
C) 4/5 
D) 5/6 
A) 1/6 
B) 1/2 
C) 4/5 
D) 5/6

Question 2

For the following questions, consult the diagram below.
Figure 15-1  
-Refer to Figure 15-1. At the interest rate specified, which of the following is most likely to happen?

Accepted Answer

A) If the interest rate is 4 percent, there is excess money demand, and the interest rate will fall. 
B) If the interest rate is 3 percent, there is excess money supply, and the interest rate will rise. 
C) If the interest rate is 4 percent, the demand for goods will rise when the money market is in its new equilibrium. 
D) If the interest rate is 2 percent, there is an excess supply of money and the interest rates will rise. 
A) If the interest rate is 4 percent, there is excess money demand, and the interest rate will fall. 
B) If the interest rate is 3 percent, there is excess money supply, and the interest rate will rise. 
C) If the interest rate is 4 percent, the demand for goods will rise when the money market is in its new equilibrium. 
D) If the interest rate is 2 percent, there is an excess supply of money and the interest rates will rise.

Question 3

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

Accepted Answer

A) the overall change in real GDP 
B) the demand for money curve 
C) interest rates 
D) demand for capital goods 
A) the overall change in real GDP 
B) the demand for money curve 
C) interest rates 
D) demand for capital goods

Question 4

When does the opportunity cost of holding money decrease or increase, and how does people's desire to hold money change?

Accepted Answer

A) The opportunity cost of holding money decreases when the interest rate increases, so people desire to hold more money. 
B) The opportunity cost of holding money decreases when the interest rate increases, so people desire to hold less money. 
C) The opportunity cost of holding money increases when the interest rate increases, so people desire to hold more money. 
D) The opportunity cost of holding money increases when the interest rate increases, so people desire to hold less money. 
A) The opportunity cost of holding money decreases when the interest rate increases, so people desire to hold more money. 
B) The opportunity cost of holding money decreases when the interest rate increases, so people desire to hold less money. 
C) The opportunity cost of holding money increases when the interest rate increases, so people desire to hold more money. 
D) The opportunity cost of holding money increases when the interest rate increases, so people desire to hold less money.

Question 5

Supply-side economists believe that changes in government purchases affect which of the following?

Accepted Answer

A) only aggregate demand 
B) only aggregate supply 
C) both aggregate demand and aggregate supply 
D) neither aggregate demand nor aggregate supply 
A) only aggregate demand 
B) only aggregate supply 
C) both aggregate demand and aggregate supply 
D) neither aggregate demand nor aggregate supply

Question 6

If inflation is zero, then the nominal and real interest rates are the same.

Accepted Answer

A) True 
 B)False

Question 7

If expected inflation is constant and the nominal interest rate increases, how does the real interest rate change?

Accepted Answer

A) It increases by more than the change in the nominal interest rate. 
B) It increases by the change in the nominal interest rate. 
C) It decreases by the change in the nominal interest rate. 
D) It decreases by more than the change in the nominal interest rate. 
A) It increases by more than the change in the nominal interest rate. 
B) It increases by the change in the nominal interest rate. 
C) It decreases by the change in the nominal interest rate. 
D) It decreases by more than the change in the nominal interest rate.

Question 8

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

Accepted Answer

A) only the short-run effect on production 
B) only the short-run effects on inflation and production 
C) only the long-run effect on inflation 
D) the long-run effect on inflation as well as the short-run effect on production 
A) only the short-run effect on production 
B) only the short-run effects on inflation and production 
C) only the long-run effect on inflation 
D) the long-run effect on inflation as well as the short-run effect on production

Question 9

Economists agree on all of the following statements EXCEPT which one?

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 10

Use the money market to explain why the aggregate demand curve slopes downward.

Accepted Answer

When the price level falls, people need

Question 11

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 12

Assume that the MPC is 0.8. Assume that the total crowding-out effect is $25 billion. How will an increase in government purchases of $9 billion shift the AD curve?

Accepted Answer

A) It will shift the AD curve right by $25 billion. 
B) It will shift the AD curve left by $25 billion. 
C) It will shift the AD curve right by $20 billion. 
D) It will shift the AD curve left by $20 billion 
A) It will shift the AD curve right by $25 billion. 
B) It will shift the AD curve left by $25 billion. 
C) It will shift the AD curve right by $20 billion. 
D) It will shift the AD curve left by $20 billion

Question 13

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?

Accepted Answer

A) The demand curve shifts right, so the interest rate increases. 
B) The demand curve shifts right, so the interest rate decreases. 
C) The demand curve shifts left, so the interest rate decreases. 
D) The demand curve shifts left, so the interest rate increases. 
A) The demand curve shifts right, so the interest rate increases. 
B) The demand curve shifts right, so the interest rate decreases. 
C) The demand curve shifts left, so the interest rate decreases. 
D) The demand curve shifts left, so the interest rate increases.

Question 14

According to liquidity preference theory, how does an increase in the price level affect the interest rate and output demanded, respectively?

Accepted Answer

A) The interest rate increases, and output demanded increases. 
B) The interest rate increases, and output demanded decreases. 
C) The interest rate decreases, and output demanded increases. 
D) The interest rate decreases, and output demanded decreases. 
A) The interest rate increases, and output demanded increases. 
B) The interest rate increases, and output demanded decreases. 
C) The interest rate decreases, and output demanded increases. 
D) The interest rate decreases, and output demanded decreases.

Question 15

If the Bank of Canada maintains a fixed exchange rate, which of the following effects 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 16

Suppose the closed economy is in long-run equilibrium. Immigration of skilled workers shifts the long-run aggregate supply curve $120 billion to the right. At the same time, government purchases increase by $50 billion. If the MPC equals 0.75 and the crowding-out effect is $80 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 17

In a small open economy with a flexible exchange rate, which of the following effects will a contractionary fiscal policy have?

Accepted Answer

A) It will cause the Canadian interest rate to fall below the world interest rate for a short period of time, which in turn will cause the dollar to depreciate and net exports to increase. 
B) It will cause the Canadian interest rate to rise above the world interest rate for a short period of time, which in turn will cause the dollar to appreciate and net exports to decrease. 
C) It will cause the Canadian interest rate to fall below the world interest rate for a short period of time, which in turn will cause the dollar to appreciate and net exports to decrease. 
D) It will cause the Canadian interest rate to rise above the world interest rate for a short period of time, which in turn will cause the dollar to depreciate and net exports to increase. 
A) It will cause the Canadian interest rate to fall below the world interest rate for a short period of time, which in turn will cause the dollar to depreciate and net exports to increase. 
B) It will cause the Canadian interest rate to rise above the world interest rate for a short period of time, which in turn will cause the dollar to appreciate and net exports to decrease. 
C) It will cause the Canadian interest rate to fall below the world interest rate for a short period of time, which in turn will cause the dollar to appreciate and net exports to decrease. 
D) It will cause the Canadian interest rate to rise above the world interest rate for a short period of time, which in turn will cause the dollar to depreciate and net exports to increase.

Question 18

Suppose the closed economy is in long-run equilibrium. Advances in technology shift the long-run aggregate supply curve $75 billion to the right. Optimistic investors have shifted the aggregate demand curve $150 billion to the right. In order to stabilize the price level at its original value, the government wants to reduce its spending. If the crowding-out effect is always half of the multiplier effect, and if the MPC equals 0.8, by how much must the government cut its spending?

Accepted Answer

A) $4 billion 
B) $30 billion 
C) $75 billion 
D) $150 billion 
A) $4 billion 
B) $30 billion 
C) $75 billion 
D) $150 billion

Question 19

The multiplier is equal to MPC/(1 - MPC).

Accepted Answer

A) True 
 B)False

Question 20

If expected inflation is constant and the nominal interest rate increased 5 percentage points, what would happen to the real interest rate?

Accepted Answer

A) It would increase 5 percentage points. 
B) It would increase, but by less than 5 percentage points. 
C) It would decrease, but by less than 5 percentage points. 
D) It would decrease by 5 percentage points. 
A) It would increase 5 percentage points. 
B) It would increase, but by less than 5 percentage points. 
C) It would decrease, but by less than 5 percentage points. 
D) It would decrease by 5 percentage points.

If the multiplier is 6, what is the MPC?

For the following questions, consult the diagram below. Figure 15-1 -Refer to Figure 15-1. At the interest rate specified, which of the following is most likely to happen?

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

When does the opportunity cost of holding money decrease or increase, and how does people's desire to hold money change?

Supply-side economists believe that changes in government purchases affect which of the following?

If inflation is zero, then the nominal and real interest rates are the same.

If expected inflation is constant and the nominal interest rate increases, how does the real interest rate change?

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

Economists agree on all of the following statements EXCEPT which one?

Use the money market to explain why the aggregate demand curve slopes downward.

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.

Assume that the MPC is 0.8. Assume that the total crowding-out effect is $25 billion. How will an increase in government purchases of $9 billion shift the AD curve?

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?

According to liquidity preference theory, how does an increase in the price level affect the interest rate and output demanded, respectively?

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

In a small open economy with a flexible exchange rate, which of the following effects will a contractionary fiscal policy have?

The multiplier is equal to MPC/(1 - MPC).

If expected inflation is constant and the nominal interest rate increased 5 percentage points, what would happen to the real interest rate?

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 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

If the multiplier is 6, what is the MPC?

For the following questions, consult the diagram below. Figure 15-1 -Refer to Figure 15-1. At the interest rate specified, which of the following is most likely to happen?

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

When does the opportunity cost of holding money decrease or increase, and how does people's desire to hold money change?

Supply-side economists believe that changes in government purchases affect which of the following?

If inflation is zero, then the nominal and real interest rates are the same.

If expected inflation is constant and the nominal interest rate increases, how does the real interest rate change?

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

Economists agree on all of the following statements EXCEPT which one?

Use the money market to explain why the aggregate demand curve slopes downward.

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.

Assume that the MPC is 0.8. Assume that the total crowding-out effect is $25 billion. How will an increase in government purchases of $9 billion shift the AD curve?

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?

According to liquidity preference theory, how does an increase in the price level affect the interest rate and output demanded, respectively?

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

In a small open economy with a flexible exchange rate, which of the following effects will a contractionary fiscal policy have?

The multiplier is equal to MPC/(1 - MPC).

If expected inflation is constant and the nominal interest rate increased 5 percentage points, what would happen to the real interest rate?

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 Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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