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

Both the multiplier and the investment accelerator tend to make the aggregate demand curve shift farther than the increase in government expenditures.

According to liquidity preference theory, when do people demand fewer goods and services?

What is the effect of a stock market boom, and how could the Bank of Canada offset that effect?

According to liquidity preference theory, other things equal, a higher price level leads households to do which of the following in the short run?

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 ?G increases income by ?G/(1 - MPC) when investment is considered constant with respect to Y. What is the ratio 1/(1 - MPC) called?

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 is an effect of an increase in government purchases?

According to which theory do changes in the interest rate bring the money market into equilibrium?

The effects of the interest rate in the short run are usually best shown using which theory?

What is the variable that balances the money demand and supply in the liquidity preference and the classical theories?

For the following questions, consult the diagram below. Figure 15-1 -Refer to Figure 15-1. At which of the following interest rates is there an excess money demand?

Suppose the closed economy is in long-run equilibrium. Technological change shifts the long-run aggregate supply curve $80 billion to the right. At the same time, government purchases increase by $40 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?

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

If households view a tax cut as being temporary, how does the tax cut affect aggregate demand?

Which of the following shifts money demand to the left?

What does fiscal policy primarily affect in the long run and the short run, respectively?

If the MPC = 5/6, what is the government purchases multiplier?

According to liquidity preference theory, why is the money demand curve downward sloping?

Which of Keynes's theories does liquidity preference refer to?

Unemployment insurance and welfare programs work as automatic stabilizers.