Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Suppose we observe that an increase in government spending of $10 billion raises the total aggregate demand by $40 billion. If there is no crowding-out effect, what would be the marginal propensity?

Why could there be a great deal of frustration for policy makers when the long-term effects of their decisions do not seem to flow through, as they wanted?

Most economists believe that a cut in tax rates:

Supply-side economists focus on:

If the interest rate increases through monetary policy, the:

Assume that the MPC is 0.5. A $100-billion cut in taxes will shift the aggregate-demand curve to the:

A change in monetary policy that aims to expand aggregate demand can be described either as:

Suppose that equilibrium in the money market is described by the equation M = aP/r, where M is the money supply, P is the price level, r is the interest rate and a is a constant. Suppose that investment is described by the equation I = b - kr, where b and k are constants. Using the equation Y = C + I + G (where Y is GDP, C is consumption and G is government spending), show that a higher price level leads to lower GDP.

For a given fixed price level, an increase in the money supply will lead to:

When the government increases its purchases, the increase in aggregate demand could be more than or less than the increase in government purchases, depending on whether the multiplier effect or the crowding-out effect is larger.

Changes in monetary policy can only be viewed in terms of a changing target for the interest rate.

The lag problem associated with monetary policy is due to:

If the economy is in a recession, an appropriate combination of monetary and fiscal policies might be to:

The government reduces taxes by $20 million. Suppose that there is no crowding-out effect, and that the marginal propensity to consume is 0.9. What is the total effect on aggregate demand?

Which of the following policies would Keynes have supported when the economy is experiencing unemployment?

If there is a major increase in economic activity, an appropriate policy for government would be to:

Assume there is no crowding-out effect. If an increase in government spending of $10 billion raises the total aggregate demand by $50 billion, then the marginal propensity is:

When the government reduces taxes, households' take-home pay:

According to the RBA's policy guidelines, if the RBA sees rising inflation, it would then increase interest rates.

Suppose the government reduces taxes by $20 million, that there is no crowding-out effect, and that the marginal propensity to consume is 0.9. What is the total effect on aggregate demand? What would be the total effect on aggregate demand if the government increased purchases by $20 million?