Question 1

The government-purchases multiplier is defined as:

Accepted Answer

A)  1 - (1/MP
C)  
B)  1/(MPC - 1) 
C)  1 - (MPC - 1) 
D)  1/(1 - MP
C)  
A)  1 - (1/MP
C)  
B)  1/(MPC - 1) 
C)  1 - (MPC - 1) 
D)  1/(1 - MP
C)

Question 2

The money-demand curve is downward-sloping because:

Accepted Answer

A)  people will want to hold less money as the interest rate falls 
B)  people will want to hold more money as the interest rate falls 
C)  interest rates rise as the Reserve Bank reduces the quantity of money demanded 
D)  interest rates fall as the Reserve Bank reduces the supply of money 
A)  people will want to hold less money as the interest rate falls 
B)  people will want to hold more money as the interest rate falls 
C)  interest rates rise as the Reserve Bank reduces the quantity of money demanded 
D)  interest rates fall as the Reserve Bank reduces the supply of money

Question 3

Define expansionary and contractionary fiscal policy, giving examples of each.

Accepted Answer

expansionary = a planned decrease in the

Question 4

Assume that the money market is initially in equilibrium. A decrease in the price level would result in _____ of money at the initial interest rate.

Accepted Answer

A)  equilibrium 
B)  an excess demand 
C)  an excess supply 
D)  none of the above 
A)  equilibrium 
B)  an excess demand 
C)  an excess supply 
D)  none of the above

Question 5

In the long run, the interest rate and inflation rate adjust to accommodate a fixed level of output. In the short run, the interest rate and output adjust to accommodate a predetermined level of prices.

Accepted Answer

A) True 
 B)False

Question 6

The theory of Ricardian equivalence suggests that an increase in public saving will be balanced by an increase in private saving.

Accepted Answer

A) True 
 B)False

Question 7

The quantity of money demanded is _____ the interest rate.

Accepted Answer

A)  the opportunity cost of 
B)  independent of 
C)  positively related to 
D)  inversely related to 
A)  the opportunity cost of 
B)  independent of 
C)  positively related to 
D)  inversely related to

Question 8

Automatic stabilisers:

Accepted Answer

A)  reduce the problems that lags cause in using fiscal policy as a stabilisation tool 
B)  are changes in fiscal policy that stimulate aggregate demand automatically when the economy goes into a recession 
C)  are changes in fiscal policy that restrain aggregate demand automatically when the economy is growing too fast 
D)  none of the above 
E)  all of the above 
A)  reduce the problems that lags cause in using fiscal policy as a stabilisation tool 
B)  are changes in fiscal policy that stimulate aggregate demand automatically when the economy goes into a recession 
C)  are changes in fiscal policy that restrain aggregate demand automatically when the economy is growing too fast 
D)  none of the above 
E)  all of the above

Question 9

If an economy goes into an expansion, then the government's:

Accepted Answer

A)  outlays (e.g. transfer payments) will automatically fall and receipts (e.g. tax revenue) will automatically rise 
B)  outlays will automatically rise and receipts will automatically fall 
C)  outlays and receipts will automatically rise 
D)  outlays and receipts will automatically fall 
A)  outlays (e.g. transfer payments) will automatically fall and receipts (e.g. tax revenue) will automatically rise 
B)  outlays will automatically rise and receipts will automatically fall 
C)  outlays and receipts will automatically rise 
D)  outlays and receipts will automatically fall

Question 10

According to classical macroeconomic theory:

Accepted Answer

A)  output is determined by the level of aggregate demand 
B)  the price level is, in the long run, relatively unresponsive to changes in aggregate demand 
C)  the interest rate adjusts to balance the supply and demand for loanable funds 
D)  none of the above 
E)  all of the above 
A)  output is determined by the level of aggregate demand 
B)  the price level is, in the long run, relatively unresponsive to changes in aggregate demand 
C)  the interest rate adjusts to balance the supply and demand for loanable funds 
D)  none of the above 
E)  all of the above

Question 11

The multipler > 1 represents a less than proportionate change on economic activity as a result of government spending.

Accepted Answer

A) True 
 B)False

Question 12

If the interest rate is below equilibrium, the excess demand for money puts downward pressure on the interest rate.

Accepted Answer

A) True 
 B)False

Question 13

The positive feedback from demand to investment is called:

Accepted Answer

A)  the investment multiplier 
B)  the investment accelerator 
C)  the multiplier accelerator 
D)  the demand accelerator 
A)  the investment multiplier 
B)  the investment accelerator 
C)  the multiplier accelerator 
D)  the demand accelerator

Question 14

A lower inflation rate leads to a higher interest rate through Reserve Bank policy and the higher interest rate stimulates investment spending.

Accepted Answer

A) True 
 B)False

Question 15

All else held constant, net taxes (i.e. taxes - transfers):

Accepted Answer

A)  remain constant as GDP rises 
B)  increase as GDP falls 
C)  decrease as GDP falls 
D)  decrease as GDP rises 
A)  remain constant as GDP rises 
B)  increase as GDP falls 
C)  decrease as GDP falls 
D)  decrease as GDP rises

Question 16

Suppose government purchases increase by $200 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.75. What is the total effect of this increase in government purchases?

Accepted Answer

A)  $150 billion 
B)  $267 billion 
C)  $800 billion 
D)  $600 billion 
A)  $150 billion 
B)  $267 billion 
C)  $800 billion 
D)  $600 billion

Question 17

Suppose an increase in oil prices puts the economy in recession. Either fiscal policy or monetary policy could be used to eliminate the recession. In terms of the short-run impact on output and prices, is there any difference between the two?

Accepted Answer

Again, there is no short-run d

Question 18

Economists agree that:

Accepted Answer

A)  fiscal policy can be used to shift the aggregate-demand curve 
B)  monetary policy should actively be used to stabilise the economy 
C)  fiscal policy should actively be used to stabilise the economy 
D)  all of the above 
A)  fiscal policy can be used to shift the aggregate-demand curve 
B)  monetary policy should actively be used to stabilise the economy 
C)  fiscal policy should actively be used to stabilise the economy 
D)  all of the above

Question 19

When the economy goes into a recession, the amount of taxes collected by the government falls automatically. Why?

Accepted Answer

Tax revenue declines when the economy go

Question 20

Fiscal policy refers to the idea that changes in:

Accepted Answer

A)  the Reserve Bank of Australia with its money supply mechanisms can affect aggregate demand 
B)  government purchases and taxing policy can affect aggregate demand 
C)  the price level affects the equilibrium interest rate 
D)  the exchange rate affects net exports 
A)  the Reserve Bank of Australia with its money supply mechanisms can affect aggregate demand 
B)  government purchases and taxing policy can affect aggregate demand 
C)  the price level affects the equilibrium interest rate 
D)  the exchange rate affects net exports

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

The government-purchases multiplier is defined as:

The money-demand curve is downward-sloping because:

Define expansionary and contractionary fiscal policy, giving examples of each.

Assume that the money market is initially in equilibrium. A decrease in the price level would result in _____ of money at the initial interest rate.

In the long run, the interest rate and inflation rate adjust to accommodate a fixed level of output. In the short run, the interest rate and output adjust to accommodate a predetermined level of prices.

The theory of Ricardian equivalence suggests that an increase in public saving will be balanced by an increase in private saving.

The quantity of money demanded is _____ the interest rate.

Automatic stabilisers:

If an economy goes into an expansion, then the government's:

According to classical macroeconomic theory:

The multipler > 1 represents a less than proportionate change on economic activity as a result of government spending.

If the interest rate is below equilibrium, the excess demand for money puts downward pressure on the interest rate.

The positive feedback from demand to investment is called:

A lower inflation rate leads to a higher interest rate through Reserve Bank policy and the higher interest rate stimulates investment spending.

All else held constant, net taxes (i.e. taxes - transfers):

Suppose government purchases increase by $200 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.75. What is the total effect of this increase in government purchases?

Suppose an increase in oil prices puts the economy in recession. Either fiscal policy or monetary policy could be used to eliminate the recession. In terms of the short-run impact on output and prices, is there any difference between the two?

Economists agree that:

When the economy goes into a recession, the amount of taxes collected by the government falls automatically. Why?

Fiscal policy refers to the idea that changes in:

Ten Lessons From Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand and Government Policies

Consumers, Producers and the Efficiency of Markets

Application: The Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Business Strategy

Competition Policy

Monopolistic Competition

The Markets for the Factors of Production

Earnings, Unions and Discrimination

Income Inequity and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment and the Financial System

The Natural Rate of Unemployment

The Monetary System

Inflation: Its Causes and Costs

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Trade-Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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