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

In the long run, the interest rate adjusts to balance the supply and demand for money, whereas in the short run, the interest rate adjusts to balance national saving and desired investment.

The two macroeconomic effects that make the size of the shift in aggregate demand differ from the change in government purchases are:

The liquidity of money explains the demand for money. People own or hold money because money:

The government-purchases multiplier is defined as:

Suppose the government reduces taxes by $200 million, that there is no crowding-out effect, and that the marginal propensity to consume is 0.75. What is the total effect on aggregate demand?

If the economy is producing a real output that is less than capacity output, a(n):

What are the key determinants of the interest rate in the short run? What are the key determinants of the interest rate in the long run?

An increase in the price level would:

The theory of liquidity preference states that the interest rate adjusts to bring money supply and money demand into balance.

The notion that when the government increases its purchases of aeroplanes, the owners and employees of the aeroplane manufacturing companies will also purchase more as their incomes rise, and hence total purchases will increase by more than the initial change in government purchases, is known as the:

An increase in Australia's marginal propensity to import will:

Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.9. What is the total effect of this increase in government purchases?

If MPC = 0.6, then the government purchases multiplier is:

If an increase in interest rates reduces investment spending by $25m:

Is the effect of an election cycle (every three years) putting at risk long-term structural changes to the economy?

Personal income tax and government outlays act as automatic stabilisers.

Assuming that the crowding-out effect is $100 billion and the multiplier effect of an increase in government purchases is $120 billion, then the total effect on aggregate demand will be:

Money pays no interest - if you keep a hundred-dollar bill for a year, then next year you will have a hundred dollars. Other assets earn interest - if you place $100 in a savings account or in government bonds, you will have more than $100 next year. Why, then, are people ever willing to hold money?

The multiplier effect suggests that the increase in aggregate demand could be smaller than the increase in government purchases, while the crowding-out effect suggests that the increase in aggregate demand could be larger than the increase in government purchases.

Any change in government spending has a multiplier effect on the level of economic activity.