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

The global financial crisis has shown that the Australian government can influence the behaviour of the economy only with fiscal policy.

In the short run:

John Maynard Keynes proposed the model of the money market called the liquidity preference theory.

At a higher price level, the demand for money increases, the interest rate increases, and the demand for business and residential investment falls. Hence the aggregate-demand curve slopes downward.

Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.8. What is the total effect of this increase in government purchases?

According to the Ricardian equivalence theory, what would happen if the government were to cut taxes without changing its spending?

Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance is called:

To eliminate a deflationary gap when the MPC is 0.75 and the deflationary gap is $500 million, investment will need to increase by how much?

Changes in government spending affect saving and growth in the long run, and aggregate demand and employment in the short run.

A reduction in direct taxes will result in:

In the long run, the level of output is:

An increase in government purchases of $100 billion will shift the aggregate-demand curve to the:

The marginal propensity to save