Question 1

Which statement is consistent with the supply-side theories?

Accepted Answer

A)  When there is a recession,the Bank of Canada should decrease the money supply. 
B)  A shift in aggregate supply leads to a permanent increase in the natural rate of output. 
C)  The government should periodically increase the minimum wage and unemployment insurance benefits. 
D)  Aggregate demand does not shift in the short run. 
A)  When there is a recession,the Bank of Canada should decrease the money supply. 
B)  A shift in aggregate supply leads to a permanent increase in the natural rate of output. 
C)  The government should periodically increase the minimum wage and unemployment insurance benefits. 
D)  Aggregate demand does not shift in the short run. B

Question 2

If the federal government cuts spending to balance the federal budget,how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?

Accepted Answer

A)  by increasing the money supply 
B)  by decreasing the money supply 
C)  by raising taxes 
D)  by cutting expenditures 
A)  by increasing the money supply 
B)  by decreasing the money supply 
C)  by raising taxes 
D)  by cutting expenditures A

Question 3

According to liquidity-preference theory,if the quantity of money supplied is greater than the quantity demanded,what will happen to the interest rate and the quantity of money demanded?

Accepted Answer

A)  The interest rate will increase,and the quantity of money demanded will decrease. 
B)  The interest rate will increase,and the quantity of money demanded will increase. 
C)  The interest rate will decrease,and the quantity of money demanded will decrease. 
D)  The interest rate will decrease,and the quantity of money demanded will increase. 
A)  The interest rate will increase,and the quantity of money demanded will decrease. 
B)  The interest rate will increase,and the quantity of money demanded will increase. 
C)  The interest rate will decrease,and the quantity of money demanded will decrease. 
D)  The interest rate will decrease,and the quantity of money demanded will increase. D

Question 4

According to supply-side theories,what happens if the government cuts the tax rate?

Accepted Answer

A)  Workers keep less of each additional dollar they earn,so work effort increases,and aggregate supply shifts right. 
B)  Workers keep less of each additional dollar they earn,so work effort decreases,and aggregate supply shifts left. 
C)  Workers keep more of each additional dollar they earn,so work effort increases,and aggregate supply shifts right. 
D)  Workers keep more of each additional dollar they earn,so work effort decreases,and aggregate supply shifts left. 
A)  Workers keep less of each additional dollar they earn,so work effort increases,and aggregate supply shifts right. 
B)  Workers keep less of each additional dollar they earn,so work effort decreases,and aggregate supply shifts left. 
C)  Workers keep more of each additional dollar they earn,so work effort increases,and aggregate supply shifts right. 
D)  Workers keep more of each additional dollar they earn,so work effort decreases,and aggregate supply shifts left.

Question 5

Which of the following shifts money demand to the right?

Accepted Answer

A)  an increase in the price level 
B)  a decrease in the price level 
C)  an increase in the interest rate 
D)  a decrease in the interest rate 
A)  an increase in the price level 
B)  a decrease in the price level 
C)  an increase in the interest rate 
D)  a decrease in the interest rate

Question 6

Which statement do opponents of active stabilization policy believe?

Accepted Answer

A)  Fiscal policy cannot stabilize the economy even in theory. 
B)  Fiscal policy has no impact in the long run. 
C)  The effects of monetary policy may last for several years. 
D)  The Bank of Canada should try to fine-tune the economy with steady growth in the money supply. 
A)  Fiscal policy cannot stabilize the economy even in theory. 
B)  Fiscal policy has no impact in the long run. 
C)  The effects of monetary policy may last for several years. 
D)  The Bank of Canada should try to fine-tune the economy with steady growth in the money supply.

Question 7

Unemployment insurance and welfare programs work as automatic stabilizers.

Accepted Answer

A) True 
 B)False

Question 8

If there are automatic stabilizers but no deliberate action by policymakers,how would government expenditures and taxes change as output falls?

Accepted Answer

A)  Both government expenditures and taxes fall. 
B)  Both government expenditures and taxes rise. 
C)  Government expenditures rise and taxes fall. 
D)  Government expenditures fall and taxes rise. 
A)  Both government expenditures and taxes fall. 
B)  Both government expenditures and taxes rise. 
C)  Government expenditures rise and taxes fall. 
D)  Government expenditures fall and taxes rise.

Question 9

According to the theory of liquidity preference,what does a decrease in the price level cause the interest rate and investment to do?

Accepted Answer

A)  It causes both the interest rate and investment to rise. 
B)  It causes both the interest rate and investment to fall. 
C)  It causes the interest rate to rise and investment to fall. 
D)  It causes the interest rate to fall and investment to rise. 
A)  It causes both the interest rate and investment to rise. 
B)  It causes both the interest rate and investment to fall. 
C)  It causes the interest rate to rise and investment to fall. 
D)  It causes the interest rate to fall and investment to rise.

Question 10

A decrease in government spending initially and primarily shifts which curve in what direction?

Accepted Answer

A)  aggregate demand right 
B)  aggregate demand left 
C)  aggregate supply right 
D)  aggregate supply left 
A)  aggregate demand right 
B)  aggregate demand left 
C)  aggregate supply right 
D)  aggregate supply left

Question 11

Which statement is consistent with the long-run theories studied?

Accepted Answer

A)  In the long run,output responds to the aggregate demand and supply of goods and services; the interest rate adjusts to balance the supply and demand for money; and the price level adjusts to balance the supply and demand for loanable funds. 
B)  In the long run,output is determined by the amount of capital,labour,and technology; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level adjusts to balance the supply and demand for money. 
C)  In the long run,output is determined by the amount of capital,labour,and technology; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level is stuck. 
D)  In the long run,output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level adjusts to balance the supply and demand for money. 
A)  In the long run,output responds to the aggregate demand and supply of goods and services; the interest rate adjusts to balance the supply and demand for money; and the price level adjusts to balance the supply and demand for loanable funds. 
B)  In the long run,output is determined by the amount of capital,labour,and technology; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level adjusts to balance the supply and demand for money. 
C)  In the long run,output is determined by the amount of capital,labour,and technology; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level is stuck. 
D)  In the long run,output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level adjusts to balance the supply and demand for money.

Question 12

When making a case against active stabilization policies,what do some economists argue?

Accepted Answer

A)  Monetary policy should not be used to stabilize the economy. 
B)  Policy instruments cannot be used to achieve long-term goals. 
C)  Fiscal policies are theoretically invalid as instruments for stabilizing the economy. 
D)  The impact of policies does not last long enough for the problem to be solved. 
A)  Monetary policy should not be used to stabilize the economy. 
B)  Policy instruments cannot be used to achieve long-term goals. 
C)  Fiscal policies are theoretically invalid as instruments for stabilizing the economy. 
D)  The impact of policies does not last long enough for the problem to be solved.

Question 13

If inflation is zero,then the nominal and real interest rates are the same.

Accepted Answer

A) True 
 B)False

Question 14

Which policy alternative would be an appropriate response to an increase in investment demand by a government that wants to stabilize output?

Accepted Answer

A)  increasing taxes 
B)  increasing the money supply 
C)  increasing government expenditures 
D)  increasing the government deficit 
A)  increasing taxes 
B)  increasing the money supply 
C)  increasing government expenditures 
D)  increasing the government deficit

Question 15

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

Accepted Answer

a.In the income-expenditure identity Y=C

Question 16

Which of the following is an effect of an increase in the interest rate?

Accepted Answer

A)  It induces firms to invest more. 
B)  It induces households to increase consumption. 
C)  It shifts money demand to the right. 
D)  It leads to the appreciation of the exchange rate. 
A)  It induces firms to invest more. 
B)  It induces households to increase consumption. 
C)  It shifts money demand to the right. 
D)  It leads to the appreciation of the exchange rate.

Question 17

If the MPC = 0.8,what is the government purchases multiplier?

Accepted Answer

A)  0.20 
B)  0.50 
C)  2 
D)  5 
A)  0.20 
B)  0.50 
C)  2 
D)  5

Question 18

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

Accepted Answer

A)  Aggregate demand increases,which Bank of Canada could offset by increasing the money supply. 
B)  Aggregate supply increases,which Bank of Canada could offset by increasing the money supply. 
C)  Aggregate demand increases,which Bank of Canada could offset by decreasing the money supply. 
D)  Aggregate supply increases,which Bank of Canada could offset by decreasing the money supply. 
A)  Aggregate demand increases,which Bank of Canada could offset by increasing the money supply. 
B)  Aggregate supply increases,which Bank of Canada could offset by increasing the money supply. 
C)  Aggregate demand increases,which Bank of Canada could offset by decreasing the money supply. 
D)  Aggregate supply increases,which Bank of Canada could offset by decreasing the money supply.

Question 19

What is most likely to happen in the short run?

Accepted Answer

A)  The price level alone adjusts to balance the supply and demand for money. 
B)  Output responds to changes in the aggregate demand for goods and services. 
C)  Changes in the money supply cause a proportional change in the price level. 
D)  Changes in available production technology for turning capital and labour into output. 
A)  The price level alone adjusts to balance the supply and demand for money. 
B)  Output responds to changes in the aggregate demand for goods and services. 
C)  Changes in the money supply cause a proportional change in the price level. 
D)  Changes in available production technology for turning capital and labour into output.

Question 20

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Accepted Answer

When the money supply increases,the inte

Which statement is consistent with the supply-side theories?

If the federal government cuts spending to balance the federal budget,how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?

According to liquidity-preference theory,if the quantity of money supplied is greater than the quantity demanded,what will happen to the interest rate and the quantity of money demanded?

According to supply-side theories,what happens if the government cuts the tax rate?

Which of the following shifts money demand to the right?

Which statement do opponents of active stabilization policy believe?

Unemployment insurance and welfare programs work as automatic stabilizers.

If there are automatic stabilizers but no deliberate action by policymakers,how would government expenditures and taxes change as output falls?

According to the theory of liquidity preference,what does a decrease in the price level cause the interest rate and investment to do?

A decrease in government spending initially and primarily shifts which curve in what direction?

Which statement is consistent with the long-run theories studied?

When making a case against active stabilization policies,what do some economists argue?

If inflation is zero,then the nominal and real interest rates are the same.

Which policy alternative would be an appropriate response to an increase in investment demand by a government that wants to stabilize output?

Which of the following is an effect of an increase in the interest rate?

If the MPC = 0.8,what is the government purchases multiplier?

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

What is most likely to happen in the short run?

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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

Which statement is consistent with the supply-side theories?

If the federal government cuts spending to balance the federal budget,how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?

According to liquidity-preference theory,if the quantity of money supplied is greater than the quantity demanded,what will happen to the interest rate and the quantity of money demanded?

According to supply-side theories,what happens if the government cuts the tax rate?

Which of the following shifts money demand to the right?

Which statement do opponents of active stabilization policy believe?

Unemployment insurance and welfare programs work as automatic stabilizers.

If there are automatic stabilizers but no deliberate action by policymakers,how would government expenditures and taxes change as output falls?

According to the theory of liquidity preference,what does a decrease in the price level cause the interest rate and investment to do?

A decrease in government spending initially and primarily shifts which curve in what direction?

Which statement is consistent with the long-run theories studied?

When making a case against active stabilization policies,what do some economists argue?

If inflation is zero,then the nominal and real interest rates are the same.

Which policy alternative would be an appropriate response to an increase in investment demand by a government that wants to stabilize output?

Which of the following is an effect of an increase in the interest rate?

If the MPC = 0.8,what is the government purchases multiplier?

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

What is most likely to happen in the short run?

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

Filters