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

In a small open economy with a flexible exchange rate,what will an expansionary fiscal policy cause?

If there is excess money demand,what will people do and what happens to the interest rate?

In which situation do people want to hold more money?

If the Bank of Canada allows the exchange rate to vary freely,which effect will an expansionary fiscal policy have?

Figure 15-1 -Refer to the Figure 15-1.At which interest rate is there an excess money demand?

Explain how unemployment insurance acts as an automatic stabilizer.

Assume that the MPC is 0.8.Assume that the total crowding-out effect is $20 billion.How will an increase in government purchases of $9 billion shift the AD curve?

We have learned in previous chapters that fiscal policy can have lasting effects on savings,investment,and economic growth.On the other hand,thisChapter seems to suggest that the only long-run effect of fiscal policy is an increase in the price level.How could you use the aggregate demand and supply model for a more accurate description of the short-run and long-run effects of an increase in government spending? Could you distinguish between different uses of government expenditures to predict their effects on prices and output?

In a small open economy with perfect capital mobility,if the Bank of Canada chooses to fix the value of the Canadian dollar,what will a contractionary monetary policy do?

What is an effect of an increase in government purchases?

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Which of the following shifts money demand to the right?

Suppose the closed economy is in long-run equilibrium.Advances in technology shift the long-run aggregate-supply curve $80 billion to the right.Optimistic investors have shifted the aggregate-demand curve $150 billion to the right.In order to stabilize the price level at its original value,the government wants to reduce its spending.If the crowding-out effect is always half of the multiplier effect,and if the MPC equals 0.75,by how much must the government cut its spending?

Assume that the MPC is 0.8.Assuming that only the multiplier effect matters,how will a decrease in government purchases of $150 billion shift the aggregate demand curve?

When Parliament reduces spending in order to balance the budget,what does it need to consider?

If the multiplier is 10,what is the MPC?

Figure 15-2 -Refer to the Figure 15-2.If the closed economy is at point b,the best policy to restore full employment is which of the following?

An increase in government spending initially and primarily shifts which curve in what direction?

Suppose that the MPC is 0.5 and there is no investment accelerator or crowding-out effects.If government expenditures increase by $200 billion,what happens to aggregate demand?

Assume the money market is initially in equilibrium.If the price level increases,according to liquidity-preference theory,what is in excess and for how long?