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

Let us derive an aggregate-demand curve starting from some money demand and money supply equations.Assume the money-demand curve is MD=150 - 15r + Y,the price level depends on r according to the equation P = 100 - 10r,and the money supply is MS = 100.Find a relationship between the price level P and output Y and show that the relation that you have found is an aggregate demand function.

During recessions,how do automatic stabilizers change government deficit and taxes?

In liquidity-preference theory,an increase in the interest rate decreases the quantity of money demanded,but does not shift the money-demand curve.

What effects do supply-side economists believe that lowering taxes have?

Which statement is NOT a reason the aggregate-demand curve slopes downward?

According to liquidity-preference theory,if the price level increases,in which direction does the demand curve shift,and how does the interest rate change?

Suppose the closed economy is in long-run equilibrium.Immigration of skilled workers shifts the long-run aggregate-supply curve $120 billion to the right.At the same time,government purchases increase by $50 billion.If the MPC equals 0.8 and the crowding-out effect is $80 billion,what would we expect to happen in the long run to real GDP and the price level?

If the interest rate is below a central bank's target,what should the central bank do?

According to most economists,what does fiscal policy affect?

Suppose that the government spends more on a missile defence program.What does this do to aggregate demand? How is your answer affected by the presence of the multiplier,crowding-out,and investment-accelerator effects?

When does the opportunity cost of holding money decrease or increase,and how does people's desire to hold money change?

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Suppose the closed economy is in long-run equilibrium.Immigration of skilled workers shifts the long-run aggregate supply curve $60 billion to the right.At the same time,government purchases increase by $40 billion.If the MPC equals 0.75 and the crowding-out effect is $160 billion,what would we expect to happen in the long-run to real GDP and the price level?

According to liquidity-preference theory,how does a decrease in the price level affect the interest rate and output demanded,respectively?

In principle,the government could increase the money supply or government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

Which of the following shifts aggregate demand to the left?

Suppose that there are no crowding-out effects and the MPC is 0.8.By how much must the government increase expenditures to shift the aggregate-demand curve right by $10 billion?

The economy is in long-run equilibrium when the government decides to significantly increase spending on transportation infrastructure,which will lower shipping costs for many businesses.What might we expect in the short run and the long run to happen to real GDP and the price level?

What is the difference between the effects of fiscal policy and the effects of monetary policy?

Canada is a small open economy with a flexible exchange rate.Which effect will a contractionary fiscal policy have?