Exam 21: The Influences of Monetary and Fiscal Policy on Aggregate Demand: Part B

Both monetary policy and fiscal policy affect aggregate demand.

Government expenditures on capital goods such as roads could increase aggregate supply.Such effects on aggregate supply are likely to matter more in the short run than in the long run.

Many economists oppose a constitutional amendment that would require a balanced budget for the federal government because it would probably make the business cycle more volatile.

Monetary policy and fiscal policy are the only factors that influence aggregate demand.

An increase in the price level shifts the money demand curve to the left,causing interest rates to increase.

During recessions,the government tends to run a budget deficit.

If the spending multiplier is 8,then the marginal propensity to consume must be 7/8.

For the most part,fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

If the marginal propensity to consume is 4/5,then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion.

Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures.