Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A)  It will cause the dollar to depreciate. 
B)  It will cause net exports to rise. 
C)  It will cause an additional investment accelerator effect. 
D)  It will cause a reduction in the demand for Canadian-produced goods.

Question 3

This question considers how an economy changes over time and how the aggregate demand and supply model treats the time dimension of an economy.
a) How do the aggregate-demand and aggregate-supply curves shift over time?
b) Related to point a, identify and discuss the limitations to the simple, "static" aggregate-demand and aggregate-supply model. What are the consequences of predicting phenomena that have a time dimension (remember the 'short-run' and 'long-run' distinction) using an essentially static model?
c) How could the static model be changed to better incorporate the time dimension of the economic variables it tries to explain?

Accepted Answer

The answer of This question considers how an economy changes...

Question 4

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

Accepted Answer

A)  the short-run effects on aggregate demand and aggregate supply, and the long-run effects on saving and growth 
B)  the short-run effects on aggregate demand and aggregate supply, and the short-run effects on saving and growth 
C)  the long-run effects on aggregate demand and aggregate supply, and the long-run effects on saving and growth 
D)  the long-run effects on aggregate demand and aggregate supply, and the short-run effects on saving and growth

Question 5

Suppose the economy is in long-run equilibrium. Parliament passes regulations that make it more costly to conduct business, so the long-run aggregate-supply curve shifts $80 billion to the left. At the same time, government purchases increase by $60 billion. If the MPC equals 0.8 and the crowding-out effect is $70 billion, what would we expect to happen in the long run to real GDP and the price level?

Accepted Answer

A)  Both real GDP and the price level would be higher. 
B)  Both real GDP and the price level would be lower. 
C)  Real GDP would be lower, but the price level would be higher. 
D)  Real GDP would be lower, but the price level would be the same.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

If the MPC is 0.4, the MPI is 0.2, and the government increases spending by $50 million, what will be the demand for goods and services generated by this increase?

Accepted Answer

A)  $20 million 
B)  $30 million 
C)  $125 million 
D)  $250 million

Question 8

What tends to make the size of a shift in aggregate demand resulting from a tax change smaller than otherwise?

Accepted Answer

A)  multiplier effect 
B)  crowding-out effect 
C)  catch-up effect 
D)  Fisher effect

Question 9

According to the crowding-out effect, how does a decrease in government spending affect the interest rate and investment spending?

Accepted Answer

A)  It increases the interest rate and so increases investment spending. 
B)  It increases the interest rate and so decreases investment spending. 
C)  It decreases the interest rate and so increases investment spending. 
D)  It decreases the interest rate and so decreases investment spending.

Question 10

If the MPC is 0.6, what is the multiplier?

Accepted Answer

A)  0.4 
B)  1.67 
C)  2.5 
D)  60

Question 11

If the MPC is 0.75 and there are no crowding-out or accelerator effects, an initial increase in AD of $100 billion will eventually shift the AD curve to the right by how much?

Accepted Answer

A)  $40 billion 
B)  $133.33 billion 
C)  $250 billion 
D)  $400 billion

Question 12

The multiplier is equal to MPC/(1 - MPC).

Accepted Answer

A) True 
 B)False

Question 13

What is the most likely effect of an increase in government spending on goods to build or repair infrastructure?

Accepted Answer

A)  It would shift the aggregate-demand curve to the left. 
B)  It would shift the long-run aggregate-supply curve to the left. 
C)  It would shift the short-run aggregate-supply curve to the left. 
D)  It would shift the long run aggregate-supply curve to the right.

Question 14

If households view a tax cut as being temporary, how does the tax cut affect aggregate demand?

Accepted Answer

A)  It has no effect on aggregate demand. 
B)  It has a stronger effect on aggregate demand than if households view the cut as permanent. 
C)  It has the same effect on aggregate demand than if households view the cut as permanent. 
D)  It has a weaker effect on aggregate demand than if households view the cut as permanent.

Question 15

Assume that the MPC is 0.75. Assuming only the multiplier effect matters, how will an increase in government purchases of $200 billion shift the aggregate demand curve?

Accepted Answer

A)  It will shift the aggregate demand curve left by $80 billion. 
B)  It will shift the aggregate demand curve left by $250 billion. 
C)  It will shift the aggregate demand curve right by $750 billion. 
D)  It will shift the aggregate demand curve right by $800 billion.

Question 16

If the MPC = 0.5 and the MPI = 0.3, what is the government purchases multiplier in an open economy?

Accepted Answer

A)  1.25 
B)  2 
C)  4 
D)  5

Question 17

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?

Accepted Answer

The answer of Suppose that there are no crowding-out effects...

Question 18

Which of the following best defines the multiplier effect?

Accepted Answer

A)  the multiplied impact on the money supply of a given increase in government purchases 
B)  the multiplied impact on tax revenues of a given increase in government purchases 
C)  the multiplied impact on investment of a given increase in interest rates 
D)  the multiplied impact on aggregate demand of a given increase in government purchases

Question 19

If the MPC = 0.6 and the MPI = 0.25, what is the government purchases multiplier in an open economy?

Accepted Answer

A)  1.8 
B)  2.5 
C)  4 
D)  6.7

Question 20

During expansions, what do automatic stabilizers make government expenditures and taxes do?

Accepted Answer

A)  They make government expenditures and taxes fall. 
B)  They make government expenditures and taxes rise. 
C)  They make government expenditures rise and taxes fall. 
D)  They make government expenditures fall and taxes rise.

Exam 16: The Influence of Fiscal Policy on Aggregate Demand

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.

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

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

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

If the MPC is 0.4, the MPI is 0.2, and the government increases spending by $50 million, what will be the demand for goods and services generated by this increase?

What tends to make the size of a shift in aggregate demand resulting from a tax change smaller than otherwise?

According to the crowding-out effect, how does a decrease in government spending affect the interest rate and investment spending?

If the MPC is 0.6, what is the multiplier?

If the MPC is 0.75 and there are no crowding-out or accelerator effects, an initial increase in AD of $100 billion will eventually shift the AD curve to the right by how much?

The multiplier is equal to MPC/(1 - MPC).

What is the most likely effect of an increase in government spending on goods to build or repair infrastructure?

If households view a tax cut as being temporary, how does the tax cut affect aggregate demand?

Assume that the MPC is 0.75. Assuming only the multiplier effect matters, how will an increase in government purchases of $200 billion shift the aggregate demand curve?

If the MPC = 0.5 and the MPI = 0.3, what is the government purchases multiplier in an open economy?

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?

Which of the following best defines the multiplier effect?

If the MPC = 0.6 and the MPI = 0.25, what is the government purchases multiplier in an open economy?

During expansions, what do automatic stabilizers make government expenditures and taxes do?