Question 1

To eliminate a deflationary gap when the MPC is 0.75 and the deflationary gap is $500 million, investment will need to increase by how much?

Accepted Answer

The answer of To eliminate a deflationary gap when the...

Question 2

According to classical macroeconomic theory, an increase in aggregate demand will _____ in the long run.

Accepted Answer

A) only raise the inflation rate 
B) increase both output and the inflation rate 
C) only reduce the inflation rate 
D) decrease both output and the inflation

Question 3

Suppose we observe that an increase in government spending of $10 billion raises the total aggregate demand by $40 billion.If there is no crowding-out effect, what would be the marginal propensity?

Accepted Answer

A) 0.25 
B) 0.4 
C) 0.75 
D) 4

Question 4

Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.8.What is the total effect of this increase in government purchases?

Accepted Answer

A) $500 billion 
B) $400 billion 
C) $125 billion 
D) $80 billion

Question 5

At a higher price level, the demand for money increases, the interest rate increases, and the demand for business and residential investment falls.Hence the aggregate-demand curve slopes downward.

Accepted Answer

A) True 
 B)False

Question 6

The two macroeconomic effects that make the size of the shift in aggregate demand differ from the change in government purchases are:

Accepted Answer

A) the multiplier effect and the crowding-out effect 
B) the multiplier effect and the Doppler effect 
C) the Keynes effect and the crowding-out effect 
D) the accelerator effect and the multiplier effect

Question 7

Suppose government purchases increase by $200 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.75.What is the total effect of this increase in government purchases?

Accepted Answer

A) $150 billion 
B) $267 billion 
C) $800 billion 
D) $600 billion

Question 8

Is the effect of an election cycle (every three years) putting at risk long-term structural changes to the economy?

Accepted Answer

The answer of Is the effect of an election cycle...

Question 9

The multiplier effect suggests that the increase in aggregate demand could be smaller than the increase in government purchases, while the crowding-out effect suggests that the increase in aggregate demand could be larger than the increase in government purchases.

Accepted Answer

A) True 
 B)False

Question 10

According to the RBA's policy guidelines, if the RBA sees rising inflation, it would then increase interest rates.

Accepted Answer

A) True 
 B)False

Question 11

The money demand curve shifts to the right if there is _____, causing the equilibrium interest rate to _____.

Accepted Answer

A) an increase in the price level; rise 
B) an increase in the price level; fall 
C) a decrease in the price level; rise 
D) a decrease in the price level; fall

Question 12

Any change in government spending has a multiplier effect on the level of economic activity.

Accepted Answer

A) True 
 B)False

Question 13

A rise in the inflation target by the RBA through monetary policy, means the:

Accepted Answer

A) aggregate demand curve shifts to the right 
B) aggregate demand curve shifts to the left 
C) aggregate supply curve shifts to the right 
D) aggregate supply curve shifts to the left

Question 14

The government reduces taxes by $20 million.Suppose that there is no crowding-out effect, and that the marginal propensity to consume is 0.9.What is the total effect on aggregate demand?

Accepted Answer

A) $18 million 
B) $22 million 
C) $180 million 
D) $200 million

Question 15

In the long run, the interest rate and inflation rate adjust to accommodate a fixed level of output.In the short run, the interest rate and output adjust to accommodate a predetermined level of prices.

Accepted Answer

A) True 
 B)False

Question 16

In the liquidity preference theory, money is the most liquid asset and used as a medium of exchange.

Accepted Answer

A) True 
 B)False

Question 17

In order to fight recession, the RBA has to raise its inflation target in order to reduce the real interest rate needed to stimulate the aggregate demand.

Accepted Answer

A) True 
 B)False

Question 18

The theory of Ricardian equivalence suggests that an increase in public saving will be balanced by an increase in private saving.

Accepted Answer

A) True 
 B)False

Question 19

The government-purchases multiplier is defined as:

Accepted Answer

A) 1 - (1/MP
C)  
B) 1/(MPC - 1) 
C) 1 - (MPC - 1) 
D) 1/(1 - MP
C)

Question 20

The money-demand curve is downward-sloping because:

Accepted Answer

A) people will want to hold less money as the interest rate falls 
B) people will want to hold more money as the interest rate falls 
C) interest rates rise as the Reserve Bank reduces the quantity of money demanded 
D) interest rates fall as the Reserve Bank reduces the supply of money

Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

To eliminate a deflationary gap when the MPC is 0.75 and the deflationary gap is $500 million, investment will need to increase by how much?

According to classical macroeconomic theory, an increase in aggregate demand will _____ in the long run.

Suppose we observe that an increase in government spending of $10 billion raises the total aggregate demand by $40 billion.If there is no crowding-out effect, what would be the marginal propensity?

Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.8.What is the total effect of this increase in government purchases?

At a higher price level, the demand for money increases, the interest rate increases, and the demand for business and residential investment falls.Hence the aggregate-demand curve slopes downward.

The two macroeconomic effects that make the size of the shift in aggregate demand differ from the change in government purchases are:

Suppose government purchases increase by $200 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.75.What is the total effect of this increase in government purchases?

Is the effect of an election cycle (every three years) putting at risk long-term structural changes to the economy?

The multiplier effect suggests that the increase in aggregate demand could be smaller than the increase in government purchases, while the crowding-out effect suggests that the increase in aggregate demand could be larger than the increase in government purchases.

According to the RBA's policy guidelines, if the RBA sees rising inflation, it would then increase interest rates.

The money demand curve shifts to the right if there is _, causing the equilibrium interest rate to _.

Any change in government spending has a multiplier effect on the level of economic activity.

A rise in the inflation target by the RBA through monetary policy, means the:

The government reduces taxes by $20 million.Suppose that there is no crowding-out effect, and that the marginal propensity to consume is 0.9.What is the total effect on aggregate demand?

In the long run, the interest rate and inflation rate adjust to accommodate a fixed level of output.In the short run, the interest rate and output adjust to accommodate a predetermined level of prices.

In the liquidity preference theory, money is the most liquid asset and used as a medium of exchange.

In order to fight recession, the RBA has to raise its inflation target in order to reduce the real interest rate needed to stimulate the aggregate demand.

The theory of Ricardian equivalence suggests that an increase in public saving will be balanced by an increase in private saving.

The government-purchases multiplier is defined as:

The money-demand curve is downward-sloping because: