Question 1

Figure 10.4
 
-Refer to Figure 10.4..Suppose the economy's equilibrium starts out with an output gap of $\hat{Y}$ ₁,and real GDP increases so the C $\hat{Y}$ ₂.If the Bank of Canada keeps the money supply constant,money demand will ________ and the nominal interest rate will ________.

Accepted Answer

A)  increase; increase 
B)  increase; decrease 
C)  increase; remain constant 
D)  remain constant; remain constant

Question 2

Explain how an increase in the real interest rate,with no changes to other factors that affect aggregate expenditure,impacts aggregate expenditure and how this interest rate increase is shown on the IS curve.How would this change if there was a negative demand shock with no change in the real interest rate? Show both situations using graphs for aggregate expenditure and the IS curve.

Accepted Answer

The answer of Explain how an increase in the real...

Question 3

Other things equal,when the real interest rate falls,C,I,and NX ________ and the output gap will ________.

Accepted Answer

A)  decrease; decrease 
B)  decrease; increase 
C)  increase; increase 
D)  increase; decrease

Question 4

If the MPC = 0.75,a decrease in government spending from $875 billion to $840 billion will decrease real GDP by

Accepted Answer

A)  $26.25 billion. 
B)  $35 billion. 
C)  $46.67 billion. 
D)  $140 billion.

Question 5

Contractionary monetary policy causes a ________ the MP curve and a ________ the aggregate demand curve.

Accepted Answer

A)  movement to the right along; shift to the right of 
B)  downward shift of; shift to the right of 
C)  movement to the left along; movement up along 
D)  upward shift of; shift to the left of

Question 6

Assume the long-term real interest rate is 4% and the expected inflation rate is 5%.If the Bank of Canada decreases the money supply and as a result,the expected inflation rate decreases to 2%,then based on the Fisher effect,the long-term real interest rate will ________ and the long-term nominal interest rate will ________.

Accepted Answer

A)  remain at 4%; rise to 7% 
B)  remain at 4%; fall to 6% 
C)  fall to 1%; fall to 6% 
D)  fall to 6%; remain at -1%

Question 7

Assume the economy is in a recession and the federal government decides to cut personal income tax rates.All else equal,the cut in tax rates should

Accepted Answer

A)  shift the IS curve to the right and move the output gap closer to zero. 
B)  shift the IS curve to the left and move the output gap farther away from zero. 
C)  shift up the MP curve and move the output gap closer to zero. 
D)  shift up the MP curve and move the output gap farther away from zero.

Question 8

Figure 10.3
  
Panel (a) Panel (b)
-Refer to Figure 10.3...An increase in the real interest rate,with no other changes that affect aggregate expenditure,is best represented by ________ in panel (a)and ________ in panel (b).

Accepted Answer

A)  a shift from AE₂ to AE₃; a shift from IS₁ to IS₂ 
B)  a shift from AE₃ to AE₂; a shift from IS₂ to IS₁ 
C)  a shift from AE₂ to AE₁; a movement from point B to point A 
D)  a shift from AE₃ to AE₁; a movement from point C to point A

Question 9

If the Bank of Canada keeps the real interest rate constant,an economic shock such as a housing market crash would cause the ________,and the output gap would ________.

Accepted Answer

A)  MP curve to shift up; increase 
B)  MP curve to shift down; decrease 
C)  IS curve to shift to the left; decrease 
D)  IS curve to shift to the right; increase

Question 10

Suppose the economy is initially in short-run equilibrium and the Bank of Canada decreases the nominal money supply.If the price level remains constant,real GDP will ________ relative to potential GDP and the real interest rate will ________.

Accepted Answer

A)  increase; increase 
B)  increase; decrease 
C)  decrease; increase 
D)  decrease; decrease

Question 11

Assume the long-term nominal interest rate is 7% and the expected inflation rate is 3%.If the Bank of Canada increases the money supply and as a result,the expected inflation rate increases to 5%,then based on the Fisher effect,the long-term real interest rate will

Accepted Answer

A)  remain at 4%. 
B)  increase to 6%. 
C)  fall to 3%. 
D)  increase to 9%.

Question 12

Figure 10.3
  
Panel (a) Panel (b)
-Refer to Figure 10.3..A negative demand shock accompanied by an increase in the real interest rate is best represented by ________ in panel (a)and ________ in panel (b).

Accepted Answer

A)  a shift from AE₃ to AE₂; a movement from point C to point B 
B)  a shift from AE₂ to AE₃; a shift from IS₁ to IS₂ 
C)  a shift from AE₂ to AE₁; a movement from point B to point A 
D)  a shift from AE₃ to AE₁; a movement from point C to point A

Question 13

Figure 10.5
 
-Refer to Figure 10.5.A shift from MP₁ to MP₃ will occur if

Accepted Answer

A)  the term structure effect increases. 
B)  the default-risk premium decreases. 
C)  investors increase the short-term interest they expect in the future. 
D)  the Bank of Canada increases its target for the short-term nominal interest rate.

Question 14

If the short-term nominal interest rate is 3.4%,the term structure effect is 1.2%,the default-risk premium is 1.4%,and the expected rate of inflation is 2.7%,the long-term real interest rate will be

Accepted Answer

A)  -1.9%. 
B)  0.5%. 
C)  3.3%. 
D)  8.7%.

Exam 10: Explaining Aggregate Demand: the Is-Mp Model

Other things equal,when the real interest rate falls,C,I,and NX and the output gap will .

If the MPC = 0.75,a decrease in government spending from $875 billion to $840 billion will decrease real GDP by

Contractionary monetary policy causes a the MP curve and a the aggregate demand curve.

Assume the economy is in a recession and the federal government decides to cut personal income tax rates.All else equal,the cut in tax rates should

Figure 10.3 Panel (a) Panel (b) -Refer to Figure 10.3...An increase in the real interest rate,with no other changes that affect aggregate expenditure,is best represented by in panel (a) and in panel (b) .

If the Bank of Canada keeps the real interest rate constant,an economic shock such as a housing market crash would cause the ,and the output gap would .

Suppose the economy is initially in short-run equilibrium and the Bank of Canada decreases the nominal money supply.If the price level remains constant,real GDP will relative to potential GDP and the real interest rate will .

Assume the long-term nominal interest rate is 7% and the expected inflation rate is 3%.If the Bank of Canada increases the money supply and as a result,the expected inflation rate increases to 5%,then based on the Fisher effect,the long-term real interest rate will

Figure 10.3 Panel (a) Panel (b) -Refer to Figure 10.3..A negative demand shock accompanied by an increase in the real interest rate is best represented by in panel (a) and in panel (b) .

Figure 10.5 -Refer to Figure 10.5.A shift from MP₁ to MP₃ will occur if

If the short-term nominal interest rate is 3.4%,the term structure effect is 1.2%,the default-risk premium is 1.4%,and the expected rate of inflation is 2.7%,the long-term real interest rate will be

Exam 10: Explaining Aggregate Demand: the Is-Mp Model

Figure 10.4 -Refer to Figure 10.4..Suppose the economy's equilibrium starts out with an output gap of Y^\hat{Y}Y^ ₁,and real GDP increases so the C Y^\hat{Y}Y^ ₂.If the Bank of Canada keeps the money supply constant,money demand will ________ and the nominal interest rate will ________.

Other things equal,when the real interest rate falls,C,I,and NX ________ and the output gap will ________.

If the MPC = 0.75,a decrease in government spending from $875 billion to $840 billion will decrease real GDP by

Contractionary monetary policy causes a ________ the MP curve and a ________ the aggregate demand curve.

Assume the economy is in a recession and the federal government decides to cut personal income tax rates.All else equal,the cut in tax rates should

Figure 10.3 Panel (a) Panel (b) -Refer to Figure 10.3...An increase in the real interest rate,with no other changes that affect aggregate expenditure,is best represented by ________ in panel (a) and ________ in panel (b) .

If the Bank of Canada keeps the real interest rate constant,an economic shock such as a housing market crash would cause the ________,and the output gap would ________.

Suppose the economy is initially in short-run equilibrium and the Bank of Canada decreases the nominal money supply.If the price level remains constant,real GDP will ________ relative to potential GDP and the real interest rate will ________.

Assume the long-term nominal interest rate is 7% and the expected inflation rate is 3%.If the Bank of Canada increases the money supply and as a result,the expected inflation rate increases to 5%,then based on the Fisher effect,the long-term real interest rate will

Figure 10.3 Panel (a) Panel (b) -Refer to Figure 10.3..A negative demand shock accompanied by an increase in the real interest rate is best represented by ________ in panel (a) and ________ in panel (b) .

Figure 10.5 -Refer to Figure 10.5.A shift from MP₁ to MP₃ will occur if

If the short-term nominal interest rate is 3.4%,the term structure effect is 1.2%,the default-risk premium is 1.4%,and the expected rate of inflation is 2.7%,the long-term real interest rate will be

Other things equal,when the real interest rate falls,C,I,and NX and the output gap will .

Contractionary monetary policy causes a the MP curve and a the aggregate demand curve.

Figure 10.3 Panel (a) Panel (b) -Refer to Figure 10.3...An increase in the real interest rate,with no other changes that affect aggregate expenditure,is best represented by in panel (a) and in panel (b) .

If the Bank of Canada keeps the real interest rate constant,an economic shock such as a housing market crash would cause the ,and the output gap would .

Suppose the economy is initially in short-run equilibrium and the Bank of Canada decreases the nominal money supply.If the price level remains constant,real GDP will relative to potential GDP and the real interest rate will .

Figure 10.3 Panel (a) Panel (b) -Refer to Figure 10.3..A negative demand shock accompanied by an increase in the real interest rate is best represented by in panel (a) and in panel (b) .