Question 1

According to liquidity-preference theory, if the price level increases, how do the equilibrium interest rate and the aggregate quantity of goods change?

Accepted Answer

A)  The interest rate and the quantity demanded rise. 
B)  The interest rate rises and the quantity demanded falls. 
C)  The interest rate falls and the quantity demanded rises. 
D)  The interest rate and the quantity demanded fall.

Question 2

The theory of liquidity preference assumes that the nominal supply of money is determined by which of the following?

Accepted Answer

A)  the level of real GDP 
B)  the rate of inflation 
C)  government spending 
D)  the central bank

Question 3

What is most likely to happen in the short run?

Accepted Answer

A)  The price level alone adjusts to balance the supply and demand for money. 
B)  Output responds to changes in the aggregate demand for goods and services. 
C)  Changes in the money supply cause a proportional change in the price level. 
D)  Changes in available production technology for turning capital and labour into output.

Question 4

How does a stock market boom affect household spending, and how would the Bank of Canada offset the effects on the price level and real GDP?

Accepted Answer

A)  household spending increases; the Bank of Canada would increase the money supply 
B)  household spending increases; the Bank of Canada would decrease the money supply 
C)  household spending decreases; the Bank of Canada would increase the money supply 
D)  household spending decreases; the Bank of Canada would decrease the money supply

Question 5

Which of the following is the most liquid asset?

Accepted Answer

A)  capital goods 
B)  stocks and bonds with a low risk 
C)  real estate 
D)  funds in a chequing account

Question 6

Why and in what way are fiscal policy lags different from monetary policy lags?

Accepted Answer

The answer of Why and in what way are fiscal...

Question 7

Which statement is consistent with the Keynesian theory?

Accepted Answer

A)  Short-run economic fluctuations are caused by unstable aggregate demand; therefore, policy instruments should be used to stabilize the economy. 
B)  Irrational waves of optimism would cause a reduction in aggregate demand and decrease unemployment. 
C)  Changes in business and consumer expectations generally stabilize the economy. 
D)  Changes in consumer confidence are irrelevant for the economy.

Question 8

According to liquidity-preference theory, if the quantity of money supplied is greater than the quantity demanded, what will happen to the interest rate and the quantity of money demanded?

Accepted Answer

A)  The interest rate will increase, and the quantity of money demanded will decrease. 
B)  The interest rate will increase, and the quantity of money demanded will increase. 
C)  The interest rate will decrease, and the quantity of money demanded will decrease. 
D)  The interest rate will decrease, and the quantity of money demanded will increase.

Question 9

If the multiplier is 10, what is the MPC?

Accepted Answer

A)  1/9 
B)  1/5 
C)  4/5 
D)  9/10

Question 10

Fiscal policy refers to the idea that aggregate demand is changed by changes in what?

Accepted Answer

A)  the money supply 
B)  government spending and taxes 
C)  trade policy 
D)  interest rates

Question 11

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

Accepted Answer

A)  The opportunity cost of holding money decreases when the interest rate increases, so people desire to hold more money. 
B)  The opportunity cost of holding money decreases when the interest rate increases, so people desire to hold less money. 
C)  The opportunity cost of holding money increases when the interest rate increases, so people desire to hold more money. 
D)  The opportunity cost of holding money increases when the interest rate increases, so people desire to hold less money.

Question 12

Over what period of time is the liquidity-preference theory most relevant, and what does it suppose?

Accepted Answer

A)  short run; it supposes that the price level adjusts to bring money supply and money demand into balance 
B)  short run; it supposes that the interest rate adjusts to bring money supply and money demand into balance 
C)  long run; it supposes that the price level adjusts to bring money supply and money demand into balance 
D)  long run; it supposes that the interest rate adjusts to bring money supply and money demand into balance

Question 13

If there is excess money demand, what will people do and what happens to the interest rate?

Accepted Answer

A)  People will deposit more into interest-bearing accounts, and the interest rate will fall. 
B)  People will deposit more into interest-bearing accounts, and the interest rate will rise. 
C)  People will withdraw money from interest-bearing accounts, and the interest rate will fall. 
D)  People will withdraw money from interest-bearing accounts, and the interest rate will rise.

Question 14

Suppose the closed economy is in long-run equilibrium. Pessimism on the part of investors then shifts the aggregate-demand curve $50 billion to the left. The government wants to increase spending in order to avoid a recession. If the crowding-out effect is always half as strong as the multiplier effect, and if the MPC equals 0.9, by how much do government purchases have to rise?

Accepted Answer

A)  $10 billion 
B)  $20 billion 
C)  $50 billion 
D)  $100 billion

Question 15

In which situation do people want to hold more money?

Accepted Answer

A)  when the price level and the interest rate increases 
B)  when the price level and the interest rate decreases 
C)  when the price level increases and the interest rate decreases 
D)  when the price level decreases and the interest rate increases

Question 16

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 17

If the Bank of Canada allows the exchange rate to vary freely, which effect will an expansionary fiscal policy have?

Accepted Answer

A)  It will cause a large and permanent rightward shift of the AD curve. 
B)  It will cause a large and permanent leftward shift of the AD curve. 
C)  It will have no permanent effect on the position of the AD curve, but it will cause interest rates to permanently increase. 
D)  It will have no permanent effect on either the position of the AD curve or the interest rate.

Question 18

According to liquidity-preference theory, why is the money-demand curve downward sloping?

Accepted Answer

A)  because interest rates rise as the Bank of Canada reduces the quantity of money demanded 
B)  because interest rates fall as the Bank of Canada reduces the supply of money 
C)  because people will want to hold less money as the cost of doing so falls 
D)  because people will want to hold more money as the cost of doing so falls

Question 19

Which of the following shifts aggregate demand to the right?

Accepted Answer

A)  an increase in the price level 
B)  an increase in the money supply 
C)  a decrease in the price level 
D)  a decrease in the money supply

Question 20

During recessions, what do taxes tend to do, and to what effect?

Accepted Answer

A)  They rise and so shift aggregate demand right. 
B)  They rise and so shift aggregate demand left. 
C)  They fall and so shift aggregate demand right. 
D)  They fall and so shift aggregate demand left.

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