Question 1

According to liquidity-preference theory, if the quantity of money demanded is greater than the quantity supplied, 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 2

According to the crowding-out effect, how do the interest rate and investment spending change when government spending increases?

Accepted Answer

A)  The interest rate and investment spending both increase. 
B)  The interest rate increases and investment spending decreases. 
C)  The interest rate decreases and investment spending increases. 
D)  The interest rate and investment spending both decrease.

Question 3

Suppose the closed economy is in long-run equilibrium. Technological change shifts the long-run aggregate-supply curve $80 billion to the right. At the same time, government purchases increase by $40 billion. If the MPC equals 0.75 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 higher but the price level would be lower. 
D)  Real GDP would be higher but the price level would be the same.

Question 4

In the short run, a decrease in the money supply causes interest rates and aggregate demand to do what?

Accepted Answer

A)  It causes interest rates to increase and aggregate demand to shift right. 
B)  It causes interest rates to increase and aggregate demand to shift left. 
C)  It causes interest rates to decrease and aggregate demand to shift right. 
D)  It causes interest rates to decrease and aggregate demand to shift left.

Question 5

According to the theory of liquidity preference, what does an increase in the price level cause the interest rate and investment to do?

Accepted Answer

A)  It causes both the interest rate and investment to rise. 
B)  It causes both the interest rate and investment to fall. 
C)  It causes the interest rate to rise and investment to fall. 
D)  It causes the interest rate to fall and investment to rise.

Question 6

If the Bank of Canada conducts open-market purchases, how do the money supply and the aggregate demand change?

Accepted Answer

A)  The money supply increases, and aggregate demand shifts right. 
B)  The money supply increases, and aggregate demand shifts left. 
C)  The money supply decreases, and aggregate demand shifts right. 
D)  The money supply decreases, and aggregate demand shifts left.

Question 7

What is the variable that balances the money demand and supply in the liquidity-preference and the classical theories?

Accepted Answer

A)  the interest rate in both theories 
B)  the price level in both theories 
C)  the interest rate in the liquidity-preference theory and the price level in the classical theory 
D)  the price level in the liquidity-preference theory and the interest rate in the classical theory

Question 8

Which statement is consistent with the short-run economic theories studied?

Accepted Answer

A)  In the short run, output is determined by the amount of capital, labour, and technology; the interest rate adjusts to balance the supply and demand for money; and the price level adjusts to balance the supply and demand for loanable funds. 
B)  In the short run, output is determined by the amount of capital, labour, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level adjusts to balance the supply and demand for money. 
C)  In the short run, output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for money; and the price level is stuck. 
D)  In the short run, output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level adjusts to balance the supply and demand for money.

Question 9

When the interest rate decreases, what happens to the opportunity cost of holding money and the quantity of money demanded?

Accepted Answer

A)  The opportunity cost of holding money increases, so the quantity of money demanded increases. 
B)  The opportunity cost of holding money increases, so the quantity of money demanded decreases. 
C)  The opportunity cost of holding money decreases, so the quantity of money demanded increases. 
D)  The opportunity cost of holding money decreases, so the quantity of money demanded decreases.

Question 10

Assume that the MPC is 0.8. Assume that there is a multiplier effect and that the total crowding-out effect is $8 billion. How will an increase in government purchases of $10 billion shift aggregate demand?

Accepted Answer

A)  It will shift aggregate demand left by $2 billion. 
B)  It will shift aggregate demand left by $42 billion. 
C)  It will shift aggregate demand right by $2 billion. 
D)  It will shift aggregate demand right by $42 billion.

Question 11

In the long run, what determines the level of output?

Accepted Answer

A)  the money supply 
B)  the price level 
C)  supply of capital and labour 
D)  policies aimed at stabilizing the economy

Question 12

What do supply-side economists believe a reduction in the tax rate will cause?

Accepted Answer

A)  a large shift of the aggregate-supply curve to the left 
B)  a large shift of the aggregate-supply curve to the right 
C)  a small shift of the aggregate-supply curve to the right 
D)  a small shift of the aggregate-supply curve to the left

Question 13

Which statement describes the interest-rate effect?

Accepted Answer

A)  A higher price level leads to higher money demand, higher money demand leads to higher interest rates, and a higher interest rate increases the quantity of goods and services demanded. 
B)  A higher price level leads to higher money demand, higher money demand leads to lower interest rates, and a higher interest rate reduces the quantity of goods and services demanded. 
C)  A lower price level leads to lower money demand, lower money demand leads to higher interest rates, and a lower interest rate reduces the quantity of goods and services demanded. 
D)  A lower price level leads to lower money demand, lower money demand leads to lower interest rates, and a lower interest rate increases the quantity of goods and services demanded.

Question 14

According to which theory do changes in the interest rate bring the money market into equilibrium?

Accepted Answer

A)  purchasing-power parity theory 
B)  aggregate-demand and aggregate-supply theory 
C)  liquidity-preference theory 
D)  classical theory

Question 15

In a small open economy with a flexible exchange rate, what does a monetary injection by the Bank of Canada cause?

Accepted Answer

A)  It causes the dollar to appreciate. 
B)  It causes net exports to fall. 
C)  It causes an additional decrease in demand for Canadian-produced goods and services that is not realized in a closed economy. 
D)  It causes a shift of the aggregate-demand curve farther to the right than it would in a closed economy.

Question 16

Which statement do opponents of active stabilization policy believe?

Accepted Answer

A)  A monetary policy designed to offset changes in the unemployment rate is effective. 
B)  Fiscal policy is unable to change aggregate demand or aggregate supply. 
C)  The political process creates lags in the implementation of fiscal policy. 
D)  Fluctuations would not exist in the absence of fiscal policies.

Question 17

The most important lag for monetary policy is the time it takes to formulate policy, while the most important lag for fiscal policy is the time it takes for the economy to respond to changes in government spending.

Accepted Answer

A) True 
 B)False

Question 18

In a small open economy with a flexible exchange rate, what does a monetary injection cause?

Accepted Answer

A)  It causes the dollar to appreciate. 
B)  It causes net exports to decline. 
C)  It causes an additional decrease in demand for Canadian-produced goods that is not realized in a closed economy. 
D)  It causes a shift of the aggregate demand curve farther to the right than in a closed economy.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

In liquidity-preference theory, an increase in the interest rate decreases the quantity of money demanded, but does not shift the money-demand curve.

Accepted Answer

A) True 
 B)False

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

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

According to the crowding-out effect, how do the interest rate and investment spending change when government spending increases?

In the short run, a decrease in the money supply causes interest rates and aggregate demand to do what?

According to the theory of liquidity preference, what does an increase in the price level cause the interest rate and investment to do?

If the Bank of Canada conducts open-market purchases, how do the money supply and the aggregate demand change?

What is the variable that balances the money demand and supply in the liquidity-preference and the classical theories?

Which statement is consistent with the short-run economic theories studied?

When the interest rate decreases, what happens to the opportunity cost of holding money and the quantity of money demanded?

Assume that the MPC is 0.8. Assume that there is a multiplier effect and that the total crowding-out effect is $8 billion. How will an increase in government purchases of $10 billion shift aggregate demand?

In the long run, what determines the level of output?

What do supply-side economists believe a reduction in the tax rate will cause?

Which statement describes the interest-rate effect?

According to which theory do changes in the interest rate bring the money market into equilibrium?

In a small open economy with a flexible exchange rate, what does a monetary injection by the Bank of Canada cause?

Which statement do opponents of active stabilization policy believe?

The most important lag for monetary policy is the time it takes to formulate policy, while the most important lag for fiscal policy is the time it takes for the economy to respond to changes in government spending.

In a small open economy with a flexible exchange rate, what does a monetary injection cause?

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

In liquidity-preference theory, an increase in the interest rate decreases the quantity of money demanded, but does not shift the money-demand curve.