Question 1

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 2

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Accepted Answer

A) True 
 B)False

Question 3

What is the difference between the effects of fiscal policy and the effects of monetary policy?

Accepted Answer

A)  Monetary policy can affect long-term growth while fiscal policy cannot. 
B)  Fiscal policy can affect the short-term price level while monetary policy cannot. 
C)  Fiscal policy can affect long-term growth while monetary policy cannot. 
D)  Monetary policy can affect the short-term level of output while fiscal policy cannot.

Question 4

In this question, we try to find out whether using the bank rate as a monetary policy tool is consistent with the liquidity-preference theory. Theoretically, when the Bank of Canada changes the bank rate and implicitly the money supply, the market interest rate would change to become equal to the bank rate AND to equate the new money supply with the money demand. But is this double role of the market interest rate possible? Let us give an example and see what happens. Assume the money demand curve is MD=150 - 15r, and the money supply curve is MS = 100 - 10R, where r is the market interest rate and R is the bank rate announced by the Bank of Canada.
a) Show that, for a given value of bank rate R, the equilibrium market rate is different from R. What does this example show?
b) Given the money demand equation MD=150 - 15r, find a money supply equation such that, for any value of R, the equilibrium market interest rate r is equal to R.
c) For the money supply equation MS = 100 - 10R and a given bank rate R, show how the market could balance at the market interest rate r = R (show what the Bank of Canada should do to balance the money market).
d) What have we learned from this exercise?

Accepted Answer

The answer of In this question, we try to find...

Question 5

If the MPC = 0.8, what is the government purchases multiplier?

Accepted Answer

A)  0.20 
B)  0.50 
C)  2 
D)  5

Question 6

Figure 15-2
 
-Refer to the Figure 15-2. Which of the following can happen in a closed economy?

Accepted Answer

A)  Unemployment falls as the economy moves from a to 
B)  Fiscal policy is ineffective to move the economy from b to 
C)  If the economy is left alone, then as the economy moves from b to long-run equilibrium, the price level will increase. 
D)  An increase in money supply increases both output and prices.

Question 7

Which of the following shifts money demand to the right?

Accepted Answer

A)  an increase in the price level 
B)  a decrease in the price level 
C)  an increase in the interest rate 
D)  a decrease in the interest rate

Question 8

How does the multiplier change when the MPC increases, and what is the effect on aggregate demand?

Accepted Answer

A)  Higher MPC increases the multiplier so that changes in government expenditures have a larger effect on aggregate demand. 
B)  Higher MPC increases the multiplier so that changes in government expenditures have a smaller effect on aggregate demand. 
C)  Higher MPC decreases the multiplier so that changes in government expenditures have a larger effect on aggregate demand. 
D)  Higher MPC decreases the multiplier so that changes in government expenditures have a smaller effect on aggregate demand.

Question 9

What is the most important automatic stabilizer?

Accepted Answer

A)  government spending 
B)  the tax system 
C)  unemployment compensation 
D)  welfare benefits

Question 10

According to most economists, what does fiscal policy affect?

Accepted Answer

A)  only aggregate demand and not aggregate supply 
B)  mostly aggregate demand 
C)  mostly aggregate supply 
D)  only aggregate supply and not aggregate demand

Question 11

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

Accepted Answer

A)  interest rate 
B)  exchange rate 
C)  quantity of output 
D)  price level

Question 12

Which reason for the downward slope of the aggregate demand curve would likely be more important for a small closed economy?

Accepted Answer

A)  wealth effect 
B)  interest-rate effect 
C)  exchange-rate effect 
D)  real-wage effect

Question 13

In a small open economy with perfect capital mobility, if exchange rates are fixed, how could aggregate demand be increased?

Accepted Answer

A)  by increasing government expenditures 
B)  by increasing tax rates 
C)  by increasing the money supply 
D)  by decreasing the money supply

Question 14

Assuming no crowding-out, investment-accelerator, or multiplier effects, how will a $100 billion increase in government expenditures shift aggregate demand?

Accepted Answer

A)  It will shift aggregate demand right by more than $100 billion. 
B)  It will shift aggregate demand right by $100 billion. 
C)  It will shift aggregate demand right by less than $100 billion. 
D)  It will shift aggregate demand left by more than $100 billion.

Question 15

Assume the money market is initially in equilibrium. If the price level decreases, according to liquidity-preference theory, what is in excess and for how long?

Accepted Answer

A)  The supply of money is in excess until the interest rate increases. 
B)  The supply of money is in excess until the interest rate decreases. 
C)  The demand for money is in excess until the interest rate increases. 
D)  The demand for money is in excess until the interest rate decreases.

Question 16

Which of the following best defines the marginal propensity to consume (MPC)?

Accepted Answer

A)  the fraction of extra income that a household consumes rather than saves 
B)  the fraction of extra income that a household either consumes or saves 
C)  the fraction of total income that a household consumes rather than saves 
D)  the fraction of total income that a household either consumes or saves

Question 17

Which statement is consistent with the supply-side theories?

Accepted Answer

A)  The Bank of Canada should use monetary policy only to control the rate of inflation. 
B)  The government should promote full employment and production. 
C)  The government should periodically increase the minimum wage and unemployment insurance benefits. 
D)  Tax cuts influence the aggregate supply significantly.

Question 18

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

Accepted Answer