Question 1

Assume the money market is initially in equilibrium. If the price level increases, 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 2

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Accepted Answer

The answer of Explain the logic according to liquidity preference...

Question 3

Which of the following terms refers to the positive feedback from aggregate demand to investment?

Accepted Answer

A) the investment multiplier 
B) the stock-market effect 
C) the investment accelerator 
D) the crowding-in multiplier

Question 4

According to liquidity preference theory, what is the opportunity cost of holding money?

Accepted Answer

A) the interest rate on bonds 
B) the inflation rate 
C) the cost of converting bonds to a medium of exchange 
D) the difference between the inflation rate and the interest rate on bonds

Question 5

In which of the following situations do people want to hold less money?

Accepted Answer

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

Question 6

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) exchange rates

Question 7

For the following questions, consult the diagram below.
Figure 15-2 
-Refer to Figure 15-2. Which of the following can happen in a closed economy?

Accepted Answer

A)  an increase in government purchases 
B)  a decrease in stock prices 
C)  consumers and firms becoming more optimistic about the future 
D)  an increase in the price level

Question 8

Assuming the crowding-out effect but no multiplier or investment-accelerator effects, what is the effect of a $500 billion increase in government expenditures on the aggregate demand or supply?

Accepted Answer

A) It shifts the aggregate demand right by more than $500 billion. 
B) It shifts the aggregate demand right by less than $500 billion. 
C) It shifts the aggregate supply left by more than $500 billion. 
D) It shifts the aggregate supply left by less than $500 billion.

Question 9

In a small open economy with a flexible exchange rate, a monetary injection by the Bank of Canada causes which of the following?

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 10

Compare the classical model of money market with the liquidity preference model.
a.Are they consistent with each other?
b.Draw the classical money demand curve in a Price-Quantity-of-money diagram.
c.How does your money demand curve shift when income, Y, increases?
d.Use your classical money demand diagram to derive an aggregate demand curve.

Accepted Answer

The answer of Compare the classical model of money market...

Question 11

In a small open economy with a flexible exchange rate, a monetary injection causes which of the following?

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 12

What does a monetary injection by the Bank of Canada do to interest rates and aggregate demand?

Accepted Answer

A) It increases interest rates and increases aggregate demand. 
B) It increases interest rates and decreases aggregate demand. 
C) It decreases interest rates and decreases aggregate demand. 
D) It decreases interest rates and increases aggregate demand.

Question 13

Suppose the closed economy is in long-run equilibrium. Immigration of skilled workers shifts the long-run aggregate supply curve $60 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 $160 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 14

Which of the following statements 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 15

Explain how unemployment insurance acts as an automatic stabilizer.

Accepted Answer

The answer of Explain how unemployment insurance acts as an...

Question 16

What do open-market purchases do to the price level and real GDP?

Accepted Answer

A) They increase the price level and real GDP. 
B) They decrease the price level and real GDP. 
C) They increase the price level and decrease real GDP. 
D) They decrease the price level and increase real GDP.

Question 17

What is the main reason the aggregate demand curve slopes downward?

Accepted Answer

A) As the price level increases, interest rates increase, and investment decreases. 
B) As the price level increases, interest rates decrease, and investment increases. 
C) As the price level decreases, interest rates increase, and investment increases. 
D) As the price level decreases, interest rates decrease, and investment decreases.

Question 18

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 right 
C) They fall and so shift aggregate demand right. 
D) They fall and so shift aggregate demand right

Question 19

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 20

Which of the following shifts aggregate demand right?

Accepted Answer

A) an increase in interest rates 
B) a decrease in the price level 
C) a decrease in the money supply 
D) a decrease in the bank rate

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