Question 1

Which of the following is characteristic of aggregate demand in Canada?

Accepted Answer

A) The exchange-rate effect is relatively small because exports and imports are a small part of real GDP. 
B) The interest-rate effect is relatively small because investment spending is not very responsive to interest rate changes. 
C) The wealth effect is relatively large because money holdings are a significant portion of most households' wealth. 
D) The interest rate effect is relatively large.

Question 2

According to liquidity preference theory, when would the money supply curve shift right?

Accepted Answer

A) if the money demand curve shifted right 
B) only if the Bank of Canada chose to increase the money supply 
C) if the interest rate increased 
D) if the price level fell or the interest rate decreased

Question 3

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 4

Which of the following factors mostly determines the lag problem associated with monetary policy?

Accepted Answer

A) the fact that business firms make investment plans far in advance 
B) the political system of checks and balances that slows down the process of determining monetary policy 
C) the time it takes for changes in government spending to affect the interest rate 
D) the time it takes to print money

Question 5

Assuming no crowding-out, investment-accelerator, or multiplier effects, how will a $200 billion increase in government expenditures shift aggregate demand?

Accepted Answer

A) It will shift aggregate demand right by more than $200 billion. 
B) It will shift aggregate demand right by $200 billion. 
C) It will shift aggregate demand right by less than $200 billion. 
D) It will shift aggregate demand left by more than $200 billion.

Question 6

An increase in the money supply shifts the aggregate supply curve right.

Accepted Answer

A) True 
 B)False

Question 7

Suppose that there are no crowding-out effects and the MPC is 0.9. 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 8

According to the theory of liquidity preference, how is the money supply affected by the interest rate?

Accepted Answer

A) positively 
B) negatively 
C) not affected 
D) directly

Question 9

Which of the following is consistent with the Keynesian theory?

Accepted Answer

A) Irrational waves of pessimism would cause a decrease in aggregate demand and increase unemployment. 
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 10

Which of the following best defines automatic stabilizers?

Accepted Answer

A) changes in taxes or government spending that increase the lags caused by fiscal policy 
B) changes in taxes or government spending that shift aggregate demand without requiring active policies 
C) changes in taxes or government spending that policymakers quickly agree to 
D) any changes in taxes or government policies

Question 11

How long does fiscal policy affect the economy?

Accepted Answer

A) only in the short run 
B) only in the long run 
C) in both the short and long run 
D) in neither the short nor long run

Question 12

If the MPC is 0, what is the multiplier?

Accepted Answer

A) 0 
B) 1 
C) 10 
D) 100

Question 13

Suppose that consumers become pessimistic about the future health of the economy, and so cut back on their consumption spending. What will happen to aggregate demand and to output? What might the executive and the Parliament have to do to keep output stable?

Accepted Answer

The answer of Suppose that consumers become pessimistic about the...

Question 14

For the following questions, consult the diagram below.
Figure 15-1 
-Refer to Figure 15-1. At an interest rate of 4 percent, how much is the excess money demand or supply?

Accepted Answer

A)  There is an excess money demand equal to the distance between a and b. 
B)  There is an excess money demand equal to the distance between b and c. 
C)  There is an excess money supply equal to the distance between b and a. 
D)  There is an excess money supply equal to the distance between c and b.

Question 15

Which of the following 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 16

Stock prices often rise when the Bank of Canada raises interest rates.

Accepted Answer

A) True 
 B)False

Question 17

When making a case against active stabilization policies, what do some economists argue?

Accepted Answer

A) Monetary policy should not be used to stabilize the economy. 
B) Policy instruments cannot be used to achieve long term goals. 
C) Fiscal policies are theoretically invalid as instruments for stabilizing the economy. 
D) Policies are effective immediately, with too short lags.

Question 18

Which of the following actions might we logically expect to result from rising stock prices?

Accepted Answer

A) Jim increases his consumption spending. 
B) Firms sell fewer shares of new stock. 
C) Firms spend less on investment. 
D) People will save less.

Question 19

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 20

What did Keynes use the term "animal spirits" to refer to?

Accepted Answer

A) debates by politicians concerning fiscal policy 
B) arbitrary changes in attitudes of households and firms 
C) mean-spirited economists who believed in the classical dichotomy 
D) firms' relentless efforts to maximize profits

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