Question 1

Suppose we observe that an increase in government spending of $10 billion raises the total aggregate demand by $40 billion. If there is no crowding-out effect, what would be the marginal propensity?

Accepted Answer

A)   0.25
B)   0.4
C)   0.75
D)   4 C

Question 2

Why could there be a great deal of frustration for policy makers when the long-term effects of their decisions do not seem to flow through, as they wanted?

Accepted Answer

The effects of monetary and fiscal policy depend on the time horizon. The aggregate-demand effects on output emphasised hold only in the short run, over which prices are sticky. In the long run, output is determined by factor supplies and technology.

Question 3

Most economists believe that a cut in tax rates:

Accepted Answer

A)   will give people the incentive to work less hours
B)   will increase government tax revenue
C)   will have only a small effect on the aggregate-supply curve
D)   all of the above C

Question 4

Supply-side economists focus on:

Accepted Answer

A)   how fiscal policy affects aggregate demand
B)   how tax-policy affects the incentives to work
C)   how fiscal policy affects aggregate supply
D)   both A and B
E)   both B and C

Question 5

If the interest rate increases through monetary policy, the:

Accepted Answer

A)   aggregate demand curve shifts to the right
B)   aggregate demand curve shifts to the left
C)   aggregate supply curve shifts to the right
D)   aggregate supply curve shifts to the left

Question 6

Assume that the MPC is 0.5. A $100-billion cut in taxes will shift the aggregate-demand curve to the:

Accepted Answer

A)   right by $500 billion
B)   right by $250 billion
C)   left by $250 billion
D)   none of the above

Question 7

A change in monetary policy that aims to expand aggregate demand can be described either as:

Accepted Answer

A)   increasing the money supply or as raising the interest rate
B)   decreasing the money supply or as raising the interest rate
C)   decreasing the money supply or as lowering the interest rate
D)   increasing the money supply or as lowering the interest rate

Question 8

Suppose that equilibrium in the money market is described by the equation M = aP/r, where M is the money supply, P is the price level, r is the interest rate and a is a constant. Suppose that investment is described by the equation I = b - kr, where b and k are constants. Using the equation Y = C + I + G (where Y is GDP, C is consumption and G is government spending), show that a higher price level leads to lower GDP.

Accepted Answer

The answer of Suppose that equilibrium in the money market...

Question 9

For a given fixed price level, an increase in the money supply will lead to:

Accepted Answer

A)   an increase in the interest rate, which in turn decreases the quantity of goods and services demanded
B)   an increase in the interest rate, which in turn increases the quantity of goods and services demanded
C)   a fall in the interest rate, which in turn increases the quantity of goods and services demanded
D)   a fall in the interest rate, which in turn decreases the quantity of goods and services demanded

Question 10

When the government increases its purchases, the increase in aggregate demand could be more than or less than the increase in government purchases, depending on whether the multiplier effect or the crowding-out effect is larger.

Accepted Answer

A) True 
 B)False

Question 11

Changes in monetary policy can only be viewed in terms of a changing target for the interest rate.

Accepted Answer

A) True 
 B)False

Question 12

The lag problem associated with monetary policy is due to:

Accepted Answer

A)   the fact that firms make investment plans far in advance
B)   the political process
C)   the time it takes for monetary policy to affect the interest rate
D)   none of the above

Question 13

If the economy is in a recession, an appropriate combination of monetary and fiscal policies might be to:

Accepted Answer

A)   increase taxes, lower government spending, expand the money supply
B)   increase taxes, raise government spending, expand the money supply
C)   decrease taxes, raise government spending, expand the money supply
D)   decrease taxes, lower government spending, contract the money supply

Question 14

The government reduces taxes by $20 million. Suppose that there is no crowding-out effect, and that the marginal propensity to consume is 0.9. What is the total effect on aggregate demand?

Accepted Answer

A)   $18 million
B)   $22 million
C)   $180 million
D)   $200 million

Question 15

Which of the following policies would Keynes have supported when the economy is experiencing unemployment?

Accepted Answer

A)   An open-market purchase
B)   A reduction in tax rates
C)   An increase in government purchases
D)   All of the above

Question 16

If there is a major increase in economic activity, an appropriate policy for government would be to:

Accepted Answer

A)   encourage individuals to save more
B)   increase the budget surplus
C)   tighten up monetary policy
D)   all of these

Question 17

Assume there is no crowding-out effect. If an increase in government spending of $10 billion raises the total aggregate demand by $50 billion, then the marginal propensity is:

Accepted Answer

A)   0.2
B)   0.5
C)   5
D)   0.8

Question 18

When the government reduces taxes, households' take-home pay:

Accepted Answer

A)   increases, households' saving increases and households' consumption increases
B)   decreases, households' saving decreases and households' consumption decreases
C)   increases, households' saving is unaffected and households' consumption increases
D)   increases, households' saving increases and households' consumption is unaffected

Question 19

According to the RBA's policy guidelines, if the RBA sees rising inflation, it would then increase interest rates.

Accepted Answer

A) True 
 B)False

Question 20

Suppose the government reduces taxes by $20 million, that there is no crowding-out effect, and that the marginal propensity to consume is 0.9. What is the total effect on aggregate demand? What would be the total effect on aggregate demand if the government increased purchases by $20 million?

Accepted Answer

The answer of Suppose the government reduces taxes by $20...

Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Suppose we observe that an increase in government spending of $10 billion raises the total aggregate demand by $40 billion. If there is no crowding-out effect, what would be the marginal propensity?

Why could there be a great deal of frustration for policy makers when the long-term effects of their decisions do not seem to flow through, as they wanted?

Most economists believe that a cut in tax rates:

Supply-side economists focus on:

If the interest rate increases through monetary policy, the:

Assume that the MPC is 0.5. A $100-billion cut in taxes will shift the aggregate-demand curve to the:

A change in monetary policy that aims to expand aggregate demand can be described either as:

For a given fixed price level, an increase in the money supply will lead to:

When the government increases its purchases, the increase in aggregate demand could be more than or less than the increase in government purchases, depending on whether the multiplier effect or the crowding-out effect is larger.

Changes in monetary policy can only be viewed in terms of a changing target for the interest rate.

The lag problem associated with monetary policy is due to:

If the economy is in a recession, an appropriate combination of monetary and fiscal policies might be to:

The government reduces taxes by $20 million. Suppose that there is no crowding-out effect, and that the marginal propensity to consume is 0.9. What is the total effect on aggregate demand?

Which of the following policies would Keynes have supported when the economy is experiencing unemployment?

If there is a major increase in economic activity, an appropriate policy for government would be to:

Assume there is no crowding-out effect. If an increase in government spending of $10 billion raises the total aggregate demand by $50 billion, then the marginal propensity is:

When the government reduces taxes, households' take-home pay:

According to the RBA's policy guidelines, if the RBA sees rising inflation, it would then increase interest rates.

Suppose the government reduces taxes by $20 million, that there is no crowding-out effect, and that the marginal propensity to consume is 0.9. What is the total effect on aggregate demand? What would be the total effect on aggregate demand if the government increased purchases by $20 million?