Question 1

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 2

Which policy would someone who wants the government to follow an active stabilization policy recommend when the economy is experiencing unemployment above the natural rate?

Accepted Answer

A)  decreasing the money supply 
B)  increasing government expenditures 
C)  increasing taxes 
D)  reducing the government deficit

Question 3

The liquidity-preference theory assumes that the interest rate adjusts to balance the money demand and supply,where the money supply is arbitrarily determined by the central bank.However,we have previously learned that the central bank controls the money supply precisely by changing the interest rate.How do you reconcile the liquidity-preference theory with using the interest rate as a monetary policy tool?

Accepted Answer

The answer of The liquidity-preference theory assumes that the interest...

Question 4

Which of the following shifts aggregate demand right?

Accepted Answer

A)  an increase in government expenditures or a decrease in the price level 
B)  a decrease in government expenditures or an increase in the price level 
C)  an increase in government expenditures,but not a change in the price level 
D)  a decrease in the price level,but not an increase in government expenditures

Question 5

If the Bank of Canada maintains a fixed exchange rate,which effect will an expansionary fiscal policy have?

Accepted Answer

A)  It will cause a large and permanent rightward shift in the AD curve. 
B)  It will cause a large and permanent leftward shift in the AD curve. 
C)  It will have no permanent effect on the position of the AD curve,but it will cause interest rates to rise. 
D)  It will have no permanent effect on either the position of the AD curve or the interest rate.

Question 6

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

Accepted Answer

A)  if government spending increased 
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 7

When the Bank of Canada decreases the money supply,what do we expect to happen to interest rates and stock prices?

Accepted Answer

A)  Interest rates and stock prices both rise. 
B)  Interest rates and stock prices both fall. 
C)  Interest rates rise and stock prices fall. 
D)  Interest rates fall and stock prices rise.

Question 8

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 9

Figure 15-2 
-Refer to the Figure 15-2.In a closed economy,what could have caused the economy to move from a to b?

Accepted Answer

A)  a wave of optimism 
B)  a decrease in price 
C)  either fiscal or monetary contraction 
D)  an increase in the price of oil

Question 10

Which statement best illustrates how the investment accelerator works?

Accepted Answer

A)  An increase in government expenditures increases the interest rate so that the Sleepwell Hotel chain decides to build fewer new hotels. 
B)  An increase in government expenditures increases aggregate spending so that the Sleepwell Hotel chain finds it profitable to build more new hotels. 
C)  An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by the Sleepwell Hotel chain rises. 
D)  An increase in government expenditures decreases the interest rate so that the Sleepwell Hotel chain decides to build more new hotels.

Question 11

What are the effects of a change in taxes on consumption and aggregate demand?

Accepted Answer

A)  If taxes increase,consumption increases and aggregate demand shifts right. 
B)  If taxes increase,consumption decreases and aggregate demand shifts left. 
C)  If taxes decrease,consumption increases and aggregate demand shifts left. 
D)  If taxes decrease,consumption decreases and aggregate demand shifts right.

Question 12

If expected inflation is constant and the nominal interest rate increased 3 percentage points,what would happen to the real interest rate?

Accepted Answer

A)  It would increase 3 percentage points. 
B)  It would increase,but by fewer than 3 percentage points. 
C)  It would decrease,but by fewer than 3 percentage points. 
D)  It would decrease by 3 percentage points.

Question 13

Assume that the MPC is 0.75.Assuming only the multiplier effect matters,how will an increase in government purchases of $200 billion shift the aggregate demand curve?

Accepted Answer

A)  It will shift the aggregate demand curve left by $80 billion. 
B)  It will shift the aggregate demand curve left by $250 billion. 
C)  It will shift the aggregate demand curve right by $750 billion. 
D)  It will shift the aggregate demand curve right by $800 billion.

Question 14

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 15

If households view a tax cut as being temporary,how does the tax cut affect aggregate demand?

Accepted Answer

A)  It has no effect on aggregate demand. 
B)  It has a stronger effect on aggregate demand than if households view the cut as permanent. 
C)  It has the same effect on aggregate demand than if households view the cut as permanent. 
D)  It has a weaker effect on aggregate demand than if households view the cut as permanent.

Question 16

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 out...

Question 17

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 18

In the short run,what effect does an increase in the money supply have on interest rates and aggregate demand?

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 19

According to the liquidity-preference theory,how does an increase in the price level affect the interest rate?

Accepted Answer

A)  It increases the money demand and the interest rate. 
B)  It lowers the money demand and the interest rate. 
C)  It increases the money demand and lowers the interest rate. 
D)  It lowers the money demand and increases the interest rate.

Question 20

How do open-market sales affect 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.

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