Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

When Parliament reduces spending in order to balance the budget, what does it need to consider?

Accepted Answer

A)   the short-run effects on aggregate demand and aggregate supply, and the long-run effects on saving and growth
B)   the short-run effects on aggregate demand and aggregate supply, and the short-run effects on saving and growth
C)   the long-run effects on aggregate demand and aggregate supply, and the long-run effects on saving and growth
D)   the long-run effects on aggregate demand and aggregate supply, and the short-run effects on saving and growthE) C) and D)
F) B) and C)

Question 3

If the MPC is 0.6, what is the multiplier?

Accepted Answer

A)   0.4
B)   1.67
C)   2.5
D)   60E) A) and D)
F) B) and D)

Question 4

During expansions, what do automatic stabilizers make government expenditures and taxes do?

Accepted Answer

A)   They make government expenditures and taxes fall.
B)   They make government expenditures and taxes rise.
C)   They make government expenditures rise and taxes fall.
D)   They make government expenditures fall and taxes rise.E) A) and D)
F) None of the above

Question 5

Suppose the economy is in long-run equilibrium. Parliament passes regulations that make it more costly to conduct business, so the long-run aggregate-supply curve shifts $80 billion to the left. At the same time, government purchases increase by $60 billion. If the MPC equals 0.8 and the crowding-out effect is $70 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 lower, but the price level would be higher.
D)   Real GDP would be lower, but the price level would be the same.E) A) and B)
F) All of the above

Question 6

This question considers how an economy changes over time and how the aggregate demand and supply model treats the time dimension of an economy.
a) How do the aggregate-demand and aggregate-supply curves shift over time?
b) Related to point a, identify and discuss the limitations to the simple, "static" aggregate-demand and aggregate-supply model. What are the consequences of predicting phenomena that have a time dimension (remember the 'short-run' and 'long-run' distinction) using an essentially static model?
c) How could the static model be changed to better incorporate the time dimension of the economic variables it tries to explain?

Accepted Answer

a) In the long run, an economy's output ...

Question 7

According to the crowding-out effect, how does a decrease in government spending affect the interest rate and investment spending?

Accepted Answer

A)   It increases the interest rate and so increases investment spending.
B)   It increases the interest rate and so decreases investment spending.
C)   It decreases the interest rate and so increases investment spending.
D)   It decreases the interest rate and so decreases investment spending.E) C) and D)
F) None of the above

Question 8

What is the most likely effect of an increase in government spending on goods to build or repair infrastructure?

Accepted Answer

A)   It would shift the aggregate-demand curve to the left.
B)   It would shift the long-run aggregate-supply curve to the left.
C)   It would shift the short-run aggregate-supply curve to the left.
D)   It would shift the long run aggregate-supply curve to the right.E) A) and B)
F) B) and D)

Question 9

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

An MPC of 0.8 means the multiplier = 1/(...

Question 10

What tends to make the size of a shift in aggregate demand resulting from a tax change smaller than otherwise?

Accepted Answer

A)   multiplier effect
B)   crowding-out effect
C)   catch-up effect
D)   Fisher effectE) A) and B)
F) All of the above

Question 11

Which of the following best defines the multiplier effect?

Accepted Answer

A)   the multiplied impact on the money supply of a given increase in government purchases
B)   the multiplied impact on tax revenues of a given increase in government purchases
C)   the multiplied impact on investment of a given increase in interest rates
D)   the multiplied impact on aggregate demand of a given increase in government purchasesE) All of the above
F) C) and D)

Question 12

The multiplier is equal to MPC/(1 - MPC).

Accepted Answer

A) True 
 B)False

Question 13

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.E) C) and D)
F) None of the above

Question 14

If the MPC = 0.6 and the MPI = 0.25, what is the government purchases multiplier in an open economy?

Accepted Answer

A)   1.8
B)   2.5
C)   4
D)   6.7E) None of the above
F) B) and C)

Question 15

In a small open economy with a flexible exchange rate, what will an expansionary fiscal policy cause?

Accepted Answer

A)   It will cause the dollar to depreciate.
B)   It will cause net exports to rise.
C)   It will cause an additional investment accelerator effect.
D)   It will cause a reduction in the demand for Canadian-produced goods.E) B) and C)
F) A) and B)

Question 16

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Accepted Answer

A) True 
 B)False

Question 17

If the MPC is 0.75 and there are no crowding-out or accelerator effects, an initial increase in AD of $100 billion will eventually shift the AD curve to the right by how much?

Accepted Answer

A)   $40 billion
B)   $133.33 billion
C)   $250 billion
D)   $400 billionE) A) and D)
F) B) and C)

Question 18

If the MPC is 0.4, the MPI is 0.2, and the government increases spending by $50 million, what will be the demand for goods and services generated by this increase?

Accepted Answer

A)   $20 million
B)   $30 million
C)   $125 million
D)   $250 millionE) A) and B)
F) A) and C)

Question 19

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.E) A) and B)
F) All of the above

Question 20

If the MPC = 0.5 and the MPI = 0.3, what is the government purchases multiplier in an open economy?

Accepted Answer

A)   1.25
B)   2
C)   4
D)   5E) A) and B)
F) A) and C)

Exam 16: The Influence of Fiscal Policy on Aggregate Demand

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?

Correct Answer
verified

If the MPC = 0.5 and the MPI = 0.3, what is the government purchases multiplier in an open economy?

Correct Answer
verified

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

Correct Answer
verified

Which of the following best defines the multiplier effect?

Correct Answer
verified

What tends to make the size of a shift in aggregate demand resulting from a tax change smaller than otherwise?

Correct Answer
verified

If the MPC is 0.75 and there are no crowding-out or accelerator effects, an initial increase in AD of $100 billion will eventually shift the AD curve to the right by how much?

Correct Answer
verified

During expansions, what do automatic stabilizers make government expenditures and taxes do?

Correct Answer
verified

In a small open economy with a flexible exchange rate, what will an expansionary fiscal policy cause?

Correct Answer
verified

If the MPC is 0.4, the MPI is 0.2, and the government increases spending by $50 million, what will be the demand for goods and services generated by this increase?

Correct Answer
verified

If the MPC = 0.6 and the MPI = 0.25, what is the government purchases multiplier in an open economy?

Correct Answer
verified

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Correct Answer
verified

According to the crowding-out effect, how does a decrease in government spending affect the interest rate and investment spending?

Correct Answer
verified

Correct Answer
verified

What is the most likely effect of an increase in government spending on goods to build or repair infrastructure?

Correct Answer
verified

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?

Correct Answer
verified
An MPC of 0.8 means the multiplier = 1/(...
View Answer

The multiplier is equal to MPC/(1 - MPC).

Correct Answer
verified

If the MPC is 0.6, what is the multiplier?

Correct Answer
verified

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

Correct Answer
verified

When Parliament reduces spending in order to balance the budget, what does it need to consider?

Correct Answer
verified

Correct Answer
verified
a) In the long run, an economy's output ...
View Answer

Exam 16: The Influence of Fiscal Policy on Aggregate Demand

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?

Correct AnswerverifiedShow Answer

If the MPC = 0.5 and the MPI = 0.3, what is the government purchases multiplier in an open economy?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following best defines the multiplier effect?

Correct AnswerverifiedShow Answer

What tends to make the size of a shift in aggregate demand resulting from a tax change smaller than otherwise?

Correct AnswerverifiedShow Answer

If the MPC is 0.75 and there are no crowding-out or accelerator effects, an initial increase in AD of $100 billion will eventually shift the AD curve to the right by how much?

Correct AnswerverifiedShow Answer

During expansions, what do automatic stabilizers make government expenditures and taxes do?

Correct AnswerverifiedShow Answer

In a small open economy with a flexible exchange rate, what will an expansionary fiscal policy cause?

Correct AnswerverifiedShow Answer

If the MPC is 0.4, the MPI is 0.2, and the government increases spending by $50 million, what will be the demand for goods and services generated by this increase?

Correct AnswerverifiedShow Answer

If the MPC = 0.6 and the MPI = 0.25, what is the government purchases multiplier in an open economy?

Correct AnswerverifiedShow Answer

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

Correct AnswerverifiedShow Answer

According to the crowding-out effect, how does a decrease in government spending affect the interest rate and investment spending?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the most likely effect of an increase in government spending on goods to build or repair infrastructure?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedAn MPC of 0.8 means the multiplier = 1/(...View AnswerShow Answer

The multiplier is equal to MPC/(1 - MPC).

Correct AnswerverifiedShow Answer

If the MPC is 0.6, what is the multiplier?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

When Parliament reduces spending in order to balance the budget, what does it need to consider?

Correct AnswerverifiedShow Answer

Correct Answerverifieda) In the long run, an economy's output ...View AnswerShow Answer

Correct Answer
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Correct Answer
verified
An MPC of 0.8 means the multiplier = 1/(...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
a) In the long run, an economy's output ...
View Answer