Question 1

If the multiplier is 4, what is the MPC?

Accepted Answer

A)  0.25
B)  0.5
C)  0.75
D)  1.00E) B) and C)
F) None of the above

Question 2

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

Accepted Answer

A)  the multiplier effect
B)  the crowding-out effect
C)  the accelerator effect
D)  the Fisher effectE) B) and C)
F) A) and B)

Question 3

Assuming the multiplier effect but no crowding-out or investment-accelerator effects, what is the effect of a $300 billion increase in government expenditures on the aggregate demand or supply?

Accepted Answer

A)  It shifts the aggregate demand right by more than $300 billion.
B)  It shifts the aggregate demand right by less than $300 billion.
C)  It shifts the aggregate demand right by exactly $300 billion
D)  It shifts the aggregate supply left by more than $300 billion.E) All of the above
F) A) and B)

Question 4

How does an automatic stabilizer interfere with fiscal policy? Discuss possible positive and negative effects.

Accepted Answer

Automatic stabilizers are countercyclica...

Question 5

What did Keynes argue about aggregate demand?

Accepted Answer

A)  Aggregate demand is stable, because the economy returns to long-run equilibrium.
B)  Aggregate demand is stable, because changes in consumption are mostly offset by changes in investment and vice versa.
C)  Aggregate demand is unstable, because waves of pessimism and optimism create fluctuations in aggregate demand.
D)  Aggregate demand is unstable, because seasonal variations create fluctuations in aggregate demand.E) All of the above
F) A) and C)

Question 6

If at some interest rate the quantity of money supplied is greater than the quantity of money demanded, what will people desire to do and what happens to the interest rate?

Accepted Answer

A)  People will sell interest-bearing assets, causing the interest rate to decrease.
B)  People will sell interest-bearing assets, causing the interest rate to increase.
C)  People will buy interest-bearing assets, causing the interest rate to decrease.
D)  People will buy interest-bearing assets, causing the interest rate to increase.E) None of the above
F) A) and C)

Question 7

In recent years, the Bank of Canada has conducted policy by setting a target for which of the following?

Accepted Answer

A)  bank reserves
B)  the monetary growth rate
C)  the exchange rate
D)  the bank rateE) None of the above
F) A) and B)

Question 8

According to the theory of liquidity preference, what does a decrease in the price level cause the interest rate and investment to do?

Accepted Answer

A)  It causes both the interest rate and investment to rise.
B)  It causes both the interest rate and investment to fall.
C)  It causes the interest rate to rise and investment to fall.
D)  It causes the interest rate to fall and investment to rise.E) None of the above
F) B) and D)

Question 9

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.E) C) and D)
F) B) and D)

Question 10

If at some interest rate the quantity of money demanded is greater than the quantity of money supplied, what will people desire to do and what will happen to the interest rate?

Accepted Answer

A)  People will sell interest-bearing assets, causing the interest rate to decrease.
B)  People will sell interest-bearing assets, causing the interest rate to increase.
C)  People will buy interest-bearing assets, causing the interest rate to decrease.
D)  People will buy interest-bearing assets, causing the interest rate to increase.E) A) and B)
F) A) and C)

Question 11

Which of the following 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.E) B) and C)
F) A) and C)

Question 12

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

Accepted Answer

The nominal interest rate on currency is...

Question 13

The most important lag for monetary policy is the time it takes to formulate policy, while the most important lag for fiscal policy is the time it takes for the economy to respond to changes in government spending.

Accepted Answer

A) True 
 B)False

Question 14

If the federal government cuts spending to balance the federal budget, how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?

Accepted Answer

A)  by increasing the money supply
B)  by decreasing the money supply
C)  by raising taxes
D)  by cutting expendituresE) A) and C)
F) B) and C)

Question 15

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) A) and C)
F) A) and B)

Question 16

In a small open economy with perfect capital mobility, if the Bank of Canada chooses to fix the value of the Canadian dollar, what will a contractionary monetary policy do?

Accepted Answer

A)  It will have no effect.
B)  It will shift the AD curve to the left.
C)  It will shift the AD curve to the right.
D)  It will shift both the AD curve and the short-run AS curve to the left.E) C) and D)
F) A) and B)

Question 17

For the following questions, consult the diagram below.
Figure 15-2 
-Refer to Figure 15-2. In a closed economy, which of the following would cause the aggregate demand curve to shift from AD to AD*?

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 levelE) B) and D)
F) B) and C)

Question 18

When the Bank of Canada increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand so the aggregate demand curve shifts to the right.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following properly describes the interest rate effect?

Accepted Answer

A)  As the money supply increases, the interest rate falls, so spending rises.
B)  As the money supply increases, the interest rate rises, so spending falls.
C)  As the price level increases, the interest rate falls, so spending rises.
D)  As the price level increases, the interest rate rises, so spending falls.E) None of the above
F) A) and D)

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

For the following questions, consult the diagram below. Figure 15-2 -Refer to Figure 15-2. In a closed economy, which of the following would cause the aggregate demand curve to shift from AD to AD*?

Correct Answer
verified

How does an automatic stabilizer interfere with fiscal policy? Discuss possible positive and negative effects.

Correct Answer
verified
Automatic stabilizers are countercyclica...
View Answer

Which of the following illustrates how the investment accelerator works?

Correct Answer
verified

Assuming the multiplier effect but no crowding-out or investment-accelerator effects, what is the effect of a $300 billion increase in government expenditures on the aggregate demand or supply?

Correct Answer
verified

Which of the following properly describes the interest rate effect?

Correct Answer
verified

If at some interest rate the quantity of money demanded is greater than the quantity of money supplied, what will people desire to do and what will happen to the interest rate?

Correct Answer
verified

If the multiplier is 4, what is the MPC?

Correct Answer
verified

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

Correct Answer
verified
The nominal interest rate on currency is...
View Answer

According to the theory of liquidity preference, what does a decrease in the price level cause the interest rate and investment to do?

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

The most important lag for monetary policy is the time it takes to formulate policy, while the most important lag for fiscal policy is the time it takes for the economy to respond to changes in government spending.

Correct Answer
verified

When the Bank of Canada increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand so the aggregate demand curve shifts to the right.

Correct Answer
verified

Which of the following best defines the multiplier effect?

Correct Answer
verified

In a small open economy with perfect capital mobility, if the Bank of Canada chooses to fix the value of the Canadian dollar, what will a contractionary monetary policy do?

Correct Answer
verified

If at some interest rate the quantity of money supplied is greater than the quantity of money demanded, what will people desire to do and what happens to the interest rate?

Correct Answer
verified

If the federal government cuts spending to balance the federal budget, how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?

Correct Answer
verified

In recent years, the Bank of Canada has conducted policy by setting a target for which of the following?

Correct Answer
verified

What did Keynes argue about aggregate demand?

Correct Answer
verified

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

For the following questions, consult the diagram below. Figure 15-2 -Refer to Figure 15-2. In a closed economy, which of the following would cause the aggregate demand curve to shift from AD to AD*?

Correct AnswerverifiedShow Answer

How does an automatic stabilizer interfere with fiscal policy? Discuss possible positive and negative effects.

Correct AnswerverifiedAutomatic stabilizers are countercyclica...View AnswerShow Answer

Which of the following illustrates how the investment accelerator works?

Correct AnswerverifiedShow Answer

Assuming the multiplier effect but no crowding-out or investment-accelerator effects, what is the effect of a $300 billion increase in government expenditures on the aggregate demand or supply?

Correct AnswerverifiedShow Answer

Which of the following properly describes the interest rate effect?

Correct AnswerverifiedShow Answer

If at some interest rate the quantity of money demanded is greater than the quantity of money supplied, what will people desire to do and what will happen to the interest rate?

Correct AnswerverifiedShow Answer

If the multiplier is 4, what is the MPC?

Correct AnswerverifiedShow Answer

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

Correct AnswerverifiedThe nominal interest rate on currency is...View AnswerShow Answer

According to the theory of liquidity preference, what does a decrease in the price level cause the interest rate and investment to do?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The most important lag for monetary policy is the time it takes to formulate policy, while the most important lag for fiscal policy is the time it takes for the economy to respond to changes in government spending.

Correct AnswerverifiedShow Answer

When the Bank of Canada increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand so the aggregate demand curve shifts to the right.

Correct AnswerverifiedShow Answer

Which of the following best defines the multiplier effect?

Correct AnswerverifiedShow Answer

In a small open economy with perfect capital mobility, if the Bank of Canada chooses to fix the value of the Canadian dollar, what will a contractionary monetary policy do?

Correct AnswerverifiedShow Answer

If at some interest rate the quantity of money supplied is greater than the quantity of money demanded, what will people desire to do and what happens to the interest rate?

Correct AnswerverifiedShow Answer

If the federal government cuts spending to balance the federal budget, how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?

Correct AnswerverifiedShow Answer

In recent years, the Bank of Canada has conducted policy by setting a target for which of the following?

Correct AnswerverifiedShow Answer

What did Keynes argue about aggregate demand?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Automatic stabilizers are countercyclica...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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verified
The nominal interest rate on currency is...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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