Question 1

According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, what will happen to the interest rate and the quantity of money demanded?

Accepted Answer

A)  The interest rate will increase, and the quantity of money demanded will decrease.
B)  The interest rate will increase, and the quantity of money demanded will increase.
C)  The interest rate will decrease, and the quantity of money demanded will decrease.
D)  The interest rate will decrease, and the quantity of money demanded will increase.E) A) and D)
F) All of the above

Question 2

Which of the following shifts aggregate demand to the left?

Accepted Answer

A)  an increase in the price level
B)  an increase in the money supply
C)  a decrease in the price level
D)  a decrease in the money supplyE) A) and C)
F) All of the above

Question 3

Which of the following policy alternatives would be an appropriate response to an increase in investment demand by a government that wants to stabilize output?

Accepted Answer

A)  increasing taxes
B)  increasing the money supply
C)  increasing government expenditures
D)  increasing the government deficitE) A) and D)
F) A) and C)

Question 4

Which of the following terms refers to the reduction in demand that results when a fiscal expansion raises the interest rate?

Accepted Answer

A)  the multiplier effect
B)  the crowding-out effect
C)  the accelerator effect
D)  the Ricardian equivalence effectE) A) and D)
F) None of the above

Question 5

Which of the following policies would stabilization policy activists support when the economy is experiencing unemployment above the natural rate?

Accepted Answer

A)  a decrease in the money supply
B)  a reduction in tax rates
C)  a decrease in government purchases
D)  an increase in taxesE) C) and D)
F) B) and D)

Question 6

If there are automatic stabilizers but no deliberate action by policymakers, how would government expenditures change as output changes?

Accepted Answer

A)  They would rise as output rises.
B)  They would remain unchanged as output rises.
C)  They would rise as output falls.
D)  They would fall as output falls.E) A) and B)
F) A) and C)

Question 7

Most economists believe that a cut in tax rates will do which of the following?

Accepted Answer

A)  increase government tax revenue
B)  decrease significantly the hours people work
C)  have a relatively small effect on the aggregate supply curve
D)  have a significant effect on the aggregate supply curveE) C) and D)
F) All of the above

Question 8

If the interest rate is below a central bank's target, what should the central bank do?

Accepted Answer

A)  buy bonds to increase the money supply
B)  buy bonds to decrease the money supply
C)  sell bonds to increase the money supply
D)  sell bonds to decrease the money supplyE) B) and C)
F) A) and B)

Question 9

When the Bank of Canada buys government bonds, how do the reserves of the banking system change and what happens to the money supply?

Accepted Answer

A)  The reserves increase, so the money supply increases.
B)  The reserves increase, so the money supply decreases.
C)  The reserves decrease, so the money supply increases.
D)  The reserves decrease, so the money supply decreases.E) None of the above
F) C) and D)

Question 10

Which of the following is NOT a response that would result from a decrease in the price level and so help to explain the slope of the aggregate demand curve?

Accepted Answer

A)  When interest rates fall, Sleepwell Hotels decides to build some new hotels.
B)  The exchange rate falls, so French restaurants in Paris buy more Canadian beef.
C)  Janet feels wealthier because of the price drop, and so she decides to remodel her bathroom.
D)  With prices down and wages fixed by contract, Gatekeeper Computers decides to lay off workers.E) None of the above
F) B) and D)

Question 11

If the MPC is 0.75 and there are no crowding-out or accelerator effects, an initial increase in AD of $200 billion will eventually shift the AD curve to the right by how much?

Accepted Answer

A)  $80 billion
B)  $133.33 billion
C)  $150 billion
D)  $800 billionE) All of the above
F) C) and D)

Question 12

How does the interest rate change when the price level falls and when the money supply falls?

Accepted Answer

A)  The interest rate rises both when the price level falls and when the money supply falls.
B)  The interest rate rises when the price level falls and falls when the money supply falls.
C)  The interest rate falls when the price level falls and rises when the money supply falls.
D)  The interest rate falls both when the price level falls and when the money supply falls.E) A) and B)
F) B) and C)

Question 13

Which of the following 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 have a crowding-out effect.
C)  It would shift the short-run aggregate supply curve, but not the long-run aggregate supply curve.
D)  It would shift the aggregate supply curve to the right in the long run.E) B) and C)
F) All of the above

Question 14

If there is excess money demand, what will people do and what happens to the interest rate?

Accepted Answer

A)  People will deposit more into interest-bearing accounts, and the interest rate will fall.
B)  People will deposit more into interest-bearing accounts, and the interest rate will rise.
C)  People will withdraw money from interest-bearing accounts, and the interest rate will fall.
D)  People will withdraw money from interest-bearing accounts, and the interest rate will rise.E) All of the above
F) B) and D)

Question 15

For Canada, the most important reason for the downward slope of the aggregate demand curve is the real exchange-rate effect.

Accepted Answer

A) True 
 B)False

Question 16

How do tax cuts and government expenditure affect aggregate demand?

Accepted Answer

A)  Both shift aggregate demand right.
B)  Both shift aggregate demand left.
C)  Tax cuts shift aggregate demand right; government expenditure shifts aggregate demand left.
D)  Tax cuts shift aggregate demand left; government expenditure shifts aggregate demand right.E) A) and D)
F) C) and D)

Question 17

When a central bank sets a target for the interest rate, it commits itself to which of the following?

Accepted Answer

A)  revealing its target to the public
B)  adjusting the demand for money in order to make the equilibrium in the money market hit that target
C)  adjusting the money supply in order to meet the interest rate target
D)  having to make open-market salesE) A) and D)
F) A) and C)

Question 18

If the Bank of Canada chooses to prevent any change in the exchange rate when government spending increases, which of the following is most likely to happen?

Accepted Answer

A)  crowding out effects
B)  no crowding out effects
C)  no increase in the demand for goods and services
D)  a decrease in aggregate demandE) B) and C)
F) None of the above

Question 19

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.E) A) and D)
F) A) and B)

Question 20

Which of the following lists of events is consistent with the long-run and short-run economic theories studied?

Accepted Answer

A)  In the short run, output is determined by the amount of capital, labour, and technology; the interest rate adjusts to balance the supply and demand for money; and the price level adjusts to balance the supply and demand for loanable funds.
B)  In the short run, output is determined by the amount of capital, labour, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level adjusts to balance the supply and demand for money.
C)  In the short run, output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for money; and the price level is stuck.
D)  In the short run, output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level adjusts to balance the supply and demand for money.E) A) and B)
F) None of the above

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

If the MPC is 0.75 and there are no crowding-out or accelerator effects, an initial increase in AD of $200 billion will eventually shift the AD curve to the right by how much?

Correct AnswerverifiedShow Answer

Which of the following lists of events is consistent with the long-run and short-run economic theories studied?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is NOT a response that would result from a decrease in the price level and so help to explain the slope of the aggregate demand curve?

Correct AnswerverifiedShow Answer

If there are automatic stabilizers but no deliberate action by policymakers, how would government expenditures change as output changes?

Correct AnswerverifiedShow Answer

If the interest rate is below a central bank's target, what should the central bank do?

Correct AnswerverifiedShow Answer

Which of the following shifts aggregate demand to the left?

Correct AnswerverifiedShow Answer

How do tax cuts and government expenditure affect aggregate demand?

Correct AnswerverifiedShow Answer

When the Bank of Canada buys government bonds, how do the reserves of the banking system change and what happens to the money supply?

Correct AnswerverifiedShow Answer

According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, what will happen to the interest rate and the quantity of money demanded?

Correct AnswerverifiedShow Answer

For Canada, the most important reason for the downward slope of the aggregate demand curve is the real exchange-rate effect.

Correct AnswerverifiedShow Answer

If there is excess money demand, what will people do and what happens to the interest rate?

Correct AnswerverifiedShow Answer

How does the multiplier change when the MPC increases, and what is the effect on aggregate demand?

Correct AnswerverifiedShow Answer

How does the interest rate change when the price level falls and when the money supply falls?

Correct AnswerverifiedShow Answer

Which of the following policy alternatives would be an appropriate response to an increase in investment demand by a government that wants to stabilize output?

Correct AnswerverifiedShow Answer

If the Bank of Canada chooses to prevent any change in the exchange rate when government spending increases, which of the following is most likely to happen?

Correct AnswerverifiedShow Answer

Which of the following terms refers to the reduction in demand that results when a fiscal expansion raises the interest rate?

Correct AnswerverifiedShow Answer

When a central bank sets a target for the interest rate, it commits itself to which of the following?

Correct AnswerverifiedShow Answer

Most economists believe that a cut in tax rates will do which of the following?

Correct AnswerverifiedShow Answer

Which of the following policies would stabilization policy activists support when the economy is experiencing unemployment above the natural rate?

Correct AnswerverifiedShow Answer

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