Question 1

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

Question 2

Which of the following defines the government purchases multiplier?

Accepted Answer

A)  MPC
B)  1 - MPC
C)  1/MPC
D)  1/(1 - MP
C)  E) A) and C)
F) All of the above

Question 3

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Accepted Answer

A) True 
 B)False

Question 4

The economy is in long-run equilibrium when the government decides to significantly increase spending on transportation infrastructure, which will lower shipping costs for many businesses. What might we expect in the short run and the long run to happen to real GDP and the price level?

Accepted Answer

A)  Real GDP will increase and the price level will fall, but in the long run, there will be no effect.
B)  Real GDP will increase and the price level will fall, but in the long run, real GDP will increase and the price level might rise, fall, or stay the same.
C)  Real GDP will increase and the price level might rise, fall, or stay the same, and in the long run, real GDP will increase and the price level might rise, fall, or stay the same.
D)  Real GDP will increase and the price level might rise, fall, or stay the same, but in the long run, the price level will increase and real GDP might rise, fall or stay the same.E) A) and D)
F) B) and C)

Question 5

Most economists believe that fiscal policy affects which of the following?

Accepted Answer

A)  only aggregate demand and not aggregate supply
B)  mostly aggregate demand
C)  mostly aggregate supply
D)  only aggregate supply and not aggregate demandE) A) and B)
F) A) and C)

Question 6

For the following questions, consult the diagram below.
Figure 15-1 
-Refer to Figure 15-1. Which of the following will happen if the current interest rate is 2 percent?

Accepted Answer

A)  There will be excess money supply.
B)  People will sell more bonds, which drives interest rates up.
C)  As the money market moves to equilibrium, people will buy more goods.
D)  People will sell more bonds, which drives the interest rates down.E) B) and C)
F) None of the above

Question 7

Which of the following shifts aggregate demand to the right?

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 D)
F) A) and C)

Question 8

The wealth effect helps explain the downward slope of the aggregate demand curve. How important is this effect and why?

Accepted Answer

A)  relatively important in Canada because expenditures on consumer durables is very responsive to changes in wealth
B)  relatively important in Canada because consumption spending is a large part of GDP
C)  relatively unimportant in Canada because money holdings are a small part of consumer wealth
D)  relatively unimportant in Canada because it takes a large change in wealth to make a significant change in interest ratesE) A) and D)
F) A) and C)

Question 9

Assume that the MPC is 0.75. Assuming only the multiplier effect matters, how will an increase in government purchases of $400 billion shift the aggregate demand curve?

Accepted Answer

A)  It will shift the aggregate demand curve left by $150 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 $1600 billion.E) B) and D)
F) None of the above

Question 10

Which of the following principles does the theory of liquidity preference illustrate?

Accepted Answer

A)  Monetary policy can be described either in terms of the money supply or in terms of the interest rate.
B)  Monetary policy can be described either in terms of the exchange rate or the interest rate.
C)  Monetary policy must be described in terms of the money supply.
D)  Monetary policy must be described in terms of the interest rate.E) B) and C)
F) None of the above

Question 11

Which of the following reasons for the downward slope of the aggregate demand curve would likely be more important for a small closed economy?

Accepted Answer

A)  the wealth effect
B)  the interest-rate effect
C)  the exchange-rate effect
D)  the real-wage effectE) A) and C)
F) A) and D)

Question 12

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve to the right away from long-run equilibrium?

Accepted Answer

A)  decreasing taxes
B)  increasing government expenditures
C)  increasing the money supply
D)  increasing taxesE) All of the above
F) A) and B)

Question 13

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Accepted Answer

If the interest rate is above equilibriu...

Question 14

The economy is in long-run equilibrium. Suppose that automatic teller machines become cheaper and more convenient to use, and as a result the demand for money falls. Other things equal, what would we expect will happen to the price level and real GDP in the short and long run?

Accepted Answer

A)  In the short run, the price level and real GDP would rise, but in the long run they would both be unaffected.
B)  In the short run, the price level and real GDP would rise, but in the long run the price level would rise and real GDP would be unaffected.
C)  In the short run, the price level and real GDP would fall, but in the long run they would both be unaffected.
D)  In the short run, the price level and real GDP would fall, but in the long run the price level would fall and real GDP would be unaffected.E) B) and C)
F) B) and D)

Question 15

In the long run, which of the following determines the level of output?

Accepted Answer

A)  the money supply
B)  the price level
C)  supply-side factors
D)  policies aimed at stabilizing the economyE) A) and B)
F) All of the above

Question 16

If the Bank of Canada conducts open-market sales, how do the money supply and the aggregate demand change?

Accepted Answer

A)  The money supply increases, and aggregate demand shifts right.
B)  The money supply increases, and aggregate demand shifts left.
C)  The money supply decreases, and aggregate demand shifts right.
D)  The money supply decreases, and aggregate demand shifts left.E) B) and C)
F) A) and B)

Question 17

Supply-side economists believe that a reduction in the tax rate will do which of the following?

Accepted Answer

A)  decrease government tax revenue
B)  shift the aggregate supply curve to the right
C)  provide no incentive for people to work more
D)  decrease consumptionE) A) and B)
F) All of the above

Question 18

In a small open economy with a flexible exchange rate, an expansionary fiscal policy will cause which of the following to happen?

Accepted Answer

A)  It will cause the dollar to depreciate.
B)  It will cause the dollar to appreciate.
C)  It will cause net exports to increase.
D)  It will cause a lasting effect on aggregate demand.E) A) and B)
F) C) and D)

Question 19

Why are monetary authorities concerned about stock market booms?

Accepted Answer

A)  because the booms decrease consumption spending
B)  because the booms decrease investment spending
C)  because the booms increase consumption spending
D)  because the booms increase government deficitE) B) and C)
F) None of the above

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 long 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 long 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 long 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 is stuck.
D)  In the long 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) B) and C)
F) A) and B)

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

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Correct AnswerverifiedShow Answer

In the long run, which of the following determines the level of output?

Correct AnswerverifiedShow Answer

Assume that the MPC is 0.75. Assuming only the multiplier effect matters, how will an increase in government purchases of $400 billion shift the aggregate demand curve?

Correct AnswerverifiedShow Answer

If the Bank of Canada conducts open-market sales, how do the money supply and the aggregate demand change?

Correct AnswerverifiedShow Answer

Which of the following principles does the theory of liquidity preference illustrate?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following defines the government purchases multiplier?

Correct AnswerverifiedShow Answer

In a small open economy with a flexible exchange rate, an expansionary fiscal policy will cause which of the following to happen?

Correct AnswerverifiedShow Answer

The economy is in long-run equilibrium. Suppose that automatic teller machines become cheaper and more convenient to use, and as a result the demand for money falls. Other things equal, what would we expect will happen to the price level and real GDP in the short and long run?

Correct AnswerverifiedShow Answer

The economy is in long-run equilibrium when the government decides to significantly increase spending on transportation infrastructure, which will lower shipping costs for many businesses. What might we expect in the short run and the long run to happen to real GDP and the price level?

Correct AnswerverifiedShow Answer

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve to the right away from long-run equilibrium?

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 shifts aggregate demand to the right?

Correct AnswerverifiedShow Answer

The wealth effect helps explain the downward slope of the aggregate demand curve. How important is this effect and why?

Correct AnswerverifiedShow Answer

For the following questions, consult the diagram below. Figure 15-1 -Refer to Figure 15-1. Which of the following will happen if the current interest rate is 2 percent?

Correct AnswerverifiedShow Answer

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Correct AnswerverifiedIf the interest rate is above equilibriu...View AnswerShow Answer

Why are monetary authorities concerned about stock market booms?

Correct AnswerverifiedShow Answer

Which of the following reasons for the downward slope of the aggregate demand curve would likely be more important for a small closed economy?

Correct AnswerverifiedShow Answer

Supply-side economists believe that a reduction in the tax rate will do which of the following?

Correct AnswerverifiedShow Answer

Most economists believe that fiscal policy affects which of the following?

Correct AnswerverifiedShow Answer

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If the interest rate is above equilibriu...
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