Question 1

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

a.Both models use a money demand and mon...

Question 2

Explain how unemployment insurance acts as an automatic stabilizer.

Accepted Answer

As income falls, unemployment rises. Mor...

Question 3

Which of the following statements do opponents of active stabilization policy believe?

Accepted Answer

A)  A monetary policy designed to offset changes in the unemployment rate is effective.
B)  Fiscal policy is unable to change aggregate demand or aggregate supply.
C)  The political process creates lags in the implementation of fiscal policy.
D)  Fluctuations would not exist in the absence of fiscal policies.E) B) and C)
F) None of the above

Question 4

In which of the following situations do people want to hold less money?

Accepted Answer

A)  when the price level or the interest rate increases
B)  when the price level or the interest rate decreases
C)  when the price level increases or the interest rate decreases
D)  when the price level decreases or the interest rate increasesE) B) and D)
F) None of the above

Question 5

In a small open economy with a flexible exchange rate, a monetary injection causes which of the following?

Accepted Answer

A)  It causes the dollar to appreciate.
B)  It causes net exports to decline.
C)  It causes an additional decrease in demand for Canadian-produced goods that is not realized in a closed economy.
D)  It causes a shift of the aggregate demand curve farther to the right than in a closed economy.E) C) and D)
F) None of the above

Question 6

During recessions, what do taxes tend to do, and to what effect?

Accepted Answer

A)  They rise and so shift aggregate demand right.
B)  They rise and so shift aggregate demand right
C)  They fall and so shift aggregate demand right.
D)  They fall and so shift aggregate demand rightE) C) and D)
F) B) and C)

Question 7

According to liquidity preference theory, what is the opportunity cost of holding money?

Accepted Answer

A)  the interest rate on bonds
B)  the inflation rate
C)  the cost of converting bonds to a medium of exchange
D)  the difference between the inflation rate and the interest rate on bondsE) None of the above
F) B) and D)

Question 8

In a small open economy with a flexible exchange rate, a monetary injection by the Bank of Canada causes which of the following?

Accepted Answer

A)  It causes the dollar to appreciate.
B)  It causes net exports to fall.
C)  It causes an additional decrease in demand for Canadian-produced goods and services that is not realized in a closed economy.
D)  It causes a shift of the aggregate demand curve farther to the right than it would in a closed economy.E) A) and B)
F) A) and C)

Question 9

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Accepted Answer

When the money supply increases, the int...

Question 10

Which of the following terms refers to the positive feedback from aggregate demand to investment?

Accepted Answer

A)  the investment multiplier
B)  the stock-market effect
C)  the investment accelerator
D)  the crowding-in multiplierE) All of the above
F) None of the above

Question 11

Fiscal policy refers to the idea that aggregate demand is changed by changes in what?

Accepted Answer

A)  the money supply
B)  government spending and taxes
C)  trade policy
D)  exchange ratesE) None of the above
F) A) and B)

Question 12

What does a monetary injection by the Bank of Canada do to interest rates and aggregate demand?

Accepted Answer

A)  It increases interest rates and increases aggregate demand.
B)  It increases interest rates and decreases aggregate demand.
C)  It decreases interest rates and decreases aggregate demand.
D)  It decreases interest rates and increases aggregate demand.E) None of the above
F) All of the above

Question 13

Assume the money market is initially in equilibrium. If the price level increases, according to liquidity preference theory, what is in excess and for how long?

Accepted Answer

A)  The supply of money is in excess until the interest rate increases.
B)  The supply of money is in excess until the interest rate decreases.
C)  The demand for money is in excess until the interest rate increases.
D)  The demand for money is in excess until the interest rate decreases.E) B) and D)
F) C) and D)

Question 14

Suppose the closed economy is in long-run equilibrium. Immigration of skilled workers shifts the long-run aggregate supply curve $60 billion to the right. At the same time, government purchases increase by $40 billion. If the MPC equals 0.75 and the crowding-out effect is $160 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 higher, but the price level would be lower.
D)  Real GDP would be higher, but the price level would be the same.E) A) and C)
F) All of the above

Question 15

What do open-market purchases do to 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.E) B) and C)
F) All of the above

Question 16

For the following questions, consult the diagram below.
Figure 15-2 
-Refer to Figure 15-2. Which of the following can happen in a closed economy?

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

Question 17

Which of the following shifts aggregate demand right?

Accepted Answer

A)  an increase in interest rates
B)  a decrease in the price level
C)  a decrease in the money supply
D)  a decrease in the bank rateE) A) and B)
F) A) and C)

Question 18

What is the main reason the aggregate demand curve slopes downward?

Accepted Answer

A)  As the price level increases, interest rates increase, and investment decreases.
B)  As the price level increases, interest rates decrease, and investment increases.
C)  As the price level decreases, interest rates increase, and investment increases.
D)  As the price level decreases, interest rates decrease, and investment decreases.E) None of the above
F) C) and D)

Question 19

Assuming the crowding-out effect but no multiplier or investment-accelerator effects, what is the effect of a $500 billion increase in government expenditures on the aggregate demand or supply?

Accepted Answer

A)  It shifts the aggregate demand right by more than $500 billion.
B)  It shifts the aggregate demand right by less than $500 billion.
C)  It shifts the aggregate supply left by more than $500 billion.
D)  It shifts the aggregate supply left by less than $500 billion.E) B) and D)
F) None of the above

Question 20

According to liquidity preference theory, if the quantity of money demanded is greater than the quantity supplied, 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) None of the above
F) C) and D)

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

Explain how unemployment insurance acts as an automatic stabilizer.

Correct Answer
verified
As income falls, unemployment rises. Mor...
View Answer

What does a monetary injection by the Bank of Canada do to interest rates and aggregate demand?

Correct Answer
verified

Correct Answer
verified

What is the main reason the aggregate demand curve slopes downward?

Correct Answer
verified

Which of the following terms refers to the positive feedback from aggregate demand to investment?

Correct Answer
verified

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

Correct Answer
verified

In a small open economy with a flexible exchange rate, a monetary injection by the Bank of Canada causes which of the following?

Correct Answer
verified

In a small open economy with a flexible exchange rate, a monetary injection causes which of the following?

Correct Answer
verified

Assuming the crowding-out effect but no multiplier or investment-accelerator effects, what is the effect of a $500 billion increase in government expenditures on the aggregate demand or supply?

Correct Answer
verified

In which of the following situations do people want to hold less money?

Correct Answer
verified

Assume the money market is initially in equilibrium. If the price level increases, according to liquidity preference theory, what is in excess and for how long?

Correct Answer
verified

During recessions, what do taxes tend to do, and to what effect?

Correct Answer
verified

Correct Answer
verified
a.Both models use a money demand and mon...
View Answer

According to liquidity preference theory, what is the opportunity cost of holding money?

Correct Answer
verified

Which of the following shifts aggregate demand right?

Correct Answer
verified

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Correct Answer
verified
When the money supply increases, the int...
View Answer

Fiscal policy refers to the idea that aggregate demand is changed by changes in what?

Correct Answer
verified

For the following questions, consult the diagram below. Figure 15-2 -Refer to Figure 15-2. Which of the following can happen in a closed economy?

Correct Answer
verified

What do open-market purchases do to the price level and real GDP?

Correct Answer
verified

Which of the following statements do opponents of active stabilization policy believe?

Correct Answer
verified

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

Explain how unemployment insurance acts as an automatic stabilizer.

Correct AnswerverifiedAs income falls, unemployment rises. Mor...View AnswerShow Answer

What does a monetary injection by the Bank of Canada do to interest rates and aggregate demand?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the main reason the aggregate demand curve slopes downward?

Correct AnswerverifiedShow Answer

Which of the following terms refers to the positive feedback from aggregate demand to investment?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In a small open economy with a flexible exchange rate, a monetary injection by the Bank of Canada causes which of the following?

Correct AnswerverifiedShow Answer

In a small open economy with a flexible exchange rate, a monetary injection causes which of the following?

Correct AnswerverifiedShow Answer

Assuming the crowding-out effect but no multiplier or investment-accelerator effects, what is the effect of a $500 billion increase in government expenditures on the aggregate demand or supply?

Correct AnswerverifiedShow Answer

In which of the following situations do people want to hold less money?

Correct AnswerverifiedShow Answer

Assume the money market is initially in equilibrium. If the price level increases, according to liquidity preference theory, what is in excess and for how long?

Correct AnswerverifiedShow Answer

During recessions, what do taxes tend to do, and to what effect?

Correct AnswerverifiedShow Answer

Correct Answerverifieda.Both models use a money demand and mon...View AnswerShow Answer

According to liquidity preference theory, what is the opportunity cost of holding money?

Correct AnswerverifiedShow Answer

Which of the following shifts aggregate demand right?

Correct AnswerverifiedShow Answer

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Correct AnswerverifiedWhen the money supply increases, the int...View AnswerShow Answer

Fiscal policy refers to the idea that aggregate demand is changed by changes in what?

Correct AnswerverifiedShow Answer

For the following questions, consult the diagram below. Figure 15-2 -Refer to Figure 15-2. Which of the following can happen in a closed economy?

Correct AnswerverifiedShow Answer

What do open-market purchases do to the price level and real GDP?

Correct AnswerverifiedShow Answer

Which of the following statements do opponents of active stabilization policy believe?

Correct AnswerverifiedShow Answer

Correct Answer
verified
As income falls, unemployment rises. Mor...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
a.Both models use a money demand and mon...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
When the money supply increases, the int...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified