Question 1

According to liquidity preference theory, why is the money demand curve downward sloping?

Accepted Answer

A)  because interest rates rise as the Bank of Canada reduces the quantity of money demanded
B)  because interest rates fall as the Bank of Canada reduces the supply of money
C)  because people will want to hold less money as the cost of doing so falls
D)  because people will want to hold more money as the cost of doing so fallsE) A) and D)
F) B) and C)

Question 2

According to liquidity preference theory, other things equal, a higher price level leads households to do which of the following in the short run?

Accepted Answer

A)  increase consumption
B)  decrease the amount of cash they want to hold
C)  buy bonds
D)  decrease consumptionE) A) and B)
F) A) and C)

Question 3

Unemployment insurance and welfare programs work as automatic stabilizers.

Accepted Answer

A) True 
 B)False

Question 4

According to which theory do changes in the interest rate bring the money market into equilibrium?

Accepted Answer

A)  both liquidity preference theory and classical theory
B)  neither liquidity preference theory nor classical theory
C)  liquidity preference theory, but not classical theory
D)  classical theory, but not liquidity preference theoryE) A) and D)
F) B) and D)

Question 5

Which of the following shifts money demand to the left?

Accepted Answer

A)  an increase in the price level
B)  a decrease in the price level
C)  an increase in the interest rate
D)  a decrease in the interest rateE) All of the above
F) A) and B)

Question 6

Which of the following is an effect of an increase in government purchases?

Accepted Answer

A)  It decreases interest rates.
B)  It results in a net decrease in aggregate demand.
C)  It crowds out investment spending by business.
D)  It decreases money demand.E) A) and C)
F) A) and B)

Question 7

Which of Keynes's theories does liquidity preference refer to?

Accepted Answer

A)  the effects of changes in money demand and supply on interest rates
B)  the effects of changes in money demand and supply on exchange rates
C)  the effects of wealth on expenditures
D)  the difference between temporary and permanent changes in incomeE) None of the above
F) C) and D)

Question 8

Consider the income-expenditure identity in a closed economy, Y = C + I + G. Suppose consumption is always a fraction MPC of income, C = MPC*Y.
a.Show that income Y is equal to (I + G)/(1 - MPC).
b.Show that an increase in G by an amount ?G increases income by ?G/(1 - MPC) when investment is considered constant with respect to Y. What is the ratio 1/(1 - MPC) called?

Accepted Answer

a.In the income-expenditure identity, re...

Question 9

For the following questions, consult the diagram below.
Figure 15-1 
-Refer to Figure 15-1. At which of the following interest rates is there an excess money demand?

Accepted Answer

A)  2 percent
B)  3 percent
C)  4 percent
D)  5 percentE) A) and C)
F) C) and D)

Question 10

If the MPC = 5/6, what is the government purchases multiplier?

Accepted Answer

A)  1/6
B)  5/6
C)  6/5
D)  6E) All of the above
F) A) and C)

Question 11

According to liquidity preference theory, when do people demand fewer goods and services?

Accepted Answer

A)  when the price level or interest rate increase
B)  when the price level or interest rate decrease
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) C) and D)

Question 12

The effects of the interest rate in the short run are usually best shown using which theory?

Accepted Answer

A)  either liquidity preference theory or classical theory
B)  neither liquidity preference theory or classical theory
C)  only liquidity preference theory
D)  only classical theoryE) B) and C)
F) A) and B)

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 affect on aggregate demand.
B)  It has more of an effect on aggregate demand than if households view it as permanent.
C)  It has the same effect on aggregate demand than if households view the cut as permanent.
D)  It has less of an effect on aggregate demand than if households view the cut as permanent.E) A) and C)
F) B) and C)

Question 14

Both the multiplier and the investment accelerator tend to make the aggregate demand curve shift farther than the increase in government expenditures.

Accepted Answer

A) True 
 B)False

Question 15

What is the variable that balances the money demand and supply in the liquidity preference and the classical theories?

Accepted Answer

A)  the interest rate in both theories
B)  the price level in both theories
C)  the interest rate in the liquidity preference theory and the price level in the classical theory
D)  the price level in the liquidity preference theory and the interest rate in the classical theoryE) A) and D)
F) A) and C)

Question 16

Assume the money market is initially in equilibrium. If the price level decreases, 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) None of the above
F) A) and D)

Question 17

What does fiscal policy primarily affect in the long run and the short run, respectively?

Accepted Answer

A)  aggregate demand in the long run; aggregate supply in the short run
B)  aggregate supply in the long run; saving, investment, and growth in the short run
C)  saving, investment, and growth in the long run; aggregate demand in the short run
D)  saving, investment, and growth in the long run; aggregate supply in the short runE) A) and D)
F) None of the above

Question 18

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

Accepted Answer

A) True 
 B)False

Question 19

Suppose the closed economy is in long-run equilibrium. Technological change shifts the long-run aggregate supply curve $80 billion to the right. At the same time, government purchases increase by $40 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 higher but the price level would be lower.
D)  Real GDP would be higher but the price level would be the same.E) None of the above
F) A) and B)

Question 20

What is the effect of a stock market boom, and how could the Bank of Canada offset that effect?

Accepted Answer

A)  Aggregate demand increases, which Bank of Canada could offset by increasing the money supply.
B)  Aggregate supply increases, which Bank of Canada could offset by increasing the money supply.
C)  Aggregate demand increases, which Bank of Canada could offset by decreasing the money supply.
D)  Aggregate supply increases, which Bank of Canada could offset by decreasing the money supply.E) B) and C)
F) A) and D)

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

Correct Answer
verified
a.In the income-expenditure identity, re...
View Answer

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

Correct Answer
verified

Both the multiplier and the investment accelerator tend to make the aggregate demand curve shift farther than the increase in government expenditures.

Correct Answer
verified

For the following questions, consult the diagram below. Figure 15-1 -Refer to Figure 15-1. At which of the following interest rates is there an excess money demand?

Correct Answer
verified

According to liquidity preference theory, other things equal, a higher price level leads households to do which of the following in the short run?

Correct Answer
verified

What is the variable that balances the money demand and supply in the liquidity preference and the classical theories?

Correct Answer
verified

What does fiscal policy primarily affect in the long run and the short run, respectively?

Correct Answer
verified

According to which theory do changes in the interest rate bring the money market into equilibrium?

Correct Answer
verified

The effects of the interest rate in the short run are usually best shown using which theory?

Correct Answer
verified

Which of the following shifts money demand to the left?

Correct Answer
verified

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

Correct Answer
verified

What is the effect of a stock market boom, and how could the Bank of Canada offset that effect?

Correct Answer
verified

According to liquidity preference theory, when do people demand fewer goods and services?

Correct Answer
verified

Unemployment insurance and welfare programs work as automatic stabilizers.

Correct Answer
verified

If the MPC = 5/6, what is the government purchases multiplier?

Correct Answer
verified

Which of Keynes's theories does liquidity preference refer to?

Correct Answer
verified

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

Correct Answer
verified

According to liquidity preference theory, why is the money demand curve downward sloping?

Correct Answer
verified

Which of the following is an effect of an increase in government purchases?

Correct Answer
verified

Correct Answer
verified

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

Correct Answerverifieda.In the income-expenditure identity, re...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Both the multiplier and the investment accelerator tend to make the aggregate demand curve shift farther than the increase in government expenditures.

Correct AnswerverifiedShow Answer

For the following questions, consult the diagram below. Figure 15-1 -Refer to Figure 15-1. At which of the following interest rates is there an excess money demand?

Correct AnswerverifiedShow Answer

According to liquidity preference theory, other things equal, a higher price level leads households to do which of the following in the short run?

Correct AnswerverifiedShow Answer

What is the variable that balances the money demand and supply in the liquidity preference and the classical theories?

Correct AnswerverifiedShow Answer

What does fiscal policy primarily affect in the long run and the short run, respectively?

Correct AnswerverifiedShow Answer

According to which theory do changes in the interest rate bring the money market into equilibrium?

Correct AnswerverifiedShow Answer

The effects of the interest rate in the short run are usually best shown using which theory?

Correct AnswerverifiedShow Answer

Which of the following shifts money demand to the left?

Correct AnswerverifiedShow Answer

For the most part, fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.

Correct AnswerverifiedShow Answer

What is the effect of a stock market boom, and how could the Bank of Canada offset that effect?

Correct AnswerverifiedShow Answer

According to liquidity preference theory, when do people demand fewer goods and services?

Correct AnswerverifiedShow Answer

Unemployment insurance and welfare programs work as automatic stabilizers.

Correct AnswerverifiedShow Answer

If the MPC = 5/6, what is the government purchases multiplier?

Correct AnswerverifiedShow Answer

Which of Keynes's theories does liquidity preference refer to?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

According to liquidity preference theory, why is the money demand curve downward sloping?

Correct AnswerverifiedShow Answer

Which of the following is an effect of an increase in government purchases?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified
a.In the income-expenditure identity, re...
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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified