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

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.

Which of the following properly describes the interest rate effect?

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?

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?

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?

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

Which of the following illustrates how the investment accelerator works?

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

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

If the multiplier is 4, what is the MPC?

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.

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

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?

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

What did Keynes argue about aggregate demand?

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

Which of the following best defines the multiplier effect?

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?

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*?