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

Assume that the MPC is 0.8.Assume that there is a multiplier effect and that the total crowding-out effect is $8 billion.How will an increase in government purchases of $10 billion shift aggregate demand?

Which policy would someone who wants the government to follow an active stabilization policy recommend when the economy is experiencing unemployment above the natural rate?

The liquidity-preference theory assumes that the interest rate adjusts to balance the money demand and supply,where the money supply is arbitrarily determined by the central bank.However,we have previously learned that the central bank controls the money supply precisely by changing the interest rate.How do you reconcile the liquidity-preference theory with using the interest rate as a monetary policy tool?

Which of the following shifts aggregate demand right?

If the Bank of Canada maintains a fixed exchange rate,which effect will an expansionary fiscal policy have?

According to liquidity-preference theory,when would the money-supply curve shift right?

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

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.

Figure 15-2 -Refer to the Figure 15-2.In a closed economy,what could have caused the economy to move from a to b?

Which statement best illustrates how the investment accelerator works?

What are the effects of a change in taxes on consumption and aggregate demand?

If expected inflation is constant and the nominal interest rate increased 3 percentage points,what would happen to the real interest rate?

Assume that the MPC is 0.75.Assuming only the multiplier effect matters,how will an increase in government purchases of $200 billion shift the aggregate demand curve?

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

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

In this question,we try to find out whether using the bank rate as a monetary policy tool is consistent with the liquidity-preference theory.Theoretically,when the Bank of Canada changes the bank rate and implicitly the money supply,the market interest rate would change to become equal to the bank rate AND to equate the new money supply with the money demand.But is this double role of the market interest rate possible? Let us give an example and see what happens.Assume the money demand curve is MD=150 - 15r,and the money supply curve is MS = 100 - 10R,where r is the market interest rate and R is the bank rate announced by the Bank of Canada. a)Show that,for a given value of bank rate R,the equilibrium market rate is different from R.What does this example show? b)Given the money demand equation MD=150 - 15r,find a money supply equation such that,for any value of R,the equilibrium market interest rate r is equal to R. c)For the money supply equation MS = 100 - 10R and a given bank rate R,show how the market could balance at the market interest rate r = R (show what the Bank of Canada should do to balance the money market). d)What have we learned from this exercise?

Which statement describes the interest-rate effect?

In the short run,what effect does an increase in the money supply have on interest rates and aggregate demand?

According to the liquidity-preference theory,how does an increase in the price level affect the interest rate?

How do open-market sales affect the price level and real GDP?