Question 1

If the Bank of Canada conducts open market ________, the money supply ________, shifting the MP curve to the right, everything else held constant.

Accepted Answer

A)  purchases; decreases 
B)  sales; decreases 
C)  purchases; increases 
D)  sales; increases

Question 2

An increase in government purchases causes the IS curve to shift ________ and the aggregate demand curve to shift ________.

Accepted Answer

A)  left; left 
B)  left; right 
C)  right; left 
D)  right; right

Question 3

A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant.

Accepted Answer

A)  up; left 
B)  up; right 
C)  down; left 
D)  down; right

Question 4

Everything else held constant, an increase in government spending will cause ________.

Accepted Answer

A)  aggregate demand to increase 
B)  aggregate demand to decrease 
C)  the quantity of aggregate demand to increase 
D)  the quantity of aggregate demand to decrease

Question 5

If Canadian college students decide that drinking Mexican-brewed beer helps one get noticed, net exports will tend to fall, causing aggregate demand to ________ and the ________ curve to shift to the left, everything else held constant.

Accepted Answer

A)  fall; MP 
B)  fall; IS 
C)  rise; MP 
D)  rise; IS

Question 6

When the central bank ________ the money supply, the MP curve shifts to the right, interest rates ________, and equilibrium aggregate output ________, everything else held constant.

Accepted Answer

A)  increases; fall; increases 
B)  increases; rise; decreases 
C)  decreases; rise; decreases 
D)  decreases; fall; increases

Question 7

In the IS and MP framework, an expansionary monetary policy causes aggregate output to ________ and the interest rate to ________, everything else held constant.

Accepted Answer

A)  increase; increase 
B)  increase; decrease 
C)  decrease; decrease 
D)  decrease; increase

Question 8

An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

Accepted Answer

A)  rise; left 
B)  rise; right 
C)  fall; left 
D)  fall; right

Question 9

Everything else held constant, a monetary contraction is characterized by ________ output and ________ interest rates.

Accepted Answer

A)  rising; rising 
B)  rising; falling 
C)  falling; rising 
D)  falling; falling

Question 10

An autonomous tightening of monetary policy ________.

Accepted Answer

A)  causes an upward movement along the monetary policy curve 
B)  causes a downward movement along the monetary policy curve 
C)  shifts the monetary policy curve upward 
D)  shifts the monetary policy curve downward

Question 11

Explain the relationship between real and nominal interest rates when inflation is expected to remain unchanged in the short run.

Accepted Answer

The answer of Explain the relationship between real and nominal...

Question 12

Tightening monetary policy refers to ________.

Accepted Answer

A)  higher real interest rates 
B)  higher nominal interest rates 
C)  lower real interest rates 
D)  lower nominal interest rates

Question 13

If the monetary policy rule is given by r = 1.0 + 0.5p, then r represents ________.

Accepted Answer

A)  the autonomous component of the real interest rate set by the central bank 
B)  the responsiveness of the real interest rate to the inflation rate 
C)  the real interest rate that is sent by the central bank 
D)  none of the above

Question 14

A reduction in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

Accepted Answer

A)  rise; MP; right 
B)  fall; IS; left 
C)  fall; MP; left 
D)  rise; IS; right

Question 15

Everything else held constant, an increase in autonomous consumer spending will cause the IS curve to shift to the ________ and aggregate demand will ________.

Accepted Answer

A)  right; increase 
B)  right; decrease 
C)  left; increase 
D)  left; decrease

Question 16

If the monetary policy rule is given by r = 1.0 + 0.5p, then 1.0 represents ________.

Accepted Answer

A)  the autonomous component of the real interest rate set by the central bank 
B)  the responsiveness of the real interest rate to the inflation rate 
C)  the nominal rate as described by the Taylor principle 
D)  none of the above

Question 17

The reason inflation spiralled in Canada in the 1970s can be attributed to ________.

Accepted Answer

A)  the central bank not following the Taylor Principle 
B)  the OPEC oil embargo 
C)  changing policies at the federal government level 
D)  an aggressive central bank policy buying bonds

Question 18

Everything else held constant, changes in the interest rate affect planned investment spending and hence the equilibrium level of output, but this change in investment spending ________.

Accepted Answer

A)  merely causes a movement along the IS curve and not a shift 
B)  is crowded out by higher taxes 
C)  is crowded out by higher government spending 
D)  is crowded out by lower consumer expenditures

Question 19

Using the IS - MP model, explain the effects of a monetary expansion combined with a fiscal contraction. How do the equilibrium level of output and interest rate change?

Accepted Answer

The answer of Using the IS - MP model, explain...

Question 20

Central banks aim to ________.

Accepted Answer

A)  keep inflation stable 
B)  keep expected inflation equal to zero 
C)  reduce inflation to zero 
D)  A and B only

Exam 22: The Monetary Policy and Aggregate Demand Curves

If the Bank of Canada conducts open market , the money supply , shifting the MP curve to the right, everything else held constant.

An increase in government purchases causes the IS curve to shift and the aggregate demand curve to shift .

A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift , the equilibrium level of aggregate output to fall, and the IS curve to shift to the , everything else held constant.

Everything else held constant, an increase in government spending will cause ________.

If Canadian college students decide that drinking Mexican-brewed beer helps one get noticed, net exports will tend to fall, causing aggregate demand to and the curve to shift to the left, everything else held constant.

When the central bank the money supply, the MP curve shifts to the right, interest rates , and equilibrium aggregate output , everything else held constant.

In the IS and MP framework, an expansionary monetary policy causes aggregate output to and the interest rate to , everything else held constant.

An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up, the equilibrium level of aggregate output to , and the IS curve to shift to the , everything else held constant.

Everything else held constant, a monetary contraction is characterized by output and interest rates.