Question 1

If the Bank of Canada maintains a fixed exchange rate, which effect will an expansionary fiscal policy have?
A) It will cause a large and permanent rightward shift in the AD curve.
B) It will cause a large and permanent leftward shift in the AD curve.
C) It will have no permanent effect on the position of the AD curve, but it will cause interest rates to rise.
D) It will have no permanent effect on either the position of the AD curve or the interest rate.

Accepted Answer

The answer of If the Bank of Canada maintains a...

Question 2

Figure 15-2
 
-Refer to the Figure 15-2. Which of the following can happen in a closed economy?
A) Unemployment falls as the economy moves from a to
B) Fiscal policy is ineffective to move the economy from b to
C) If the economy is left alone, then as the economy moves from b to long-run equilibrium, the price level will increase.
D) An increase in money supply increases both output and prices.

Accepted Answer

The answer of Figure 15-2
 
-Refer to the Figure 15-2....

Question 3

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?
A) It will shift aggregate demand left by $2 billion.
B) It will shift aggregate demand left by $42 billion.
C) It will shift aggregate demand right by $2 billion.
D) It will shift aggregate demand right by $42 billion.

Accepted Answer

The multiplier effect tells us that the total impact on aggregate demand will be greater than the initial increase in government purchases. The formula for this is:

Multiplier = 1 / (1 - MPC)

In our case, the multiplier is:

Multiplier = 1 / (1 - 0.8) = 5

This means that the total increase in aggregate demand will be 5 times the initial increase in government purchases:

Total increase = Multiplier x Initial increase
Total increase = 5 x $10 billion = $50 billion

However, we also know that there will be a crowding-out effect of $8 billion. This means that some of the increase in government purchases will be offset by a decrease in private spending. The net increase in aggregate demand will be:

Net increase = Total increase - Crowding-out effect
Net increase = $50 billion - $8 billion = $42 billion

Since the initial $10 billion increase in government purchases will lead to a net increase in aggregate demand of $42 billion, we can conclude that aggregate demand will shift right by $42 billion.

Question 4

In a small open economy with a flexible exchange rate, what will an expansionary fiscal policy cause?
A) the dollar to depreciate
B) the dollar to appreciate
C) net exports to increase
D) a lasting effect on aggregate demand

Accepted Answer

An expansionary fiscal policy in a small open economy with a flexible exchange rate typically leads to an appreciation of the domestic currency. This is because higher government spending increases domestic interest rates, attracting foreign capital and causing the currency to appreciate.

Question 5

Canada is a small open economy with a flexible exchange rate. Which effect will a contractionary fiscal policy have?
A) It will cause the Canadian interest rate to fall below the world interest rate for a short period of time, which in turn will cause the dollar to depreciate and net exports to increase.
B) It will cause the Canadian interest rate to rise above the world interest rate for a short period of time, which in turn will cause the dollar to appreciate and net exports to decrease.
C) It will cause the Canadian interest rate to fall below the world interest rate for a short period of time, which in turn will cause the dollar to appreciate and net exports to decrease.
D) It will cause the Canadian interest rate to rise above the world interest rate for a short period of time, which in turn will cause the dollar to depreciate and net exports to increase.

Accepted Answer

The answer of Canada is a small open economy with...

Question 6

Suppose that the MPC is 0.5 and there is no investment accelerator or crowding-out effects. If government expenditures increase by $200 billion, what happens to aggregate demand?
A) It shifts right by $200 billion.
B) It shifts left by $200 billion.
C) It shifts right by $400 billion.
D) It shifts left by $400 billion.

Accepted Answer

The increase in government expenditures will increase aggregate demand by a multiple of the initial increase, which is equal to the multiplier of 1/(1-MPC). With an MPC of 0.5, the multiplier is 2. Therefore, the increase in aggregate demand will be 2 times the increase in government expenditures, or $400 billion (2 x $200 billion).

Question 7

How do tax cuts and government expenditure affect aggregate demand?
A) Both shift aggregate demand right.
B) Both shift aggregate demand left.
C) Tax cuts shift aggregate demand right; government expenditure shifts aggregate demand left.
D) Tax cuts shift aggregate demand left; government expenditure shifts aggregate demand right.

Accepted Answer

Tax cuts increase disposable income and encourage consumer spending, while government expenditure directly injects money into the economy, both leading to an increase in aggregate demand.

Question 8

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?
A) It will shift the aggregate demand curve left by $80 billion.
B) It will shift the aggregate demand curve left by $250 billion.
C) It will shift the aggregate demand curve right by $750 billion.
D) It will shift the aggregate demand curve right by $800 billion.

Accepted Answer

The multiplier effect formula is: 1/(1-MPC). When MPC=0.75, the multiplier effect is 1/(1-0.75) = 4. Therefore, the increase in government spending of $200 billion will result in an increase in aggregate demand of $200 billion x 4 = $800 billion. Since the increase in government spending will shift the aggregate demand curve to the right, the correct answer is D, an increase in AD by $800 billion.

Question 9

In a small open economy with perfect capital mobility, if the exchange rate is flexible, what would be the effect of an expansionary monetary policy?
A) It would cause the domestic interest rate to increase permanently.
B) It would cause the domestic interest rate to decrease permanently.
C) It would cause the domestic interest rate to increase temporarily.
D) It would cause the domestic interest rate to decrease temporarily.

Accepted Answer

An expansionary monetary policy would increase the money supply, leading to a decrease in the domestic interest rate in the short run. However, since the economy is open and capital is mobile, investors may see the lower interest rate as less attractive and move their investments abroad, which would increase demand for foreign currency and cause the exchange rate to depreciate. As the currency depreciates, imports become more expensive, and exports become cheaper, which can lead to inflationary pressures, causing the central bank to increase interest rates in the long run, reversing the initial decrease in the interest rate. Therefore, the expansionary monetary policy would cause a temporary decrease in the domestic interest rate.

Question 10

Assume that the MPC is 0.8. Assuming that only the multiplier effect matters, how will a decrease in government purchases of $150 billion shift the aggregate demand curve?
A) It will shift the aggregate demand curve left by $120 billion.
B) It will shift the aggregate demand curve left by $150 billion.
C) It will shift the aggregate demand curve right by $150 billion.
D) It will shift the aggregate demand curve left by $750 billion.

Accepted Answer

The multiplier effect is calculated as 1/(1-MPC), which in this case is 1/(1-0.8) = 5. A decrease in government purchases of $150 billion will be multiplied by 5, resulting in a shift of the aggregate demand curve to the left by $750 billion.

Question 11

If the Bank of Canada allows the exchange rate to vary freely, which effect will an expansionary fiscal policy have?
A) It will cause a large and permanent rightward shift of the AD curve.
B) It will cause a large and permanent leftward shift of the AD curve.
C) It will have no permanent effect on the position of the AD curve, but it will cause interest rates to permanently increase.
D) It will have no permanent effect on either the position of the AD curve or the interest rate.

Accepted Answer

If the Bank of Canada allows the exchange rate to vary freely, an expansionary fiscal policy will have no permanent effect on either the position of the AD curve or the interest rate. However, there may be short-term fluctuations in exchange rates and interest rates due to market reactions to the fiscal policy.

Question 12

Figure 15-2
 
-Refer to the Figure 15-2. If the closed economy is at point b, the best policy to restore full employment is which of the following?
A) increasing the money supply
B) decreasing government purchases
C) increasing taxes
D) selling Canadian dollars

Accepted Answer

Point b represents equilibrium output below full employment. To restore full employment, aggregate demand needs to be increased. The best policy to increase aggregate demand is to increase the money supply, which will lower interest rates and increase investment and consumption spending. Decreasing government purchases or increasing taxes would reduce aggregate demand and worsen the recession. Selling Canadian dollars would have no effect on aggregate demand in a closed economy.

Question 13

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?
A) a wave of optimism
B) a decrease in price
C) either fiscal or monetary contraction
D) an increase in the price of oil

Accepted Answer

The movement from point a to b involves a decrease in output and an increase in the price level. This suggests a contraction in the economy, which could be caused by either a fiscal or monetary contraction. A wave of optimism would lead to an increase in output, not a decrease. A decrease in price would also lead to an increase in output, not a decrease. An increase in the price of oil would lead to a decrease in output and an increase in the price level, but it is not the only possible explanation, and it would not distinguish between fiscal or monetary policy.

Question 14

In a small open economy with perfect capital mobility, if exchange rates are fixed, how could aggregate demand be increased?
A) by increasing government expenditures
B) by increasing tax rates
C) by increasing the money supply
D) by decreasing the money supply

Accepted Answer

In a small open economy with perfect capital mobility and fixed exchange rates, the monetary policy is constrained, and thus changes in aggregate demand can only come from fiscal policy. Increasing government expenditures can increase aggregate demand and stimulate the economy. Increasing tax rates would have the opposite effect, and changing the money supply is not an option as the exchange rate is fixed.

Question 15

In a small open economy with a flexible exchange rate, what will an expansionary fiscal policy cause?
A) It will cause the dollar to depreciate.
B) It will cause net exports to rise.
C) It will cause an additional investment accelerator effect.
D) It will cause a reduction in the demand for Canadian-produced goods.

Accepted Answer

The answer of In a small open economy with a...

Question 16

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?
A) It will have no effect.
B) It will shift the AD curve to the left.
C) It will shift the AD curve to the right.
D) It will shift both the AD curve and the short-run AS curve to the left.

Accepted Answer

In a small open economy with perfect capital mobility, if the central bank fixes the value of the currency, a contractionary monetary policy will have no effect on the aggregate demand (AD) curve. This is because the central bank must buy or sell domestic currency to keep the exchange rate fixed, which offsets the effects of the contractionary monetary policy on domestic interest rates and thus on aggregate demand.

Question 17

If the Bank of Canada chooses to prevent any change in the exchange rate when government spending increases, what is most likely to happen?
A) crowding-out effects
B) no crowding-out effects
C) no increase in the demand for goods and services
D) a decrease in aggregate demand

Accepted Answer

If the Bank of Canada prevents any change in the exchange rate when government spending increases, it is likely that there will be no crowding-out effects. This means that the increase in government spending will not reduce private investment as interest rates are not affected by the Bank of Canada's policy. It is also unlikely that there will be a decrease in aggregate demand, as the increase in government spending will still lead to an increase in the demand for goods and services. Choosing A or D implies that there will be negative effects of government spending, which is not necessarily the case in this scenario.

Question 18

How do the multiplier effect and the crowding-out effect change the consequences of an increase in government spending?
A) They both amplify the consequences.
B) They both diminish the consequences.
C) The multiplier effect diminishes the consequences, while the crowding-out effect amplifies the consequences.
D) The multiplier effect amplifies the consequences, while the crowding-out effect diminishes the consequences.

Accepted Answer

The multiplier effect refers to how an initial increase in government spending can lead to a larger overall increase in GDP, as the money is spent and re-spent throughout the economy. This amplifies the consequences of the initial spending. On the other hand, the crowding-out effect refers to how an increase in government spending can lead to a decrease in private investment, as the government borrows more money and drives up interest rates. This diminishes the consequences of the initial spending. Therefore, the correct answer is that the multiplier effect amplifies the consequences, while the crowding-out effect diminishes the consequences.

Question 19

Assume that the MPC is 0.8. Assume that the total crowding-out effect is $20 billion. How will an increase in government purchases of $9 billion shift the AD curve?
A) It will shift the AD curve right by $25 billion.
B) It will shift the AD curve left by $25 billion.
C) It will shift the AD curve right by $20 billion.
D) It will shift the AD curve left by $20 billion

Accepted Answer

The initial increase in government purchases of $9 billion will have a multiplier effect, calculated as 1/(1-MPC) = 1/(1-0.8) = 5. This means the total increase in demand due to the government purchases would be $9 billion * 5 = $45 billion. However, with a crowding-out effect of $20 billion, the net increase in demand is $45 billion - $20 billion = $25 billion. Therefore, the AD curve will shift right by $25 billion.

Question 20

Figure 15-2
 
-Refer to the Figure 15-2. In a closed economy, what would cause the aggregate demand curve to shift from AD to AD*?
A) an increase in government purchases
B) a decrease in stock prices
C) an increase in consumer and firm optimism about the future
D) an increase in the price level

Accepted Answer

The answer of Figure 15-2
 
-Refer to the Figure 15-2....

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

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

Figure 15-2 -Refer to the Figure 15-2. Which of the following can happen in a closed economy?

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?

In a small open economy with a flexible exchange rate, what will an expansionary fiscal policy cause?

Canada is a small open economy with a flexible exchange rate. Which effect will a contractionary fiscal policy have?

Suppose that the MPC is 0.5 and there is no investment accelerator or crowding-out effects. If government expenditures increase by $200 billion, what happens to aggregate demand?

How do tax cuts and government expenditure affect aggregate demand?

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?

In a small open economy with perfect capital mobility, if the exchange rate is flexible, what would be the effect of an expansionary monetary policy?

Assume that the MPC is 0.8. Assuming that only the multiplier effect matters, how will a decrease in government purchases of $150 billion shift the aggregate demand curve?

If the Bank of Canada allows the exchange rate to vary freely, which effect will an expansionary fiscal policy have?

Figure 15-2 -Refer to the Figure 15-2. If the closed economy is at point b, the best policy to restore full employment is which of the following?

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?

In a small open economy with perfect capital mobility, if exchange rates are fixed, how could aggregate demand be increased?

In a small open economy with a flexible exchange rate, what will an expansionary fiscal policy cause?

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 Bank of Canada chooses to prevent any change in the exchange rate when government spending increases, what is most likely to happen?

How do the multiplier effect and the crowding-out effect change the consequences of an increase in government spending?

Assume that the MPC is 0.8. Assume that the total crowding-out effect is $20 billion. How will an increase in government purchases of $9 billion shift the AD curve?

Figure 15-2 -Refer to the Figure 15-2. In a closed economy, what would cause the aggregate demand curve to shift from AD to AD*?