Question 1

In the IS and MP framework, an expansionary monetary policy causes aggregate output to ________ and the interest rate to ________, everything else held constant.
A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Accepted Answer

An expansionary monetary policy shifts the LM curve to the right, causing interest rates to decrease and aggregate output to increase. Choice B correctly reflects this relationship.

Question 2

Higher interest rates lead to reductions in the aggregate output due to ________.
A)reductions in autonomous consumer expenditure
B)reductions in planned investment expenditure
C)higher expected inflation
D)higher employment

Accepted Answer

Higher interest rates make borrowing more expensive, thus reducing planned investment expenditure by firms. This leads to a decrease in aggregate output as firms reduce their production and employment levels. A is incorrect as higher interest rates do not necessarily lead to reductions in autonomous consumer expenditure. C is also incorrect as higher expected inflation may actually increase output in the short run by increasing demand for goods and services. D is incorrect as higher interest rates are not necessarily associated with higher employment levels.

Question 3

An increase in financial frictions causes the IS curve to shift ________ and the aggregate demand curve to shift ________.
A)left; left
B)left; right
C)right; left
D)right; right

Accepted Answer

An increase in financial frictions, such as higher interest rates or tighter credit conditions, will reduce demand for investment and consumption goods, leading to a leftward shift in the IS curve (as Y decreases at any given interest rate) and a leftward shift in the aggregate demand curve (as both consumption and investment spending decrease).

Question 4

Everything else held constant, a monetary expansion is characterized by ________ output and ________ interest rates.
A)rising; rising
B)rising; falling
C)falling; rising
D)falling; falling

Accepted Answer

A monetary expansion increases the money supply, which leads to an increase in spending and aggregate demand, ultimately resulting in a rise in output. However, the increased demand also puts upward pressure on prices, causing inflation. To combat inflation, the central bank typically raises interest rates. Therefore, a monetary expansion is characterized by rising output and falling interest rates.

Question 5

An autonomous rise in ________ shifts the MP curve to the ________, everything else held constant.
A)net exports; right
B)net exports; left
C)money demand; right
D)money demand; left

Accepted Answer

An autonomous increase in money demand would lead to an increase in interest rates (since there is a fixed supply of money), which, in turn, would lead to a leftward shift of the money demand curve. This leftward shift of the money demand curve would cause the equilibrium interest rate to rise, leading to a leftward shift in the MP curve.

Question 6

An increase in autonomous consumer expenditure causes the IS curve to shift ________ and the aggregate demand curve to shift ________.
A)left; left
B)left; right
C)right; left
D)right; right

Accepted Answer

The answer of An increase in autonomous consumer expenditure causes...

Question 7

Despite an expansionary monetary policy, an economy experiences a recession. Everything else held constant, the recession could occur in spite of the rightward shift of the MP curve if ________.
A)consumer confidence decreases sharply
B)there is an investment boom
C)the money supply increases
D)taxes are cut

Accepted Answer

Even with an expansionary monetary policy, if consumer confidence decreases sharply, it can cause a decrease in consumption and lead to a recession. This would shift the AD curve leftward, leading to a decrease in output and GDP.

Question 8

In deriving the aggregate demand curve a ________ inflation rate leads the central bank to ________ real interest rates, thereby ________ the level of equilibrium aggregate output.
A)higher; raise; lowering
B)lower; raise; lowering
C)higher; lower; lowering
D)higher; lower; raising

Accepted Answer

A higher inflation rate typically leads the central bank to raise real interest rates to control inflation, which in turn lowers the level of equilibrium aggregate output by reducing spending and investment.

Question 9

Everything else held constant, a monetary contraction is characterized by ________ output and ________ interest rates.
A)rising; rising
B)rising; falling
C)falling; rising
D)falling; falling

Accepted Answer

A monetary contraction involves reducing the money supply, which leads to a decrease in spending and investment, resulting in a decrease in output. To counteract inflation, central banks also increase interest rates, as it makes borrowing more expensive, which further decreases spending and investment. Therefore, falling output and rising interest rates are the key characteristics of a monetary contraction.

Question 10

Suppose the aggregate demand curve is given by Y = 12 - r then, if inflation increases by 1 percent ________.
A)aggregate output is unchanged
B)aggregate output increases
C)the nominal interest changes
D)the real interest rate falls

Accepted Answer

The given aggregate demand function does not depend on inflation, so an increase in inflation should not affect aggregate output (choice A) or cause an increase in aggregate output (choice B). The nominal interest rate is not explicitly given in the function, so it is not clear whether it would change (choice C). However, since the real interest rate is equal to the nominal interest rate minus the inflation rate, an increase in inflation should lead to a decrease in the real interest rate (choice D).

Question 11

Describe monetary easing at the Bank of Canada during the 2007-2009 Financial Crisis.

Accepted Answer

The answer of Describe monetary easing at the Bank of...

Question 12

An increase in autonomous investment spending causes the IS curve to shift ________ and the aggregate demand curve to shift ________.
A)left; left
B)left; right
C)right; left
D)right; right

Accepted Answer

The answer of An increase in autonomous investment spending causes...

Question 13

The aggregate demand curve is derived from the ________.
A)IS curve
B)MP curve
C)LM curve
D)A and B only

Accepted Answer

The answer of The aggregate demand curve is derived from...

Question 14

A decrease in taxes causes the IS curve to shift ________ and the aggregate demand curve to shift ________.
A)left; left
B)left; right
C)right; left
D)right; right

Accepted Answer

The answer of A decrease in taxes causes the IS...

Question 15

Explain the difference between autonomous changes in monetary policy and the Taylor principle.

Accepted Answer

The answer of Explain the difference between autonomous changes in...

Question 16

In the money market, a condition of excess demand for money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Accepted Answer

When there is excess demand for money in the money market, people are holding more money than they desire, so they try to sell some of their financial assets to get more money. As the demand for financial assets falls, their prices also fall, which leads to a rise in interest rates. To eliminate excess demand for money, we need to either decrease the demand for money or increase the supply of money. A decrease in aggregate output would reduce the demand for money, while an increase in the interest rate would increase the supply of money, as the return on holding money increases. Therefore, only option C fits the description.

Question 17

Describe how the Bank of Canada would apply the Taylor principle.

Accepted Answer

The answer of Describe how the Bank of Canada would...

Question 18

A contractionary monetary policy shifts the MP curve to the ________, reducing ________, everything else held constant.
A)left; output and increasing interest rates
B)left; both real output and interest rates
C)right; both interest rates and real output
D)right; interest rates and increasing real output

Accepted Answer

Contractionary monetary policy reduces the money supply, which results in higher interest rates and lower output. This shift the MP curve to the left, resulting in a decrease in output and an increase in interest rates, everything else held constant. Choice A is the only option that accurately reflects this relationship.

Question 19

Suppose the aggregate demand curve is given by Y = 12 - r then, if the nominal interest rate increases by 1 percent ________.
A)aggregate output is unchanged
B)aggregate output increases
C)the nominal interest changes
D)the real interest rate falls

Accepted Answer

The answer of Suppose the aggregate demand curve is given...

Question 20

An increase in government purchases causes the IS curve to shift ________ and the aggregate demand curve to shift ________.
A)left; left
B)left; right
C)right; left
D)right; right

Accepted Answer

The answer of An increase in government purchases causes the...

Quiz 22: The Monetary Policy and Aggregate Demand Curves

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

Higher interest rates lead to reductions in the aggregate output due to ________.

An increase in financial frictions causes the IS curve to shift and the aggregate demand curve to shift .

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

An autonomous rise in shifts the MP curve to the , everything else held constant.

An increase in autonomous consumer expenditure causes the IS curve to shift and the aggregate demand curve to shift .

Despite an expansionary monetary policy, an economy experiences a recession. Everything else held constant, the recession could occur in spite of the rightward shift of the MP curve if ________.

In deriving the aggregate demand curve a inflation rate leads the central bank to real interest rates, thereby the level of equilibrium aggregate output.

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

Suppose the aggregate demand curve is given by Y = 12 - r then, if inflation increases by 1 percent ________.

Describe monetary easing at the Bank of Canada during the 2007-2009 Financial Crisis.

An increase in autonomous investment spending causes the IS curve to shift and the aggregate demand curve to shift .

The aggregate demand curve is derived from the ________.

A decrease in taxes causes the IS curve to shift and the aggregate demand curve to shift .

Explain the difference between autonomous changes in monetary policy and the Taylor principle.

In the money market, a condition of excess demand for money can be eliminated by a in aggregate output or a in the interest rate, everything else held constant.

Describe how the Bank of Canada would apply the Taylor principle.

A contractionary monetary policy shifts the MP curve to the , reducing , everything else held constant.

Suppose the aggregate demand curve is given by Y = 12 - r then, if the nominal interest rate increases by 1 percent ________.

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