Question 1

The lag problem associated with monetary policy is due to:

Accepted Answer

Monetary policy affects the economy with a lag because firms and households make investment and spending decisions in advance, and it takes time for changes in interest rates to influence these decisions.

Question 2

Suppose we observe that an increase in government spending of $10 billion raises the total aggregate demand by $40 billion.If there is no crowding-out effect, what would be the marginal propensity?

Accepted Answer

The answer of Suppose we observe that an increase in...

Question 3

The aggregate supply curve is _____ in the short run, but _____ in the long run.

Accepted Answer

In the short run, the aggregate supply curve is upward sloping because as prices increase, producers are willing and able to supply more goods and services. In the long run, the aggregate supply curve is vertical, reflecting the idea that the economy's productive capacity is determined by factors other than the price level, such as technology and resources.

Question 4

Which of the following cannot stabilise a booming economy?

Accepted Answer

Reducing the interest rate can further stimulate an already booming economy, potentially leading to overheating and higher inflation, rather than stabilizing it.

Question 5

If the marginal propensity to save is 0.3, then the corresponding marginal propensity to consume must be ____.

Accepted Answer

The marginal propensity to save (MPS) is defined as the portion of each additional dollar of income that is saved rather than spent. The marginal propensity to consume (MPC) is the portion of each additional dollar of income that is spent rather than saved. The MPC and MPS must sum to one (i.e. MPC + MPS = 1). Therefore, if the MPS is 0.3, then the MPC must be 0.7 (i.e. 1 - 0.3 = 0.7).

Question 6

According to the Ricardian equivalence theory, what would happen if the government were to cut taxes without changing its spending?

Accepted Answer

According to Ricardian equivalence, a tax cut without a change in government spending would lead individuals to save the extra income to pay for future tax increases, thus increasing private saving. Public saving would fall due to the tax cut, but national saving (the sum of private and public saving) would remain unchanged.

Question 7

Assume there is no crowding-out effect.If an increase in government spending of $10 billion raises the total aggregate demand by $50 billion, then the marginal propensity is:

Accepted Answer

The answer of Assume there is no crowding-out effect.If an...

Question 8

According to classical macroeconomic theory, an increase in aggregate demand will _____ in the long run.

Accepted Answer

According to classical macroeconomic theory, in the long run, an increase in aggregate demand is believed to only raise the inflation rate, as output is determined by supply-side factors (like technology and resources) and is considered to be at its natural level in the long run.

Question 9

A rise in the inflation target by the RBA through monetary policy, means the:

Accepted Answer

A rise in the inflation target by the RBA through monetary policy means that the RBA is willing to tolerate a higher rate of inflation, which is typically achieved through lower interest rates. Lower interest rates stimulate economic activity and increase aggregate demand, causing the AD curve to shift to the right.

Question 10

An increase in Australia's marginal propensity to import will:

Accepted Answer

A higher marginal propensity to import means that more of the spending is directed towards imports from other countries, which reduces the demand for domestically produced goods and services. This can lead to a decrease in GDP as production decreases in the domestic economy.

Question 11

A reduction in direct taxes will result in:

Accepted Answer

The answer of A reduction in direct taxes will result...

Question 12

If the economy is in a recession, an appropriate combination of monetary and fiscal policies might be to:

Accepted Answer

During a recession, the government should increase aggregate demand. This can be done through a combination of expansionary monetary and fiscal policies. The Federal Reserve should increase the money supply, which helps to lower interest rates and stimulate borrowing and spending. The government should also increase government spending and decrease taxes to encourage consumer spending and business investment. Therefore, the appropriate combination of policies during a recession is to decrease taxes, raise government spending, and expand the money supply.

Question 13

The government reduces taxes by $20 million.Suppose that there is no crowding-out effect, and that the marginal propensity to consume is 0.9.What is the total effect on aggregate demand?

Accepted Answer

The multiplier is 1/(1-MPC) = 1/(1-0.9) = 10. So the total effect on aggregate demand is $20 million x 10 = $200 million.

Question 14

Which of the following is an automatic stabiliser?

Accepted Answer

Unemployment benefit payments to the unemployed are automatic stabilizers as they increase during economic downturns, providing a cushion to those who have lost their jobs, stabilizing their income levels, and reducing the impact of a recession on consumer spending.

Question 15

Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.9.What is the total effect of this increase in government purchases?

Accepted Answer

The total effect of the increase in government purchases can be calculated using the multiplier effect formula, which is 1/(1 - MPC), where MPC is the marginal propensity to consume. With an MPC of 0.9, the multiplier is 1/(1 - 0.9) = 10. Therefore, the total effect is $100 billion * 10 = $1000 billion.

Question 16

In the short run:

Accepted Answer

In the short run, the price level is often considered to be sticky or fixed due to menu costs and other frictions, meaning it does not adjust immediately. Instead, the interest rate adjusts to balance the supply and demand for money, and the level of output changes in response to shifts in aggregate demand and aggregate supply. This reflects the Keynesian perspective that in the short run, economies experience price stickiness, allowing for adjustments in output and employment levels in response to economic fluctuations.

Question 17

If the economy is producing a real output that is less than capacity output, a(n):

Accepted Answer

If the economy is producing a real output that is less than capacity output, it means there is a recessionary gap or an output gap. In this situation, the government could use expansionary monetary policy to increase aggregate demand, which would result in an increase in real output and potentially increase the general price level. Option D is the only one that correctly identifies the use of expansionary monetary policy in this situation.

Question 18

Suppose government purchases increase by $100 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.8.What is the total effect of this increase in government purchases?

Accepted Answer

The total effect of the increase in government purchases can be calculated using the multiplier effect formula: 1/(1 - MPC) = 1/(1 - 0.8) = 5. Therefore, the total effect is 5 times the initial increase in government purchases, which is 5 * $100 billion = $500 billion.

Question 19

If MPC = 0.6, then the government purchases multiplier is:

Accepted Answer

The government purchases multiplier is the reciprocal of the MPS (Marginal Propensity to Save), which equals to 1-MPC. Therefore, the government purchases multiplier is 1/(1-MPC) = 1/0.4 = 2.5.

Question 20

Suppose the government reduces taxes by $200 million, that there is no crowding-out effect, and that the marginal propensity to consume is 0.75.What is the total effect on aggregate demand?

Accepted Answer

The answer of Suppose the government reduces taxes by $200...

Quiz 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand