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Monetary and Fiscal Policy

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1000 Intro to Economics (Monetary and Fiscal Policy) Quiz on Monetary and Fiscal Policy, created by Megan Clermont on 14/04/2016.
Megan Clermont
Quiz by Megan Clermont, updated more than 1 year ago
Megan Clermont
Created by Megan Clermont about 8 years ago
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Resource summary

Question 1

Question
According to the theory of liquidity preference, how is the money supply affected by the interest rate?
Answer
  • directly
  • negatively
  • not affected
  • positively

Question 2

Question
When the interest rate increases, how do the opportunity cost of holding money and the quantity of money demanded change?
Answer
  • The opportunity cost of holding money increases, so the quantity of money demanded increases.
  • The opportunity cost of holding money increases, so the quantity of money demanded decreases.
  • The opportunity cost of holding money decreases, so the quantity of money demanded decreases.
  • The opportunity cost of holding money decreases, so the quantity of money demanded increases.

Question 3

Question
According to liquidity-preference theory, if the quantity of money demanded is greater than the quantity supplied, what will happen to the interest rate and the quantity of money demanded?
Answer
  • The interest rate will increase, and the quantity of money demanded will increase.
  • The interest rate will increase, and the quantity of money demanded will decrease.
  • The interest rate will decrease, and the quantity of money demanded will decrease.
  • The interest rate will decrease, and the quantity of money demanded will increase.

Question 4

Question
Which of the following shifts money demand to the right?
Answer
  • an increase in the interest rate
  • a decrease in the price level
  • an increase in the price level
  • a decrease in the interest rate

Question 5

Question
Which of the following is an effect of an increase in the interest rate?
Answer
  • It induces firms to invest more.
  • It shifts money demand to the right.
  • It leads to the appreciation of the exchange rate.
  • It induces households to increase consumption.

Question 6

Question
How does an increase in the price level affect the interest rate?
Answer
  • It increases the money demand and lowers the interest rate.
  • It lowers the money demand and increases the interest rate.
  • It increases the money demand and the interest rate.
  • It lowers the money demand and the interest rate.

Question 7

Question
In the short run, what effect does an increase in the money supply have on interest rates and aggregate demand?
Answer
  • It causes interest rates to decrease and aggregate demand to shift left
  • It causes interest rates to increase and aggregate demand to shift right.
  • It causes interest rates to decrease and aggregate demand to shift right.
  • It causes interest rates to increase and aggregate demand to shift left.

Question 8

Question
If the Bank of Canada conducts open-market sales, how do the money supply and the aggregate demand change?
Answer
  • The money supply increases, and aggregate demand shifts left.
  • The money supply increases, and aggregate demand shifts right.
  • The money supply decreases, and aggregate demand shifts left.
  • The money supply decreases, and aggregate demand shifts right.

Question 9

Question
The economy is in long-run equilibrium. Suppose that automatic teller machines become cheaper and more convenient to use, and as a result the demand for money falls. Other things being equal, what would we expect will happen to the price level and real GDP in the short and long run?
Answer
  • In the short run, the price level and real GDP would rise, but in the long run the price level would rise and real GDP would be unaffected.
  • In the short run, the price level and real GDP would fall, but in the long run the price level would fall and real GDP would be unaffected.
  • In the short run, the price level and real GDP would rise, but in the long run they would both be unaffected.
  • In the short run, the price level and real GDP would fall, but in the long run they would both be unaffected.

Question 10

Question
How does the interest rate change when the price level falls and when the money supply falls?
Answer
  • The interest rate rises when the price level falls and falls when the money supply falls.
  • The interest rate falls when the price level falls and rises when the money supply falls.
  • The interest rate rises both when the price level falls and when the money supply falls.
  • The interest rate falls both when the price level falls and when the money supply falls.

Question 11

Question
In a small open economy with a flexible exchange rate, a monetary injection by the Bank of Canada causes which of the following?
Answer
  • It causes a shift of the aggregate-demand curve farther to the right than it would in a closed economy.
  • It causes an additional decrease in demand for Canadian-produced goods and services that is not realized in a closed economy.
  • It causes net exports to fall.
  • It causes the dollar to appreciate.

Question 12

Question
Fiscal policy refers to the idea that aggregate demand is changed by changes in what?
Answer
  • trade policy
  • government spending and taxes
  • the money supply
  • exchange rates

Question 13

Question
If the multiplier is 5, what is the MPC?
Answer
  • 0.75
  • 0.80
  • 1.00
  • 0.50

Question 14

Question
If the MPC is 0.75 and there are no crowding-out effects, an initial increase in AD of $150 billion will eventually shift the AD curve to the right by how much?
Answer
  • $133.33 billion
  • $80 billion
  • $600 billion
  • $800 billion

Question 15

Question
Assume that the MPC is 0.8. Assume that the total crowding-out effect is $25 billion. How will an increase in government purchases of $9 billion shift the AD curve?
Answer
  • It will shift the AD curve left by $25 billion.
  • It will shift the AD curve right by $45 billion.
  • It will shift the AD curve left by $20 billion.
  • It will shift the AD curve right by $20 billion.
  • It will shift the AD curve left by $45 billion.

Question 16

Question
In a small open economy with a flexible exchange rate, an expansionary fiscal policy will cause which of the following to happen?
Answer
  • It will cause an increase in the money supply
  • It will cause net exports to rise.
  • It will cause the dollar to depreciate.
  • It will cause a reduction in the demand for Canadian-produced goods.

Question 17

Question
Canada is a small open economy with a flexible exchange rate. Which of the following effects will a contractionary fiscal policy have?
Answer
  • 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.
  • 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.
  • 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.
  • 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.

Question 18

Question
Suppose the closed economy is in long-run equilibrium. Technological change shifts the long-run aggregate-supply curve $80 billion to the right. At the same time, government purchases increase by $40 billion. If the MPC equals 0.8 and the crowding-out effect is $70 billion, what would we expect to happen in the long-run to real GDP and the price level?
Answer
  • Real GDP would be higher but the price level would be the same.
  • Both real GDP and the price level would be lower.
  • Real GDP would be higher but the price level would be lower.
  • Both real GDP and the price level would be higher.

Question 19

Question
Suppose the closed economy is in long-run equilibrium. Immigration of skilled workers shifts the long-run aggregate supply curve $60 billion to the right. At the same time, government purchases increase by $40 billion. If the MPC equals 0.75 and the crowding-out effect is $160 billion, what would we expect to happen in the long-run to real GDP and the price level?
Answer
  • Real GDP would be higher, but the price level would be lower.
  • Both real GDP and the price level would be lower.
  • Both real GDP and the price level would be higher.
  • Real GDP would be higher, but the price level would be the same.

Question 20

Question
If the federal government cuts spending to balance the federal budget, how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?
Answer
  • by increasing the money supply
  • by raising taxes
  • by decreasing the money supply
  • by cutting expenditures
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