the economics of money, banking, and financial markets

(Sean Pound) #1
694 #
© 2014 Pearson Canada Inc.#



  1. Everything else held constant, if aggregate output is to the ____ of the IS curve, then
    there is an excess ____ of goods which will cause aggregate output to rise.
    A) right; supply
    B) right; demand
    C) left; supply
    D) left; demand
    Answer: D
    Diff: 2 Type: MC Page Ref: 548
    Skill: Recall
    Objective List: 22.1 Utilize the Keynesian cross model for the determination of aggregate output




  2. Describe how the economy heads towards equilibrium and why it has a tendency to settle
    there.
    Answer: When production is above the equilibrium level, output will exceed aggregate demand
    and firms will continue cutting production and aggregate output will decrease. When aggregate
    output is below the equilibrium level of output, firms want to increase production because
    inventories are declining by more than they desire and aggregate output will increase. When
    aggregate demand equals aggregate output there is no further tendency for output to change.
    Diff: 2 Type: SA Page Ref: 549
    Skill: Recall
    Objective List: 22.1 Utilize the Keynesian cross model for the determination of aggregate output




  3. The Bank of Canada increases interest rates when they want to reduce aggregate demand to
    fight inflation. How do increases in the interest rate reduce aggregate demand?
    Answer: Increases in interest rates reduce planned investment. The decrease in investment
    reduces equilibrium output by a multiple amount due to the multiplier effect. Also, increases in
    interest rates increase the value of the dollar, reducing net exports, which reduce aggregate
    demand and equilibrium output by a multiple amount.
    Diff: 2 Type: SA Page Ref: 549 - 550
    Skill: Recall
    Objective List: 22.1 Utilize the Keynesian cross model for the determination of aggregate output



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