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© 2014 Pearson Canada Inc.#
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
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
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