the economics of money, banking, and financial markets

736 $

© 2014 Pearson Canada Inc.$

61. 
    

    Using the IS - MP model, explain the effects of a monetary expansion combined with a fiscal
    contraction. How do the equilibrium level of output and interest rate change?
    Answer: The monetary expansion shifts the LM curve to the right which by itself would cause
    the interest rate to decrease and aggregate output to increase. The fiscal contraction shifts the IS
    curve to the left which by itself would cause the interest rate to decrease and aggregate output to
    decrease. Therefore, the equilibrium interest rate unambiguously falls, while the effect on output
    is indeterminate.
    Diff: 2 Type: SA Page Ref: 566
    Skill: Recall
    Objective List: 23.1 Apply the IS-MP framework for the determination of aggregate output and
    the interest rate

    
    


62. 
    

    List the six factors that cause both the IS and the aggregate demand curve to shift.
    Answer:

    
    

1. Autonomous consumption expenditure


2. Autonomous investment spending


3. Government purchases


4. Taxes


5. Autonomous net exports


6. Financial frictions.
   Diff: 2 Type: SA Page Ref: 564
   Skill: Recall
   Objective List: 23.1 Apply the IS-MP framework for the determination of aggregate output and
   the interest rate

63. 
    

    How does autonomous tightening of monetary policy impact the aggregate demand curve.
    Answer: A rise in the real interest rate at any given inflation, shifts the monetary policy curve
    upward. The higher interest rates leads to lower output due to a decline in investment and net
    exports which lowers aggregate output and therefore the aggregate demand curve to the left.
    Diff: 2 Type: SA Page Ref: 568 - 569
    Skill: Recall
    Objective List: 23.1 Apply the IS-MP framework for the determination of aggregate output and
    the interest rate

    
    


64. 
    

    Describe non-conventional policies that could be implemented by the Bank of Canada when
    the policy rate approaches the lower bound.
    Answer: The central bank could use forward guidance, quantitative easing and credit easing.
    Diff: 2 Type: SA Page Ref: 567
    Skill: Recall
    Objective List: 23.1 Apply the IS-MP framework for the determination of aggregate output and
    the interest rate