Question

Assume that the MPCis 0.75. Assuming only the multiplier effect matters, how will an increase in government purchases of $400 billion shift the aggregate demand curve?

a.	It will shift the aggregate demand curve left by $150 billion.
b.	It will shift the aggregate demand curve left by $250 billion.
c.	It will shift the aggregate demand curve right by $750 billion.
d.	It will shift the aggregate demand curve right by $1600 billion.

In a small open economy with a flexible exchange rate, an expansionary fiscal policy will cause which of the following to happen?

a.	It will cause the dollar to depreciate.
b.	It will cause the dollar to appreciate.
c.	It will cause net exports to increase.
d.	It will cause a lasting effect on aggregate demand.

If the Bank of Canada maintains a fixed exchange rate, which of the following effects will an expansionary fiscal policy have?

a.	It will cause a large and permanent rightward shift in the AD curve.
b.	It will cause a large and permanent leftward shift in the AD curve.
c.	It will have no permanent effect on the position of the AD curve, but it will cause interest rates to rise.
d.	It will have no permanent effect on either the position of the AD curve or the interest rate.

Answer 1

1.

Given MPC or marginal propensity to consume is 0.75 means money multiplier is 1/(1-MPC)= 4 and increase in government purchases is $400 billion would lead to an increase in the aggregate demand by 400*4=$1600 billion and shift to the right.

the correct option is (d)

2.

In small open economy with flexible exchange rate, an expansionary fiscal policy means increase in government purchases or cut in taxes would cause output to rise and rate of interest and domestic exchange rate to appreciate means dollar will depreciate.

the correct option is (b)

3.

If Bank of Canada maintains a fixed exchange rate, an expansionary fiscal policy then there is no permanent effect on aggregate demand curve or interest rate. Though aggregate demand shifts to the right causing output to increases and rate of interest falls below interest rate parity, aggregate supply curve also shifts to the right to maintain interest parity.

the correct option is (d)