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Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 22 The Monetary Policy and Aggregate Demand Curves

22.1 The Bank of Canada and Monetary Policy

1) The Bank of Canada conducts monetary policy by ________.


A) setting the overnight interest rate
B) buying and selling bonds in open market operations
C) changing the tax rate to influence aggregate demand
D) changing the exchange rate to influence aggregate demand
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.1 Recognize the impact of changes in the nominal overnight interest rate on short-
term real interest rates

2) The Bank of Canada controls the overnight rate by ________.


A) varying the settlement balances it provides to the banking system
B) dictating terms of the LVTS
C) managing government savings
D) borrowing from the provincial government
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.1 Recognize the impact of changes in the nominal overnight interest rate on short-
term real interest rates

3) Because prices are slow to move in the short-run, when the Bank of Canada lowers the
overnight rate, ________.
A) nominal interest rates rise
B) real interest rates fall
C) inflation falls
D) real interest rates rise
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.1 Recognize the impact of changes in the nominal overnight interest rate on short-
term real interest rates

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4) Because prices are sticky in the short-run, when the Bank of Canada raises the overnight
rate, ________.
A) nominal interest rates fall
B) real interest rates rise
C) inflation falls
D) real interest rates fall
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.1 Recognize the impact of changes in the nominal overnight interest rate on short-
term real interest rates

5) Explain the relationship between Bank of Canada's overnight rate and the real interest rate.
Answer: Because prices are stickychanges in monetary policy will not have an immediate
effect on inflation and expected inflation. As a result, when the Bank of Canada lowers the
overnight interest rate, real interest rates fall; and when the Bank of Canada raises the overnight
rate, real interest rates rise.
Diff: 2 Type: ES
Skill: Recall
Objective: 22.1 Recognize the impact of changes in the nominal overnight interest rate on short-
term real interest rates

6) Explain the relationship between real and nominal interest rates when inflation is expected to
remain unchanged in the short run.
Answer: The Fisher equation states that real interest rate equals the nominal interest rate minus
expected inflation. If there is no change in expected inflation, then over the short run, the real
and nominal rates will be the same.
Diff: 2 Type: ES
Skill: Recall
Objective: 22.1 Recognize the impact of changes in the nominal overnight interest rate on short-
term real interest rates

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22.2 The Monetary Policy Curve

1) The monetary policy (MP) curve indicates the relationship between ________.
A) the overnight rate and the real interest rate
B) the overnight rate and the inflation rate
C) the inflation rate and the expected inflation rate
D) the real interest rate the central bank sets and the inflation rate
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

2) An increase in the interest rate due to Taylor principle changes result in ________.
A) a movement up the monetary policy curve
B) a movement down the monetary policy curve
C) an upward shift of the monetary policy curve
D) a downward shift of the monetary policy curve
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

3) If the central bank did not follow the Taylor principle ________.
A) inflation would spiral out of control
B) it could rely on autonomous monetary policy changes
C) it could rely on non-conventional monetary policy tools
D) B and C only
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

4) If the central bank did not follow the Taylor principle so that the real interest rate fell when
inflation rose, ________.
A) inflation would increase
B) the nominal interest rate would not change
C) expected inflation would be equal to zero
D) output would remain unchanged
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

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5) If the monetary policy rule is given by r = 1.0 + 0.5p, then 1.0 represents ________.
A) the autonomous component of the real interest rate set by the central bank
B) the responsiveness of the real interest rate to the inflation rate
C) the nominal rate as described by the Taylor principle
D) none of the above
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

6) If the monetary policy rule is given by r = 1.0 + 0.5p, then 0.5 represents ________.
A) the autonomous component of the real interest rate set by the central bank
B) the responsiveness of the real interest rate to the inflation rate
C) the nominal rate as described by the Taylor principle
D) none of the above
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

7) If the monetary policy rule is given by r = 1.0 + 0.5p, then r represents ________.
A) the autonomous component of the real interest rate set by the central bank
B) the responsiveness of the real interest rate to the inflation rate
C) the real interest rate that is sent by the central bank
D) none of the above
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

8) Central banks aim to ________.


A) keep inflation stable
B) keep expected inflation equal to zero
C) reduce inflation to zero
D) A and B only
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

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9) The reason inflation spiralled in Canada in the 1970s can be attributed to ________.
A) the central bank not following the Taylor Principle
B) the OPEC oil embargo
C) changing policies at the federal government level
D) an aggressive central bank policy buying bonds
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

10) In the 1970s , the inflation rate in Canada reach levels over ________ percent.
A) 2
B) 5
C) 10
D) 12
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

11) The Taylor Principle differs from the Taylor rule because ________.
A) it does not provide a rule for how monetary policy should react to conditions in the economy
B) the Taylor principle relates to real interest rates and the Taylor rule pertains to nominal
interest rates
C) the Taylor principle is exclusively used by the Bank of Canada while the Taylor rule is used
by the U.S. Fed
D) the Taylor rule relates to inflation rates while the Taylor principle is applied to real interest
rates
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

12) Higher inflation results from higher interest rates due to ________.
A) the Taylor principle
B) the Taylor rule
C) the slope of the monetary policy curve
D) the Fisher equation
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

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13) Tightening monetary policy refers to ________.
A) higher real interest rates
B) higher nominal interest rates
C) lower real interest rates
D) lower nominal interest rates
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

14) The upward slope of the MP curve indicates that ________.


A) the central bank lowers real interest rates when inflation rises
B) the central bank raises real interest rates when inflation falls
C) the central bank raises nominal interest rates when inflation rises
D) the central bank raises real interest rates when inflation rises
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

15) The Taylor Principle states that central banks raise nominal rates by ________ than any rise
in expected inflation so that real interest rates ________ when there is a rise in inflation.
A) less; rise
B) more; fall
C) less; fall
D) more; rise
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

16) An autonomous tightening of monetary policy ________.


A) causes an upward movement along the monetary policy curve
B) causes a downward movement along the monetary policy curve
C) shifts the monetary policy curve upward
D) shifts the monetary policy curve downward
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

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17) An autonomous easing of monetary policy ________.
A) causes an upward movement along the monetary policy curve
B) causes a downward movement along the monetary policy curve
C) shifts the monetary policy curve upward
D) shifts the monetary policy curve downward
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

18) Based on the Taylor Principle, a central bank's endogenous response of raising interest rates
when inflation rises ________.
A) causes an upward movement along the monetary policy curve
B) causes a downward movement along the monetary policy curve
C) shifts the monetary policy curve upward
D) shifts the monetary policy curve downward
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

19) Based on the Taylor Principle, a central bank's endogenous response of decreasing interest
rates when inflation falls ________.
A) causes an upward movement along the monetary policy curve
B) causes a downward movement along the monetary policy curve
C) shifts the monetary policy curve upward
D) shifts the monetary policy curve downward
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

20) When the financial crisis started in August 2007, inflation was rising and the Bank of
Canada began an aggressive easing lowering of the overnight rate, which indicated that
________.
A) the Bank of Canada pursued an autonomous monetary policy tightening
B) the Bank of Canada pursued an autonomous monetary policy easing
C) the Bank of Canada had an automatic negative response to inflation based on the Taylor rule
D) the Bank of Canada had an automatic positive response to inflation based on the Taylor rule
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve
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21) An increase in the money supply, other things equal, shifts the ________ curve to the
________.
A) IS; right
B) IS; left
C) MP; left
D) MP; right
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

22) An expansionary monetary policy shifts the MP curve to the ________, reducing
________, everything else held constant.
A) left; output and increasing interest rates
B) left; both real output and interest rates
C) right; both interest rates and real output
D) right; interest rates and increasing real output
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

23) If the Bank of Canada conducts open market purchases, the money supply ________,
shifting the MP curve to the ________, everything else held constant.
A) decreases; right
B) decreases; left
C) increases; right
D) increases; left
Answer: C
Diff: 1 Type: MC
Skill: Applied
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

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Copyright 2017 Pearson Canada, Inc.
24) If the Bank of Canada conducts open market sales, the money supply ________, shifting
the MP curve to the ________, everything else held constant.
A) decreases; right
B) decreases; left
C) increases; right
D) increases; left
Answer: B
Diff: 1 Type: MC
Skill: Applied
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

25) If the Bank of Canada conducts open market ________, the money supply ________,
shifting the MP curve to the right, everything else held constant.
A) purchases; decreases
B) sales; decreases
C) purchases; increases
D) sales; increases
Answer: C
Diff: 2 Type: MC
Skill: Applied
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

26) If the Bank of Canada conducts open market ________, the money supply ________,
shifting the MP curve to the left, everything else held constant.
A) purchases; decreases
B) sales; decreases
C) purchases; increases
D) sales; increases
Answer: B
Diff: 2 Type: MC
Skill: Applied
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

27) A decline in the money ________ shifts the MP curve to the ________, causing the interest
rate to rise and output to fall, everything else held constant.
A) demand; right
B) demand; left
C) supply; right
D) supply; left
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve
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28) A decline in the money supply shifts the MP curve to the left, causing the interest rate to
________ and output to ________, everything else held constant.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

29) An increase in the money ________ shifts the MP curve to the ________, causing the
interest rate to fall and output to rise, everything else held constant.
A) demand; right
B) demand; left
C) supply; right
D) supply; left
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

30) An increase in the money supply shifts the MP curve to the right, causing the interest rate to
________ and output to ________, everything else held constant.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

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31) When the central bank ________ the money supply, the MP curve shifts to the right,
interest rates ________, and equilibrium aggregate output ________, everything else held
constant.
A) increases; fall; increases
B) increases; rise; decreases
C) decreases; rise; decreases
D) decreases; fall; increases
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

32) An autonomous decrease in money demand, other things equal, shifts the ________ curve
to the ________.
A) IS; right
B) IS; left
C) MP; left
D) MP; right
Answer: D
Diff: 2 Type: MC
Skill: Applied
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

33) An autonomous increase in money demand, other things equal, shifts the ________ curve
to the ________.
A) IS; right
B) IS; left
C) MP; left
D) MP; right
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

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Copyright 2017 Pearson Canada, Inc.
34) As bonds become a riskier asset, the demand for money ________ and, all else constant,
the equilibrium interest rate ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
Answer: A
Diff: 3 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

35) An autonomous rise in ________ shifts the MP curve to the ________, everything else held
constant.
A) net exports; right
B) net exports; left
C) money demand; right
D) money demand; left
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

36) Despite an expansionary monetary policy, an economy experiences a recession. Everything


else held constant, the recession could occur in spite of the rightward shift of the MP curve if
________.
A) consumer confidence decreases sharply
B) there is an investment boom
C) the money supply increases
D) taxes are cut
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

37) Describe how the Bank of Canada would apply the Taylor principle.
Answer: To stabilize inflation, the Bank of Canada raises nominal rates by more than any rise
in expected inflation so that real interest rates rise when there is a rise in inflation.
Diff: 2 Type: ES
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

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38) Explain the difference between autonomous changes in monetary policy and the Taylor
principle.
Answer: The Bank of Canada uses autonomous monetary policy to shift the monetary policy
curve in order to change in inflation rate, for example. The Taylor principle changes the real
interest rate which does not impact the monetary policy curve.
Diff: 2 Type: ES
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

39) Describe monetary easing at the Bank of Canada during the 2007-2009 Financial Crisis.
Answer: The Bank pursued autonomous monetary policy easing because of the negative shock
to the economy from the disruption to financial markets indicated that despite current high
inflation rates, the economy was likely to weaken in the near future and the inflation rate would
fall.
Diff: 2 Type: ES
Skill: Recall
Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the
MP curve

22.3 The Aggregate Demand Curve

1) In deriving the aggregate demand curve a ________ inflation rate leads the central bank to
________ real interest rates, thereby ________ the level of equilibrium aggregate output.
A) higher; raise; lowering
B) lower; raise; lowering
C) higher; lower; lowering
D) higher; lower; raising
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

2) The aggregate demand curve is derived from the ________.


A) IS curve
B) MP curve
C) LM curve
D) A and B only
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

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3) Suppose the aggregate demand curve is given by Y = 12 - r then, if inflation increases by 1
percent ________.
A) aggregate output is unchanged
B) aggregate output increases
C) the nominal interest changes
D) the real interest rate falls
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

4) Suppose the aggregate demand curve is given by Y = 12 - r then, if the nominal interest rate
increases by 1 percent ________.
A) aggregate output is unchanged
B) aggregate output increases
C) the nominal interest changes
D) the real interest rate falls
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

5) Higher interest rates lead to reductions in the aggregate output due to ________.
A) reductions in autonomous consumer expenditure
B) reductions in planned investment expenditure
C) higher expected inflation
D) higher employment
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

6) An increase in autonomous consumer expenditure causes the IS curve to shift ________ and
the aggregate demand curve to shift ________.
A) left; left
B) left; right
C) right; left
D) right; right
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

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Copyright 2017 Pearson Canada, Inc.
7) An increase in financial frictions causes the IS curve to shift ________ and the aggregate
demand curve to shift ________.
A) left; left
B) left; right
C) right; left
D) right; right
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

8) An increase in autonomous investment spending causes the IS curve to shift ________ and
the aggregate demand curve to shift ________.
A) left; left
B) left; right
C) right; left
D) right; right
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

9) An increase in government purchases causes the IS curve to shift ________ and the
aggregate demand curve to shift ________.
A) left; left
B) left; right
C) right; left
D) right; right
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

10) A decrease in taxes causes the IS curve to shift ________ and the aggregate demand curve
to shift ________.
A) left; left
B) left; right
C) right; left
D) right; right
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve
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11) In the IS and MP framework, an expansionary monetary policy causes aggregate output to
________ and the interest rate to ________, everything else held constant.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

12) Everything else held constant, a monetary expansion is characterized by ________ output
and ________ interest rates.
A) rising; rising
B) rising; falling
C) falling; rising
D) falling; falling
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

13) A contractionary monetary policy shifts the MP curve to the ________, reducing ________,
everything else held constant.
A) left; output and increasing interest rates
B) left; both real output and interest rates
C) right; both interest rates and real output
D) right; interest rates and increasing real output
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

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Copyright 2017 Pearson Canada, Inc.
14) Everything else held constant, a monetary contraction is characterized by ________ output
and ________ interest rates.
A) rising; rising
B) rising; falling
C) falling; rising
D) falling; falling
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

15) In the money market, a condition of excess demand for money can be eliminated by a
________ in aggregate output or a ________ in the interest rate, everything else held constant.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

16) In the money market, a condition of excess supply of money can be eliminated by a
________ in aggregate output or a ________ in the interest rate, everything else held constant.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

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Copyright 2017 Pearson Canada, Inc.
17) In the IS-MP framework, an expansionary fiscal policy resulting from government
purchases, causes aggregate output to ________ and the interest rate to ________, everything
else held constant.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

18) In the IS-MP framework a contractionary fiscal policy causes aggregate output to ________
and the interest rate to ________, everything else held constant.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

19) Everything else held constant, an expansionary ________ policy will cause the interest rate
to rise, while an expansionary ________ policy will cause the interest rate to fall.
A) monetary; monetary
B) monetary; fiscal
C) fiscal; monetary
D) fiscal; fiscal
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

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20) Aggregate output and the interest rate are ________ related to government spending and
are ________ related to taxes.
A) positively; positively
B) positively; negatively
C) negatively; positively
D) negatively; negatively
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

21) An increase in spending that results from expansionary ________ policy causes the interest
rate to ________, everything else held constant.
A) fiscal; rise
B) fiscal; fall
C) incomes; rise
D) incomes; fall
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

22) If an economy experiences high interest rates and high unemployment, the ISLM
framework predicts that ________ policy has been too ________.
A) fiscal; expansionary
B) fiscal; contractionary
C) monetary; expansionary
D) monetary; contractionary
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

23) Which of the following statements concerning IS - MP analysis is true?


A) For a given change in taxes, the IS curve will shift less than for an equal change in
government spending.
B) Changes in net exports arising from a change in interest rates causes a shift in the IS curve.
C) A fall in the money supply shifts the LM curve to the right.
D) Expansionary fiscal policy will cause the interest rate to fall.
Answer: A
Diff: 3 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve
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24) A decline in autonomous consumer expenditure causes the aggregate demand function to
shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the
________, everything else held constant.
A) up; left
B) up; right
C) down; left
D) down; right
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

25) A decline in autonomous consumer expenditure causes the aggregate demand function to
shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to
the ________, everything else held constant.
A) rise; left
B) rise; right
C) fall; left
D) fall; right
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

26) An increase in autonomous consumer expenditure causes the aggregate demand function to
shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the
________, everything else held constant.
A) rise; left
B) rise; right
C) fall; left
D) fall; right
Answer: B
Diff: 1 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

20
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27) An increase in autonomous consumer expenditure causes the equilibrium level of aggregate
output to ________ at any given interest rate and shifts the ________ curve to the ________,
everything else held constant.
A) rise; MP; right
B) rise; IS; right
C) fall; MP; left
D) fall; IS; left
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

28) A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate
output to ________ at any given interest rate and shifts the ________ curve to the ________,
everything else held constant.
A) rise; MP; right
B) rise; IS; right
C) fall; IS; left
D) fall; MP; left
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

29) Everything else held constant, changes in the interest rate affect planned investment
spending and hence the equilibrium level of output, but this change in investment spending
________.
A) merely causes a movement along the IS curve and not a shift
B) is crowded out by higher taxes
C) is crowded out by higher government spending
D) is crowded out by lower consumer expenditures
Answer: A
Diff: 3 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

21
Copyright 2017 Pearson Canada, Inc.
30) A rise in autonomous planned investment spending causes the equilibrium level of
aggregate output to ________ and shifts the ________ curve to the ________, everything else
held constant.
A) rise; MP; right
B) rise; IS; right
C) fall; IS; left
D) fall; MP; left
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

31) A decline in autonomous planned investment spending causes the equilibrium level of
aggregate output to ________ and shifts the ________ curve to the ________, everything else
held constant.
A) rise; MP; right
B) rise; IS; right
C) fall; IS; left
D) fall; MP; left
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

32) A decrease in investment spending because companies become more pessimistic about
investment profitability causes the aggregate demand function to shift ________ and the
equilibrium level of aggregate output to ________, everything else held constant.
A) up; rise
B) up; fall
C) down; rise
D) down; fall
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

22
Copyright 2017 Pearson Canada, Inc.
33) An increase in investment spending because companies become more optimistic about
investment profitability causes the aggregate demand function to shift ________ and the
equilibrium level of aggregate output to ________, everything else held constant.
A) up; rise
B) up; fall
C) down; rise
D) down; fall
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

34) An increase in investment spending because companies become more optimistic about
investment profitability causes the aggregate demand function to shift ________, the
equilibrium level of aggregate output to rise, and the IS curve to shift to the ________,
everything else held constant.
A) up; left
B) up; right
C) down; left
D) down; right
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

35) A decrease in investment spending because companies become more pessimistic about
investment profitability causes the aggregate demand function to shift ________, the
equilibrium level of aggregate output to fall, and the IS curve to shift to the ________,
everything else held constant.
A) up; left
B) up; right
C) down; left
D) down; right
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

23
Copyright 2017 Pearson Canada, Inc.
36) A decrease in investment spending because companies become more pessimistic about
investment profitability causes the aggregate demand function to shift down, the equilibrium
level of aggregate output to ________, and the IS curve to shift to the ________, everything
else held constant.
A) rise; left
B) rise; right
C) fall; left
D) fall; right
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

37) An increase in investment spending because companies become more optimistic about
investment profitability causes the aggregate demand function to shift up, the equilibrium level
of aggregate output to ________, and the IS curve to shift to the ________, everything else
held constant.
A) rise; left
B) rise; right
C) fall; left
D) fall; right
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

38) A decrease in autonomous planned investment spending, other things equal, shifts the
________ curve to the ________.
A) IS; right
B) IS; left
C) MP; left
D) MP; right
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

24
Copyright 2017 Pearson Canada, Inc.
39) An increase in government spending causes the equilibrium level of aggregate output to
________ at any given interest rate and shifts the ________ curve to the ________, everything
else held constant.
A) rise; MP; right
B) rise; IS; right
C) fall; IS; left
D) fall; MP; left
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

40) A reduction in government spending causes the equilibrium level of aggregate output to
________ at any given interest rate and shifts the ________ curve to the ________, everything
else held constant.
A) rise; MP; right
B) fall; IS; left
C) fall; MP; left
D) rise; IS; right
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

41) A decline in taxes ________ consumer expenditure and shifts the ________ curve to the
________, everything else held constant.
A) raises; MP; right
B) lowers; IS; left
C) raises; IS; right
D) lowers; MP; left
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

25
Copyright 2017 Pearson Canada, Inc.
42) If Canadian college students decide that drinking Mexican-brewed beer helps one get
noticed, net exports will tend to fall, causing aggregate demand to ________ and the ________
curve to shift to the left, everything else held constant.
A) fall; MP
B) fall; IS
C) rise; MP
D) rise; IS
Answer: B
Diff: 2 Type: MC
Skill: Applied
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

43) Other things equal, a decrease in autonomous consumption shifts the ________ curve to the
________.
A) IS; right
B) IS; left
C) MP; left
D) MP; right
Answer: B
Diff: 1 Type: MC
Skill: Applied
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

44) A decline in autonomous consumer expenditure causes the aggregate demand function to
shift ________ and the equilibrium level of aggregate output to ________, everything else held
constant.
A) up; rise
B) up; fall
C) down; rise
D) down; fall
Answer: D
Diff: 1 Type: MC
Skill: Applied
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

26
Copyright 2017 Pearson Canada, Inc.
45) The aggregate demand curve is downward sloping because a higher inflation rate leads the
central bank to raise ________ interest rates, thereby ________ the level of equilibrium
aggregate output., everything else held constant.
A) real; lowering
B) real; raising
C) nominal; lowering
D) nominal; raising
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

46) The aggregate demand curve is downward sloping because a higher inflation rate leads the
central bank to ________ real interest rates, thereby ________ the level of equilibrium
aggregate output., everything else held constant.
A) raise; lowering
B) raise; raising
C) reduce; lowering
D) reduce; raising
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

47) Everything else held constant, an increase in government spending will cause ________.
A) aggregate demand to increase
B) aggregate demand to decrease
C) the quantity of aggregate demand to increase
D) the quantity of aggregate demand to decrease
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

27
Copyright 2017 Pearson Canada, Inc.
48) Everything else held constant, an autonomous easing of monetary policy will cause
________.
A) the quantity of aggregate demand to increase
B) the quantity of aggregate demand to decrease
C) aggregate demand to decrease
D) aggregate demand to increase
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

49) Everything else held constant, an autonomous tightening of monetary policy will cause
________.
A) the quantity of aggregate demand to increase
B) the quantity of aggregate demand to decrease
C) aggregate demand to increase
D) aggregate demand to decrease
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

50) Everything else held constant, an autonomous easing of monetary policy will cause
________.
A) aggregate demand to increase
B) aggregate demand to decrease
C) the quantity of aggregate demand to increase
D) the quantity of aggregate demand to decrease
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

51) Everything else held constant, an increase in autonomous consumer spending will cause the
IS curve to shift to the ________ and aggregate demand will ________.
A) right; increase
B) right; decrease
C) left; increase
D) left; decrease
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve
28
Copyright 2017 Pearson Canada, Inc.
52) Everything else held constant, a decrease in autonomous consumer spending will cause the
IS curve to shift to the ________ and aggregate demand will ________.
A) right; increase
B) right; decrease
C) left; increase
D) left; decrease
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

53) Everything else held constant, an increase in autonomous planned investment spending will
cause the IS curve to shift to the ________ and aggregate demand will ________.
A) right; increase
B) right; decrease
C) left; increase
D) left; decrease
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

54) Everything else held constant, a decrease in autonomous planned investment spending will
cause the IS curve to shift to the ________ and aggregate demand will ________.
A) right; increase
B) right; decrease
C) left; increase
D) left; decrease
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

55) Everything else held constant, a decrease in net taxes will cause the IS curve to shift to the
________ and aggregate demand will ________.
A) right; increase
B) right; decrease
C) left; increase
D) left; decrease
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve
29
Copyright 2017 Pearson Canada, Inc.
56) Everything else held constant, an increase in net taxes will cause the IS curve to shift to the
________ and aggregate demand will ________.
A) right; increase
B) right; decrease
C) left; increase
D) left; decrease
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

57) Everything else held constant, an appreciation of the domestic currency will cause the IS
curve to shift to the ________ and aggregate demand will ________.
A) right; increase
B) right; decrease
C) left; increase
D) left; decrease
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

58) Everything else held constant, a depreciation of the domestic currency will cause the IS
curve to shift to the ________ and aggregate demand will ________.
A) right; increase
B) right; decrease
C) left; increase
D) left; decrease
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

59) Everything else held constant, a decrease in government spending will cause the IS curve to
shift to the ________ and aggregate demand will ________.
A) right; increase
B) right; decrease
C) left; increase
D) left; decrease
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve
30
Copyright 2017 Pearson Canada, Inc.
60) 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: ES
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

61) 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: ES
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

62) 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: ES
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

63) Describe the relationship between the IS and MP curves and the aggregate demand curve.
Answer: Any factor that shifts the IS curve shifts the aggregate demand curve in the same
direction. When the MP curve shifts up, the aggregate demand curve shifts left; when the MP
curve shifts down the aggregate demand curve shifts right.
Diff: 2 Type: ES
Skill: Recall
Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain
shifts in the AD curve

31
Copyright 2017 Pearson Canada, Inc.