1.An increase in the price level, through its effects on the money market and on
ID: 2439108 • Letter: 1
Question
1.An increase in the price level, through its effects on the money market and on AD, can eliminate
A. a deflationary gap as long as the money supply does not fall
B. an inflationary gap as long as the money supply does not increase
C. an inflationary gap as long as the money supply is increased
D. a deflationary gap as long as the money supply is decreased
2.If the government places a $5 tax on each ATM (automated teller machine) transaction, the demand for money will likely
A. increase
B. decrease
C. be unaffected
3.To close a recessionary gap using monetary policy, the Bank of Canada should _______ the money supply to ________ investment and consumer spending, and shift the aggregate demand curve to the ____________
A. increase; increase; left
B. decrease; decrease; left
C. increase; increase; right
D. decrease, decrease; right
4.Suppose the economy is operating at full employment and there is an increase in the money supply. Which of the following best describes what will happen in the short run and in the long run?
A. aggregate output will rise above potential output, nominal wages will rise and SRAS will shift to the left
B. aggregate output will fall below potential output, nominal wages will rise and SRAS will shift to the left
C. aggregate output will rise above potential output, nominal wages will fall and SRAS will shift to the left
D. aggregate output will rise above potential output, nominal wages will rise and SRAS will shift to the right
1.An increase in the price level, through its effects on the money market and on AD, can eliminate
A. a deflationary gap as long as the money supply does not fall
B. an inflationary gap as long as the money supply does not increase
C. an inflationary gap as long as the money supply is increased
D. a deflationary gap as long as the money supply is decreased
Explanation / Answer
(1) (B)
Increase in price level will increase the cost of inputs, which will lower aggregate supply, shifting AS curve leftward, further increasing the price level but decreasing output, which will eliminate an inflationary gap. But this holds truw only if money supply does not increase (since higher money supply will decrease interest rate, which will increase investment and aggregate demand, shifting AD curve rightward which will counteract the decrease in AS).
(2) (B)
The tax will make ATM transactions costlier than before, so people will want to withdraw and hold less money than before, reducing the demand for money.
(3) (C)
Expansionary monetary policy will lower interest rate that will increase investment, increase aggregate demand and shift the AD curve rightward.
(4) (A)
Increase in money supply will increase aggregate demand, increasing price level and output in short run, creating inflationary gap. In the long run, higher price level increases nominal wage rate and cost of inputs, which lowers aggregate supply and SRAS curve shifts to left.
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