Quiz 5

Question 1

What does it mean when AE > Y ?

Answer 1

When AE is greater than Y, it means that planned spending (AE) is higher than production (Y). Firms notice because their inventories will be falling unexpectedly so they will increase their production (economy expansion) until the economy reaches equilibrium AE=Y.

Question 2

What does it mean when AE < Y ?

Answer 2

When AE is lower than output/production (Y), firms’ inventories will be rising unexpectedly and they will cut back on production (economic recession) until the economy reaches equilibrium AE=Y.

Question 3

What does the Keynesian cross diagram show (2) ?

Answer 3

The Keynesian cross diagram shows the economy is stable due to the point of equilibrium we move towards and that the economy does not correct itself

Question 4

What is the multiplier formula?

Answer 4

The multiplier, K, is = 1/(1-the slope of AE equation). Rounded to one decimal.

Question 5

What is the multiplier effect?

Answer 5

The multiplier effect: If there is an increase/decrease in one of the constants, equilibrium Y will rise/fall by more than the increase/decrease in the constant. The change in Y is a multiple of any change in A.

Question 6

If the AE slope becomes steeper, it means there is an economic __.

Answer 6

Recovery.

Question 7

If the trade balance worsens because there has been an expansion, is this bad for the economy?

Answer 7

No, because there is no loss of jobs and we are still producing and selling the same amount of exports.

Question 8

Why does the government budget matter?

Answer 8

The government budget matters because if the government is in deficit, it almost always means taxes will be increased in the future which will mean eventually the economy will slow down and jobs will be lost.

Question 9

What would make investments decrease?

Answer 9

If interest rates increase or uncertainty.

Question 10

When taxes go up, what happens?

Answer 10

When taxes go up, it is a contractionary event and costs jobs in the country.

Question 11

What is a reason exports would fall?

Answer 11

Exports could fall due to trading partners going into recession and are spending less on everything.

Question 12

If the trade balance has deteriorated because exports have fallen, what will this mean?

Answer 12

If the trade balance has deteriorated because exports have fallen, it will mean a recession and loss of jobs since less production will be happening.

Question 13

What kind of gap is it when AE > Y ?

Answer 13

An inflationary gap.

Question 14

What kind of gap is it when AE < Y ?

Answer 14

A recessionary gap.

Question 15

Why would the government or central bank want to interfere with the economy’s adjustment toward equilibrium Y?

Answer 15

To prevent unemployment

Question 16

What happens in expansionary fiscal policy?

Answer 16

The government increases spending and/or cuts taxes so that AE will increase and there will be a recovery/expansion.

Question 17

What happens in contractionary fiscal policy? Why would this need to happen?

Answer 17

The government can cut spending and/or increase taxes to slow spending in the economy down (contraction). This would be necessary to prevent or reduce inflation

Question 18

Who is monetary policy run by?

Answer 18

Monetary policy is run by the Bank of Canada

Question 19

What happens in expansionary monetary policy? Why would this need to happen?

Answer 19

The Bank of Canada increases supply of money to the banking system. Interest rates will fall so investment increases. AE will increase (expansion).
This would need to happen to prevent or reduce unemployment and a recession

Question 20

What happens in contractionary monetary policy? Why would this need to happen?

Answer 20

The Bank of Canada reduces supply of money to the banking system. Interest rates will rise and investments and overall spending (AE) will slow down (contraction). This would need to happen to prevent pr reduce inflation.