The following questions should be answered in paragraph format, where possible. It is expected that students will provide a suitable discussion when required, and therefore short answers and point-form are not preferred. 1. Consider the following statement: "Fiscal policy is a very precise tool for controlling aggregate demand. If the government wants to increase aggregate demand by $5 billion, all it has to do is to carry out exactly $5 billion worth of government spending". Is this statement true or false? Explain. In your answer, consider both a closed economy and an open economy. Also, consider the difference between fixed and floating exchange rates in the open economy. (10 marks) 2. Discuss the possible impacts of a restrictive monetary policy on the housing market. What conditions (other than a reversal of the monetary policy) may counteract these impacts on the housing market? Provide at least two examples. Assume this is a closed economy. (8 marks) 3. It may be argued that government programs, tax, and inflation policies have benefited home owners in Canada. Explain how, if at all, each of these economic components affects house prices. Provide at least two specific examples of tax policies/ government programs with suggestions for how they affect house prices. (6 marks)4. Fill in the table below with the direction (rises, falls, or no change) of the variables that change in response to the events in the first column. (15 marks) Variable Canadian real Canadian Canadian Canadian Canadian real mortgage domestic exchange rate interest rate net capital of domestic rates investment outflow currency Canadian government budget deficit increases Canada Event imposes import quotas Capital flight from Canada 5. A group of policymakers have put forth a proposal to drastically increase the use of monetary and fiscal policy to stabilize the economy in Canada in the short run. Your team has been tasked by the Government of Canada to analyze their proposal and provide insight. (a) What is the case for active monetary and fiscal policy to stabilize an economy? Provide two specific economic events that may require stabilization through monetary or fiscal policy. (6 marks) (b) What is the case against active monetary policy? What is the case against active fiscal policy? Explain. (6 marks) (c) Can aggregate demand be stimulated when the economy enters a recession without policymakers having to implement new stabilization policies? Explain. (4 marks)