Econ 295 Final Pt. 2 Flashcards
In the long run, changes in average material living standards are best shown by A) growth in real GDP.
B) population growth.
C) growth in real per capita GDP.
D) improvements in fiscal policy.
E) improvements in monetary policy.
C
The compounding of economic growth rates means that
A) a large increase in investment today has little effect on national income over the long run. B) small changes in sustained growth rates can have a significant impact on national income over several decades.
C) consumers should not save, given the low real returns that compounding produces.
D) a 10% annual rate of return will double an investment in less than 6 years.
E) a 2% annual growth rate of GDP will double national income in 27 years.
B
If per capita GDP in a richer country grows at a faster annual rate than in a poorer country,
A) the gap between their standards of living will widen over time.
B) the gap between their standards of living will close over time.
C) the gap between their standards of living will close over time as long as the rate of population growth is higher in the poorer country.
D) whether the gap in living standards widens or closes over time depends on the absolute size of the relative growth rates.
E) the difference in their living standards will not change over time.
A
If GDP in a richer country grows at the same annual rate as in a poorer country, the A) gap between their standards of living will widen over time.
B) gap between their standards of living will close over time.
C) gap between their standards of living will close over time as long as the rate of population growth is lower in the poorer country.
D) gap between their standards of living will close over time as long as the rate of population growth is lower in the richer country.
E) difference in their living standards will not change over time.
C
A common measure of a country’s level of productivity is A) the average efficiency of capital.
B) the capital-output ratio.
C) output per capita.
D) output per unit of labour input.
E) per capita GDP.
D
In the short run, changes in real GDP are primarily determined by changes in factor-utilization rates which, in turn, are due to changes in
A) aggregate demand only.
B) aggregate demand because increases in demand will lead to increases in output.
C) aggregate supply only.
D) aggregate supply because when firms increase prices they are then willing to produce more.
E) both aggregate demand and aggregate supply.
E
A common measure of a country’s rate of economic growth is A) the marginal efficiency of capital.
B) the capital-output ratio.
C) the level of output per capita.
D) the change in output per capita.
E) the level of real gross domestic product.
D
Over the long term, by far the most potent force for raising average material living standards is
A) economic growth.
B) reducing inefficiencies.
C) redistributing income.
D) increasing the money supply.
E) appropriate fiscal policies.
A
If real income grows at approximately 2% per year, the number of years it will take for real income to double is approximately
A) 5.
B) 12.
C) 24.
D) 36.
E) 72.
D
If real income grows at approximately 4% per year, the number of years it will take for real income to double is approximately
A) 5.
B) 12.
C) 18.
D) 36.
E) 72.
C
Of the variables listed below, the best measure of a nation’s average material standard of living is
A) nominal GDP.
B) percent change in nominal GDP.
C) per capita real GDP.
D) per capita nominal GDP.
E) real GDP.
C
An increase in potential GDP would most likely be caused by a (an) A) decrease in factor-utilization rates.
B) increase in factor productivity.
C) increase in interest rates.
D) decrease in saving in the short run. E) increase in the unemployment rate.
B
The theory of economic growth concentrates on the ________ over the long run, not on ________.
A) growth of investment in capital goods; short-run fluctuations of investment
B) growth of real GDP; growth of potential GDP
C) factor utilization rates; growth of the supplies of factors
D) factor utilization rates; growth of real GDP
E) growth of potential output; fluctuations of output around potential
E
Which of the following is the best example of the acquisition of human capital?
A) A worker takes a training course that increases his/her productivity.
B) A worker receives new machinery enabling him/her to do the amount of work that was formerly done by two workers.
C) A worker communicates more quickly and accurately with suppliers because of upgrades to communications software.
D) A government-sponsored program increases the amount of investment available per worker.
E) A computer chip manufacturer introduces a faster processor for micro-computing.
A
four major determinants of economic growth include all of the following EXCEPT A) technological improvement.
B) growth in physical capital.
C) growth in human capital.
D) growth in financial capital.
E) growth in the labour force.
D
The study of the short run in macroeconomics focuses
A) equally on potential GDP and actual GDP.
B) primarily on changes to potential GDP.
C) primarily on changes to potential GDP with less emphasis on changes in actual GDP. D) primarily on changes to actual GDP with no interest in the output gap.
E) primarily on changes to the output gap with less emphasis on changes to potential GDP
E
If a country transfers resources from the production of consumption goods to the production of capital goods, the result will be to
A) raise future consumption.
B) raise current living standards.
C) decrease the long-run growth rate. D) lower future living standards.
E) raise current consumption.
A
One of the benefits of long-run economic growth is A) growth in nominal GDP greater than real GDP.
B) decreased productive capacity.
C) a greater ability to reduce inequality.
D) increased future interest rates.
E) decreased current saving and increased current consumption.
C
The costs of long-run economic growth include:
1) declining future average living standards;
2) that current consumption must be sacrificed to increase investment in capital goods;
3) current increases in investment may only generate greater consumption in the distant future. A) 1 and 2
B) 2 and 3
C) 1 only
D) 2 only
E) 3 only
B
For a given level of technology, a more rapid rate of economic growth can probably be achieved only if a country’s citizens are prepared to
A) redistribute income.
B) sacrifice some present consumption.
C) increase their demand for goods and services.
D) increase exports.
E) decrease interest rates.
B
The costs of economic growth include
A) declining future living standards.
B) current saving must be sacrificed to increase investment in capital goods.
C) improvements in technology.
D) the effects on workers whose skills are made obsolete by technical change.
E) reduced interest rates.
D
Long-run economic growth can help alleviate the problems of poverty by
A) creating new low-paying jobs for the unemployed.
B) generating more resources that can be used to reduce income inequality.
C) reallocating income away from low-value production to increase the incentives for high-value production.
D) requiring increased saving on the part of most of the population.
E) increasing future consumption for the middle class.
B
The level of aggregate output is determined in the short run by ________ but in the long run by the level of ________.
A) the output gap; factor productivity
B) the AD curve; interest rates
C) the AS curve; potential output
D) the AD and AS curves; Y*
E) the AD and AS curves; factor utilization
D
Long-term economic growth
A) is achieved only by changes in factor-utilization rates.
B) alleviates all poverty.
C) can improve average material living standards.
D) is the result of expansionary fiscal policy.
E) leads to equal income distribution.
C
Over a long period of time, perhaps many years, changes in real GDP come primarily from
A) upward shifts of the AS curve.
B) upward shifts of the AE curve.
C) rightward shifts of the AD curve.
D) continuous increases in potential GDP.
E) leftward shifts of the AD curve.
D
Consuming fewer goods today in order to invest resources in capital goods can be considered the ________ of economic growth.
A) opportunity cost
B) social cost
C) investment cost
D) external cost
E) total cost
A
Alleviation of poverty is more achievable in a growing economy mainly because
A) individuals are more likely to object to the redistribution of income when they earn more. B) everyone, including the poor, benefits equally from growth.
C) poor individuals are relatively easier to be identified in a growing economy.
D) nobody has to be made worse off when the increment to income caused by growth is redistributed.
E) wage rates for low-income people are naturally rising.
D
An important social cost of economic growth is
A) the increasing inequality of income that usually accompanies sustained growth.
B) the sacrifice of current consumption required for a higher level of future consumption. C) the associated inflation.
D) the associated frictional unemployment.
E) the destruction of jobs due to labour skills of certain workers becoming obsolete.
E
Economic growth is often associated with structural change in the economy, and this change can present difficult policy challenges to governments. Which of the following government policies would be most useful at addressing the social costs of economic growth?
A) expansionary monetary policy
B) the imposition of trade restrictions to protect Canadian jobs C) subsidies directed at Canadian manufacturing firms
D) worker re-training and education programs
E) reducing income taxes
D
Which of the equations is a correct expression for national saving in the long run when real GDP equals potential output?
A) NS = Y* - C - G
B) NS = Y* - C + T - G
C) NS = Y* - T - C
D) NS = T - G
E) NS = T - G - C
A
Consider the long-run theory of investment, saving and growth. In the long-run version of our macro model (with real GDP equal to Y*), the equilibrium interest rate is determined where
A) aggregate demand equals aggregate expenditure.
B) desired national saving equals desired investment.
C) the nominal price level equals the real price level.
D) desired consumption equals desired investment.
E) desired saving equals desired consumption.
B
If government policies are to be successful in enhancing a country’s long-run growth rate, they likely work through generating
A) higher levels of current consumption.
B) greater private investment in physical and human capital.
C) an increase in current consumption and a reduction in saving.
D) a leftward shift in the AS curve.
E) fiscal policies that shift the AD curve to the right.
B
Consider the long-run theory of investment, saving, and growth. For a given level of private saving, an increase in government purchases will likely ________ the economy’s long-run growth rate.
A) slow down
B) accelerate
C) not affect
D) increase
E) Not enough information to know
A
For a given level of national income, an increase in private consumption or government purchases will cause national saving to
A) increase.
B) grow at a constant rate.
C) remain unchanged from its initial level. D) exceed investment.
E) decrease.
E
An increase in the government budget surplus, everything else constant, will cause a(n) A) decrease in national saving.
B) increase in national saving.
C) decrease in the growth rate.
D) equal increase in private consumption. E) equal decrease in private investment.
B
Consider a closed economy in the long run. A country with a low national saving rate (as a fraction of real GDP) is likely to have
A) a high growth rate because aggregate expenditure will be high out of any given income.
B) either a high or low growth rate depending on the investment schedule.
C) an AS curve moving continually to the right.
D) trouble achieving potential real national income in the short run.
E) a low growth rate because sustained high investment is not possible with low saving.
E
Consider the market for financial capital for a closed economy in the long run. Other things being equal, a country with a high national saving rate will tend to have
A) a high growth rate because aggregate expenditure will be high out of any given income.
B) a high growth rate because sustained high investment is possible with high saving.
C) an AS curve moving continually to the left.
D) trouble achieving potential real national income in the short run.
E) either a high or low growth rate depending on the investment demand schedule.
B
Which of the following statements concerning national saving is true?
A) A country’s saving rate is unrelated to its growth rate.
B) An increase in the rate of saving will lead to a reduction in consumption and therefore to both a short-run and a long-run decrease in national income.
C) An increase in the rate of saving will cause an immediate increase in national income, but may cause a drop in national income in the long-run.
D) An increase in the rate of saving will always be offset by a reduction in private investment. E) An increase in the rate of saving will lead to a short-run reduction in national income, but to higher economic growth in the long run.
E
For a given level of national income, a decrease in government tax revenues will cause
A) a decrease in national saving.
B) an increase in national saving. C) an increase in the growth rate. D) no effect on national saving. E) a decrease in consumption.
A
For a given level of private saving, a decrease in the government’s budget deficit ________ the long-run rate of economic growth.
A) will reduce
B) will leave unchanged
C) will increase
D) will diminish
E) none of the above
C
Consider the long-run theory of investment, saving, and growth. For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to
A) increase and the flow of national saving to decrease.
B) increase and the flow of investment to increase.
C) increase and the flow of investment to decrease.
D) decrease and the flow of national saving to increase. E) decrease and the flow of national saving to decrease.
D
For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to
A) increase and the flow of national saving to fall.
B) increase and the flow of investment to increase.
C) increase and the flow of investment to decrease. D) decrease and the flow of investment to decrease. E) decrease and the flow of investment to increase.
E
Consider the market for financial capital in the long run. The national saving curve is upward sloping because an increase in the real interest rate
A) leads households to increase their current consumption.
B) leads to an increase in investment demand.
C) decreases the supply of public saving.
D) leads households to reduce their current consumption. E) decreases the supply of private saving.
D
Consider the market for financial capital in the long run. The investment demand curve is downward sloping because
A) an increase in the real interest rate leads to an increase in investment demand.
B) all components of desired investment are negatively related to the real interest rate. C) all components of desired investment are positively related to the real interest rate.
D) a decrease in the real interest rate reflects a higher opportunity cost to firms of using financial capital.
E) an increase in the real interest rate reflects a lower opportunity cost to firms of using financial capital.
B
In the long run, an increase in the demand for investment pushes ________ the real interest rate, encourages ________ saving by households, and leads to a ________ future growth rate of potential output.
A) down; less; lower
B) up; less; lower
C) down; less; higher
D) up; more; higher
E) up; more; lower
D
Data from most industrialized countries show that countries with high investment rates (as a percentage of GDP) tend to be countries
A) with the highest levels of per capita GDP.
B) with the highest levels of GDP.
C) with high rates of economic growth.
D) with the lowest rate of national saving.
E) with a negative relationship between investment and the rate of economic growth.
C
Consider the Neoclassical growth model. The effect of an increase in population (or the labour force) in an economy, with everything else held constant, is
A) an increase in per capita national income.
B) an increasingly aging population.
C) a decrease in per capita output.
D) a decrease in the capital-output ratio.
E) an inward shift of the production possibilities boundary.
C
Consider the Neoclassical growth model. The effect of an increase in population (or the labour force) in an economy, with everything else held constant, is
A) an increase in per capita national income.
B) an increasingly aging population.
C) a decrease in per capita output.
D) a decrease in the capital-output ratio.
E) an inward shift of the production possibilities boundary.
C
The main properties of a Neoclassical aggregate production function are ________ when all factors are increased proportionally and ________ when any one factor is increased on its own. A) increasing returns to scale; diminishing marginal returns
B) constant returns to scale; diminishing marginal returns
C) constant returns to scale; constant marginal returns
D) decreasing returns to scale; diminishing marginal returns E) increasing returns to scale; increasing marginal returns
B
The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor will eventually
A) increase the average product of the factor.
B) decrease the average product of the factor.
C) lead to an increase in the marginal output of the factor. D) lead to a decrease in total output by the factor.
E) lead to an increase in the material standard of living.
B
The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor eventually cause the
A) average product of the factor to increase.
B) marginal product of the factor to fall.
C) marginal product of the factor to increase at an increasing rate. D) marginal product of the factor to increase but at a decreasing rate. E) material standard of living to increase.
B
A central assumption of the Neoclassical growth model is that A) long-run growth arises from correcting market failures.
B) long-run growth arises only from technological innovation.
C) there are diminishing marginal returns to a single factor. D) there are constant marginal returns to investment.
E) there are increasing marginal returns to capital investment.
C
In the Neoclassical growth model, whenever diminishing returns applies, increases in the population, other things being equal, are accompanied by
A) decreasing GDP and falling living standards.
B) decreasing GDP and increasing living standards.
C) increasing GDP and falling living standards.
D) increasing GDP and constant living standards. E) increasing GDP and increasing living standards.
C
In the Neoclassical growth model, decreases in the population, other things being equal, would eventually result in
A) decreasing GDP and falling living standards.
B) decreasing GDP and increasing living standards.
C) increasing GDP and falling living standards.
D) increasing GDP and increasing living standards. E) increasing savings and increasing living standards.
B
In the Neoclassical growth model, increases in the stock of physical capital, other things being equal, will lead to
A) decreasing GDP and falling living standards.
B) decreasing GDP and increasing living standards.
C) increasing GDP and falling living standards.
D) increasing GDP and increasing living standards.
E) increasing GDP and decreased national wealth.
D
In the Neoclassical growth model, if capital and labour grow at the same rate, we will observe
A) rising GDP but falling living standards.
B) rising GDP but no change in living standards.
C) rising GDP and increasing living standards.
D) increasing living standards but only for workers using labour-intensive production. E) increasing living standards but only for workers using capital-intensive production.
B
According to the Neoclassical growth model, it is most likely that GDP would increase, but that average material living standards would fall, as a result of
A) a fast-growing capital stock.
B) a better educated labour force.
C) an increase in the working population.
D) a growing capacity to develop and incorporate new innovations. E) an increase in the availability of natural resources.
C
In Neoclassical growth theory, an increase in the labour force ________ total output and ________ total output per person.
A) increases; increases
B) increases; leaves constant
C) increases; reduces
D) leaves constant; leaves constant
E) leaves constant; reduces
C
In Neoclassical growth theory, average material living standards in an economy could fall when
A) additional units of capital are added to the other factors.
B) additional units of labour are added to the other factors.
C) there is equal percentage growth in capital and labour inputs. D) technology improves.
E) there is a decline in the population.
B
In Neoclassical growth theory, increasing the amount of capital employed in production ________ the average standard of living as long as the marginal product of capital exceeds zero. A) unambiguously raises
B) unambiguously reduces
C) has no effect on
D) at first raises but eventually reduces
E) at first reduces but eventually raises
A
The Neoclassical theory of economic growth led economics to be referred to as the “dismal science.” The explanation for this reference lies in the theory’s emphasis on
A) growing inequality of income.
B) increasing government intervention in the economy.
C) increasing damage to the environment. D) the immoral behaviour of firms.
E) diminishing returns in production.
E
The Neoclassical growth model assumes that with a given state of technology,
A) increases in the use of a single factor bring increasing returns.
B) increases in the use of a single factor result in constant returns.
C) increases in GDP are possible only if all factors are increased at an equal rate.
D) growth in GDP happens only if the labour force grows more quickly than the amount of physical capital.
E) the standard of living will decrease if the labour force grows more quickly than the amount of physical capital.
E
In the Neoclassical growth model, the law of diminishing marginal returns implies that capital accumulation leads to ever
A) larger decreases in GDP and large decreases in living standards.
B) larger increases in GDP but smaller decreases in living standards.
C) smaller increases in GDP and living standards.
D) larger levels of unemployment but small increases in the standard of living. E) larger levels of unemployment but larger increases in the standard of living.
C
A person who returns to school to improve her computer skills is an example of an increase in
A) the labour force.
B) human capital.
C) physical capital.
D) technological capital.
E) financial capital.
B
According to the Neoclassical growth model, which of the following scenarios explains improvements in long-run material living standards?
A) an increase in population
B) a decrease in unemployment rates
C) an increase in the stock of physical capital
D) an equal increase in both population and the stock of capital E) an equal increase in both population and output
C
According to the Neoclassical growth model, which of the following scenarios (other things being equal) explains progressively smaller increases in per capita GDP?
A) an increase in population
B) a decrease in unemployment rates
C) an increase in the capital stock
D) an equal increase in both population and the stock of capital E) an equal increase in population and output
C
Real GDP is not a good measure of average material living standards because A) it is biased by the changes in the inflation rate.
B) it excludes the role of imported goods.
C) it does not take into account the size of the population.
D) it is sensitive to the base year chosen in its calculation.
E) the price level may be changing, which affects what people can afford to buy.
C
Balanced growth of labour and capital in the Neoclassical growth model A) leads to rising material living standards.
B) will not increase the level of per capita GDP.
C) will result in a constant level of GDP.
D) is a natural outcome of long-run equilibrium.
E) explains current rising per capita incomes in many countries.
B
According to the Neoclassical growth theory, sustained rising material living standards can only be explained by
A) growth in human capital.
B) growth in physical capital.
C) growth in the labour force.
D) balanced growth of labour and capital.
E) exogenous technological change.
E
Embodied technical change” is said to occur when
A) older capital equipment is replaced with different, more productive, capital.
B) the capital-labour ratio is increasing.
C) innovations in the organization of production take place which do not involve changes in the form of capital used.
D) techniques of managerial control are improved.
E) the labour force acquires new skills that can be used across a wide range of industries.
A
Consider the Neoclassical growth model. Sustained economic growth in the long run could best be fostered by
A) expansionary fiscal policy.
B) decreasing excise taxes on consumer goods.
C) technological improvements embodied in physical or human capital.
D) elimination of an output gap.
E) expansionary monetary policy.
C
Neoclassical growth theory is based on the assumption of ________ marginal returns to a single factor and ________ returns to scale exhibited by the aggregate production function. A) decreasing; constant
B) decreasing; decreasing
C) constant; decreasing
D) increasing; increasing
E) increasing; constant
A
An aggregate production function exhibits constant returns to scale when a 1% increase in labour input
A) produces a 1% increase in output.
B) along with a 1% increase in capital produces the same amount of output.
C) along with a 1% increase in capital produces one percent more output.
D) along with a 1% decrease in capital produces the same amount of output. E) induces a 1% increase in capital input.
C
An aggregate production function exhibits increasing returns to capital when A) no change in capital produces a one percent increase in output.
B) a 1% decrease in capital produces an increase in the marginal product of capital. C) a 1% increase in capital produces no change in output.
D) each additional unit of capital increases the number of jobs by more than 1%.
E) each additional unit of capital has a higher marginal product than the previous unit.
E
Consider an aggregate production function Y = F(K, L) that displays diminishing marginal returns to labour. If the amount of capital is held constant and the amount of labour used in production is increasing, then
A) each additional unit of labour will add less to total output than the previous unit of labour.
B) each additional unit of labour will add more to total output than the previous unit of labour. C) total output increases in proportion to the increases in labour.
D) there are increasing returns to scale.
E) there are constant returns to scale.
A
Modern or “new” theories of long-run economic growth are based on the assumptions that technological change is mainly ________ to an economy and that investment yields ________ marginal returns.
A) exogenous; diminishing
B) exogenous; constant
C) exogenous; increasing
D) endogenous; decreasing
E) endogenous, increasing
E
The “new” theories of economic growth emphasize that the pace of technological change is ________ to economic signals, and that it is ________ to the economic system.
A) responsive; exogenous
B) responsive; endogenous
C) unresponsive; exogenous
D) unresponsive; endogenous
E) unresponsive; unrelated
B
The “new” theories of economic growth emphasize that technological change ________ to price and profit signals.
A) and product development are both directly related
B) is directly related and product development is inversely related
C) is unaffected by but product development is directly related D) is directly related and population growth is inversely related E) and product development are both unrelated
A
According to the “new” theories of economic growth, increasing marginal returns to capital investment is
A) possible, but only in the early stages of innovation before imitators rush in to drive prices down.
B) possible after initial fixed costs of innovation have been borne.
C) possible only if the capital is government-owned infrastructure. D) impossible, and is thus a weak source of growth.
E) impossible because diminishing returns are unavoidable.
B
New theories of economic growth based on the idea that growth is endogenous
A) assume that the rate of growth of the economy is equal to the rate of population growth. B) assume that the growth rate of technology is exogenous.
C) incorporate factors such as central-bank behaviour.
D) ignore the role of technology.
E) stress the role of knowledge and learning in the economy’s rate of growth.
E
With respect to long-run economic growth, one rationale for the idea that there may be increasing marginal returns to investment is that
A) as further investment takes place the economy moves down to the right along the marginal product schedule.
B) as further investment takes place the economy moves upward to the left along the marginal product schedule.
C) the investment costs to “followers” are lower than those for “pioneers.”
D) initial investment shifts the the investment demand schedule to the left, making further investment less costly.
E) initial investment shifts the the aggregate demand schedule to the left, making further investment less costly.
C
According to some modern theories of long-run economic growth, successive increments of investment have ________ returns since some fixed costs are ________ for subsequent firms.
A) constant; identical
B) increasing; lower
C) increasing; higher D) decreasing; higher E) decreasing; lower
B
In new theories of “endogenous growth,” increasing marginal returns to investment can occur because
A) investment costs for followers can be higher than for pioneers.
B) knowledge provides the input that allows investment to be profitable.
C) many investments require large fixed costs, the benefits of which are not available to subsequent firms.
D) little risk is associated with the process of innovation for technological followers.
E) early investors create an infrastructure favorable to followers.
E
Compared to Neoclassical growth theory, newer “endogenous growth” theories are more ________ regarding the prospect of continuous increases in the standard of living, due in part to its emphasis on the ________.
A) pessimistic; endogeneity of technological change
B) pessimistic; accelerating depletion of natural resources
C) pessimistic; increasing birth rates as a result of higher real income per capita D) optimistic; accelerating depletion of natural resources
E) optimistic; endogeneity of technological change
E
Given the rapid growth of world population in recent decades, the present needs and aspirations of the world’s population can likely only be met through
A) enormous increases in financial capital.
B) increasing knowledge and technological improvements.
C) reductions in the world’s capital stock, as a means of controlling the exhaustion of natural resources.
D) coordination of fiscal and monetary policies.
E) relatively small increases in the saving rates of the developing economies.
B
Modern growth theories are more optimistic than Neoclassical growth theories because the former emphasize the unlimited potential of
A) modern capital.
B) knowledge-driven technological change.
C) more educated government policy making.
D) modern labour.
E) economic theory.
B
Which of the following statements is true of new growth theory, and not true of Neoclassical growth theory?
A) It cannot explain improved living standards over the long term.
B) It can explain improved living standards over the long term.
C) Economic growth does not have an impact on resource exhaustion. D) Economic growth depends only on population growth.
E) Economic growth is the result of innovation.
B
Investment in innovation is often considered to have increasing marginal returns because A) new products increase firms’ profits.
B) R&D costs are negligible relative to firms’ total costs.
C) innovation is mostly through “leaning by doing.”
D) of market development costs and the “public good” nature of knowledge.
E) after the initial investment is made, subsequent investors face more difficult and expensive production problems.
D
Consider the competing products made by Apple (iPhone) and Samsung, for example. The innovation generated by these firms as a result of their intense rivalry is an example of
A) covert collusion.
B) constant returns to scale.
C) exogenous technological change.
D) endogenous technological change.
E) decreasing marginal returns.
D
In new theories of economic growth, “learning by doing” contributes to endogenous technological change because
A) knowledge can be considered a private good.
B) knowledge can be considered a public good.
C) information at all stages of the design and production processes is fed upstream and contributes to further innovation.
D) “learning by doing” increases the marginal product of physical capital.
E) new technical knowledge can be transferred at zero cost.
C
Resource exhaustion is not considered to be among the main factors that limit economic growth because
A) the population growth rate is decreasing over time and projected to be negative in the future. B) different types of inputs are used in production over time.
C) resources can be obtained from other planets as technology advances.
D) technological advances change the nature of production over time and also make more resources available for extraction.
E) there are limitless supplies of resources, at high enough prices.
D
In 1950, when the world’s population was 2.5 billion, it was unimaginable that the world could ever produce enough food to feed the present world population of 7 billion. Such a belief was likely based on the following erroneous assumptions:
A) food production increases geometrically and population increases arithmetically.
B) the potential GDP of all countries is constant, and food production would comprise a declining share of GDP.
C) the state of technology is constant and the stock of resources is fixed.
D) global political and economic cooperation would be a necessary condition to feed such a growing population.
C
Suppose that most of the world’s population would like to achieve a standard of living equal to that of the average Canadian family. Such a rise in global living standards is
A) not possible given the world’s current resources and the current state of technology.
B) possible with better political and economic cooperation around the world.
C) possible given the world’s current resources and current state of technology.
D) not possible under any circumstances.
E) possible with no adverse effects on pollution and environmental degradation.
A
Economic growth allows increasing numbers of people around the world to enjoy higher incomes and to escape (material) poverty. Which of the following statements best describes the current limits to this growth?
A) Rising consumption due to higher incomes puts increasing pressure on the world’s natural ecosystems and its ability to cope with further pollution and environmental degradation.
B) The supply of financial capital is insufficient to maintain this level of economic growth. C) The inability of developing countries to increase their human capital will prevent further economic growth.
D) Increasing prices of natural resources will limit further economic growth.
E) Innovation and technological change with respect to resource development have been exhausted.
A
The function of money in an economy is to serve as 1) a unit of account;
2) a store of value;
3) a medium of exchange.
A) 1 and 2
B) 2 and 3
C) 1 and 3
D) 1, 2, and 3
E) 3 only
D
Money is commonly defined as
A) a generally accepted medium of exchange.
B) gold.
C) foreign-exchange reserves.
D) paper currency.
E) the Canadian dollar.
A
In order to be considered “money,” paper currency must be A) convertible into a precious metal.
B) impossible to counterfeit.
C) issued by a chartered bank.
D) issued by a government agency.
E) generally acceptable as a medium of exchange.
In order to be considered “money,” paper currency must be
A) convertible into a precious metal.
B) impossible to counterfeit.
C) issued by a chartered bank.
D) issued by a government agency.
E) generally acceptable as a medium of exchange.
Doug compares the unit price of chocolate bars in order to get the “best buy.” This represents using money as
A) a medium of exchange.
B) a store of value.
C) a unit of account.
D) a unit of deferred payment.
E) a money substitute.
C
The major advantage of using money rather than barter is that
A) in the barter system there is no way to express values of commodities. B) money is the only convenient way to store one’s wealth.
C) money has more value than real goods.
D) money stays where you put it, whereas a cow often has to be fenced in.
E) the use of money significantly reduces transactions costs.
E
The biggest disadvantage of a barter system compared to one that uses money is that A) it is difficult to find goods to trade in a barter system that satisfy the needs of society.
B) a standardized unit of account cannot exist in a barter system.
C) commodities are difficult to transport and therefore inefficient for exchange.
D) each trade requires a double coincidence of wants. E) commodities are difficult to use as a store of value.
D
If a majority of Canadian households and businesses refused to accept Canadian dollars in exchange for goods and services, the value of the Canadian dollar would
A) fall.
B) rise since less would be in circulation.
C) stay constant since the value does not depend on its acceptability by people.
D) stay constant since its value is determined only by the Bank of Canada.
E) stay constant since its value is determined only by the Government of Canada.
A
I n order for money to be successfully used as a medium of exchange, it must 1) be readily acceptable;
2) be easily divisible;
3) have a high value-weight ratio.
A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 1, 2, and 3
E
The use of money in an economy does which of the following?
A) creates the necessity for a double coincidence of wants
B) solves the problem of inflation
C) creates a problem of trading a portion of indivisible commodities such as a ship
D) promote specialization and the division of labour
E) promotes the use of barter
D
When metal coins, such as gold and silver, were used as money, a technique which helped to prevent the reduction of their value through clipping was
A) basing.
B) re-minting.
C) milling.
D) debasement.
E) sweating.
C
Historically, when gold and silver coins were used as money, their debasement resulted in
A) deflation
B) an increase in the supply of money.
C) an increase in the amount of gold bullion.
D) an increase in the desire to store wealth by holding coins.
E) a decrease in the money supply
B
Gresham’s law predicts that
A) good money drives out bad money.
B) debased money will circulate with undebased money.
C) undebased money will be driven from circulation.
D) debased money will be driven from circulation.
E) money is neutral in the long run.
C
Which of the following is consistent with the predictions of Gresham’s law?
A) An increase in the money supply will be followed by inflation.
B) The increased circulation of U.S. coins in Canada during periods when the Canadian dollar is worth significantly less than the U.S. dollar.
C) Debasement of a metallic money will be followed by inflation.
D) Increases in the money supply led to the hyperinflation of the 1920s in Germany.
E) The disappearance of U.S. coins circulating in Canada during periods when the Canadian dollar is worth less than the U.S. dollar.
E
Suppose you come into possession of two “silver” dollars, one minted in the 1950s which contains a lot of silver, the other minted in the 1990s which contains no silver at all. The legal exchange rate between the coins is fixed at one for one. According to Gresham’s law, the 1950s silver dollar
A) is considered “bad” money.
B) will drive out of circulation the 1990s silver dollar.
C) is more likely to be used as a medium of exchange.
D) is less likely to be used as a medium of exchange.
E) is less likely to be used as a store of value because it will appear old fashioned.
D
Which of the following was the most important initial step in the evolution of paper currency?
A) the acceptance of bank notes
B) the acceptance of goldsmiths’ receipts
C) the acceptance of metallic coins
D) the issuance of currency by governments
E) the use of the Gold Standard
B
Suppose an economy has two types of money — gold and silver coins — that are both legal tender but have different non-monetary values. Gresham’s law has come into effect when
A) people refuse to use the coins of lesser value.
B) the value of the coins is in the same ratio as their non-monetary values.
C) the lower-valued coin is taken out of circulation.
D) the higher-valued coin is taken out of circulation.
E) people use the higher-valued coins for exchange and the lower-valued for savings.
D
The major problem of a currency that is fractionally backed and convertible into a precious metal is that of
A) clipping, which debases the metal coins.
B) counterfeiting.
C) maintaining its convertability into the metal.
D) paper money being less durable than gold.
E) perennial shortages of paper currency.
C
Most Canadians accept Canadian dollars in payment for goods and services in Canada because they have confidence that the dollar
A) will be accepted in the future.
B) is fully convertible into gold.
C) is accepted by foreigners as more stable than their own currency. D) is fully convertible into American dollars at a set exchange rate. E) is fully backed by the British pound sterling.
A
If most individuals accept paper currency in transactions, and paper currency is convertible into gold, then banks can safely issue
A) no more paper currency than the value of the gold they hold.
B) more paper currency than the value of the gold they hold.
C) as much paper currency as they please.
D) paper currency equal to a fraction of the gold they hold.
E) paper currency equal to the bank’s commercial debt divided by their gold reserves.
B
The currency that is in circulation in Canada today is A) fully backed by gold held at the central bank.
B) backed by the U.S. dollar.
C) backed by the euro.
D) fractionally backed by gold.
E) not officially backed by anything.
E
Which of the following illustrates the use of fiat money? A) exchanging Canadian dollars for a T-shirt
B) exchanging money-market funds for gold
C) exchanging money-market funds for insurance
D) keeping gold as a hedge against inflation E) bartering goods for services
A
Debit cards that are issued by commercial banks can be characterized as A) an example of near money.
B) an electronic version of a cheque.
C) deposit money.
D) fiat money.
E) a store of value.
B
In recent years, the use of debit cards issued by commercial banks has skyrocketed. When you pay for a purchase at a store using a debit card, you are
A) authorizing the transfer of cash from your bank account to the merchant’s bank account. B) creating an electronic debt to the merchant.
C) authorizing an electronic transfer of a money substitute from you to the merchant.
D) authorizing an electronic transfer of deposit money from you to the merchant.
E) authorizing the transfer of bank notes from you to the merchant.
D
Which of the following statements about deposit money is true?
A) The quantity of fiat money in the Canadian economy far exceeds the quantity of deposit money.
B) Deposit money can legally be created solely by the Bank of Canada.
C) Deposit money is the paper money or coinage that is decreed by the government to be accepted as legal tender.
D) Deposit money is recorded as an asset on the balance sheet of a commercial bank.
E) The quantity of deposit money in the Canadian economy far exceeds the quantity of fiat money in circulation.
E
The largest element of the Canadian money supply today is
A) coins.
B) paper money.
C) bank deposits.
D) gold.
E) the debt of the federal government.
C
The functions of the Bank of Canada include
A) acting as the lender of last resort for the largest private corporations. B) acting as banker for the commercial banks.
C) regulating both the money market and stock market.
D) setting the exchange rate for the Canadian dollar on world markets. E) providing deposit insurance at Canadian commercial banks.
B
Basic functions of the Bank of Canada include
1) acting as lender of last resort to private non-financial corporations; 2) acting as banker for the chartered banks.
3) regulating the money supply.
A) 1 only
B) 2 only
C) 3 only
D) 2 and 3
E) 1, 2, and 3
D
The largest component of the assets of the Bank of Canada is
A) Government of Canada securities.
B) Government of Canada deposits.
C) notes and coins in circulation.
D) loans to commercial banks. E) loans to private individuals.
A
The largest component of the liabilities of the Bank of Canada is
A) Government of Canada securities.
B) Government of Canada deposits.
C) Canadian dollars in circulation.
D) deposits of commercial banks and other financial institutions. E) loans to private individuals.
C
In the event of a sudden loss in confidence in the ability of the commercial banks to redeem deposits, the Bank of Canada would probably
A) take over the operation of any banks in severe difficulties.
B) lend reserves to the commercial banks.
C) offer to sell government bonds to the chartered banks.
D) suspend operation of the banking system until the panic subsided.
E) impose severe financial penalties on the commercial banks by charging them interest at higher than the Bank rate.
B
Suppose the rare event occurs that a major Canadian commercial bank is on the verge of insolvency and collapse due to volatile world credit markets. The likely initial response is
A) a bankruptcy filing overseen by the Superintendent of Financial Institutions.
B) the adoption of all of the bank’s liabilities by the Bank of Canada as the “lender of last resort.” C) the sale of the bank’s assets to the remaining commercial banks.
D) the provision of funds by the World Bank as the “lender of last resort.”
E) the provision of funds by the Bank of Canada as the “lender of last resort.”
E
Which of the following statements best describes the relationship between the Bank of Canada and the Government of Canada?
A) The Bank of Canada has the same status as the Department of Finance and is directly responsible to Parliament for its day-to-day operations of monetary policy.
B) The Bank of Canada is a wholly owned entity of the government but is given independence in the day-to-day operations of monetary policy.
C) The Bank of Canada is a central-banking institution that is completely independent of the government and is fully autonomous in its conduct of monetary policy.
D) The Bank of Canada is a privately owned banking institution that is overseen by a Board of Directors with a mandate to act in the best interests of the citizens of Canada.
E) The governor of the Bank of Canada and the minister of finance have joint responsibility for both fiscal and monetary policy.
B
Which of the following entries would appear on the liabilities side of the Bank of Canada’s balance sheet?
A) deposit money held in accounts at Canada’s commercial banks
B) Government of Canada securities
C) foreign currency reserves
D) paper notes in circulation
E) Canadian corporate securities
D
Commercial banks in Canada are prohibited by law from A) accepting demand deposits.
B) issuing paper currency.
C) lending money to households and firms.
D) accepting term deposits.
E) settling inter-bank debts through a clearinghouse.
B
The financial crisis that occurred in 2007 and 2008 highlighted one of the crucial functions of commercial banks and other financial institutions in developed economies. A crucial function that ceased to work smoothly during this time, and contributed to the global recession that began in 2008, was
A) the acceptance of deposits from firms and households.
B) the joint regulation of financial markets.
C) the provision of credit to firms and households.
D) cheque clearing and collection.
E) the clearing of electronic transfers.
C
An example of “interbank activities” in the Canadian banking system is
A) banks pooling their money together to fund the operations of the Bank of Canada. B) banks lending money to each other in order to meet daily cash requirements.
C) the joint regulation of financial markets.
D) the joint regulation of the money supply.
E) lender of last resort to the banking system.
B
The Canada Deposit Insurance Corporation (CDIC) was set up to protect
A) member financial institutions in case of non-payment of loans from borrowers.
B) member financial institutions in case of non payment of loans from the government.
C) depositors with Canadian dollar accounts in member institutions for up to a maximum of $100 000 per eligible deposit.
D) depositors with Canadian dollar accounts in any Canadian financial institution for up to a maximum of $100 000 per institution.
E) depositors of any currency in any Canadian financial institution for up to a maximum of $100 000 per institution.
C
Which of the following entries would appear on the liabilities side of the Bank of Canada’s balance sheet?
A) Government of Canada securities
B) deposits of commercial banks
C) advances to commercial banks
D) savings deposits
E) shareholders’ equity
B
Which of the following entries would appear on the assets side of a commercial bank’s balance sheet?
A) Government of Canada securities
B) chequable deposits
C) Government of Canada deposits
D) savings deposits
E) shareholders’ equity
A
Which of the following entries would appear on the liabilities side of a commercial bank’s balance sheet?
A) mortgage loans
B) Government of Canada securities
C) cash reserves
D) foreign currency reserves
E) demand deposits
E
A bank run is unlikely to occur in Canada today because
A) if necessary, the central bank can provide all the reserves that are necessary to avoid this situation.
B) the commercial banks are required by law to maintain 100% of their deposits in cash.
C) there is relatively little demand for cash at present.
D) banking is done mostly electronically.
E) the commercial banks hold enough government securities that are convertible into cash.
A
What is a bank run?
A) A situation where a commercial bank is holding zero reserves.
B) A panic situation where many depositors rush simultaneously to withdraw their deposit money in the form of cash.
C) A situation where all commercial banks in the system are simultaneously short of reserves. D) The collapse of a non-commercial bank as a result of non-payment of loans.
E) The collapse of a commercial banks as a result of the devaluation of their assets.
B
Why is the possibility of a bank run extremely small in Canada today?
A) The Bank of Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals.
B) The Department of Finance guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals.
C) The Canadian Deposit Insurance Corporation provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic.
D) The Office of the Superintendent of Financial Institutions provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic.
E) Industry Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals.
C
Canadian commercial banks maintain their reserves in the form of A) cash in their bank vaults and deposits at the Bank of Canada.
B) cash in their bank vaults.
C) gold in their bank vaults.
D) deposits at other commercial banks that are immediately accessible. E) cash and foreign currency at the Bank of Canada.
A
commercial bank’s actual reserve ratio is the
A) fraction of its deposit liabilities that it actually holds as reserves, either as cash or as deposits with the Bank of Canada.
B) fraction of its deposit liabilities that it actually holds as gold, other precious metal or cash in its own vaults.
C) fraction of its deposit liabilities that are backed by gold.
D) ratio of Canadian dollars to foreign currencies that it holds on its books.
E) ratio of chequable deposits to term deposits that it holds on its books.
A
Excess reserves” for a commercial bank refer to
A) any surplus in the bank’s supply of gold.
B) any surplus of chequable deposits.
C) any reserves (cash or deposits with the Bank of Canada) that the bank holds over and above its desired reserves.
D) reserves (cash or deposits with the Bank of Canada) that the Bank of Canada requires the bank to hold.
E) excess demand for money from that bank.
C
A commercial bank’s target reserve ratio is the
A) fraction of its deposit liabilities that it wishes to holds as reserves, either as cash or as deposits with the Bank of Canada.
B) fraction of its deposit liabilities that it actually holds as cash in its own vaults.
C) fraction of its deposit liabilities that are backed by gold.
D) ratio of Canadian dollars to foreign currencies that the bank holds on its books.
E) ratio of chequable deposits to term deposits that the bank holds on its books.
A
Which of the following statements about reserve ratios at Canadian commercial banks is true? Commercial banks in Canada
A) are required by the Bank Act to hold required reserves.
B) have a reserve ratio of zero.
C) have a reserve ratio of 100%. D) have a positive reserve ratio. E) never have excess reserves.
D
Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank). This fraction is known as
A) the required reserve.
B) the excess reserve ratio.
C) the fractional reserve.
D) the reserve ratio.
E) the target reserve.
D
The Canadian banking system is a A) gold-reserve system.
B) fractional-reserve system.
C) target-reserve system.
D) asset-backed reserve system. E) treasury-bill reserve system.
B
Suppose a commercial bank has a level of target reserves of $500 million and actual reserves of $575 million. This bank’s ________ is/are $75 million.
A) profits
B) fractional reserves
C) excess reserves
D) reserve ratio
C
Suppose a commercial bank has a target reserve ratio of 1%, but has an actual reserve ratio of 0.8%. This bank will likely
A) expand its portfolio of loans.
B) contract its portfolio of loans.
C) maintain its new, higher reserve ratio because it is more profitable. D) buy government securities from the Bank of Canada.
E) allow fewer cash withdrawals by the bank’s customers.
B
Suppose Bank ABC has a target reserve ratio of 10%. If Bank ABC receives a new deposit of $100 000 it will immediately find itself with
A) no excess cash reserves.
B) excess cash reserves of $10 000.
C) excess cash reserves of $90 000.
D) excess cash reserves of $100 000.
E) excess cash reserves equal to 10% of its deposits.
C
A central bank can “create” money by
A) selling some of its foreign-currency reserves for domestic currency. B) selling government Treasury bills to the commercial banks.
C) increasing the rate of inflation.
D) issuing its own Central Bank bonds.
E) purchasing government securities on the open market.
E
Which of the following examples constitutes a new deposit to the Canadian commercial banking system?
A) an individual transfers money from ShipShape Credit Union to Scotiabank
B) an individual immigrates to Canada and deposits money from abroad
C) an individual puts cash in a safety-deposit box
D) the Bank of Canada sells government securities to an individual or a firm
E) the Bank of Canada buys foreign currency from abroad
B
A new deposit to the banking system can result when
A) an individual stashes cash in a mattress.
B) a new immigrant to Canada sends cash to his or her home country.
C) the Bank of Canada sells a government security to a firm which then maintains the asset in a bank.
D) the Bank of Canada buys a government security from a firm, which keeps the proceeds from the sale in a company vault.
E) the Bank of Canada buys a government security from a firm, which then deposits the proceeds from the sale in its account at a commercial bank.
E
Which of the following examples constitutes a new deposit to the Canadian commercial banking system?
A) an individual transfers money from Ship Shape Credit Union to Scotiabank
B) an individual immigrates to Canada and maintains his existing deposits in a foreign bank C) an individual puts cash in a safety-deposit box
D) the Bank of Canada buys government securities from a Canadian commercial bank E) the Bank of Canada buys foreign currency from abroad
D
Consider the creation of deposit money in the banking system. One implication of an increase in the cash drain to the public is that the
A) banking system cannot create any additional money following a new deposit.
B) amount of new money that can be created from a new source of reserves is increased. C) desired ratio is reduced.
D) desired reserve ratio is increased.
E) banking system’s ability to create new money following a new deposit is reduced.
E
A desire by ________ has no effect on the ability of the banking system to create bank deposits, for a given amount of reserves in the banking system.
A) banks to delay making loans in expectation of higher future interest rates
B) households to increase the fraction of their money held in the form of currency
C) households to hold more money in safety-deposit boxes
D) the government to increase its level of spending
E) firms to reduce their desired level of borrowing from banks
D
The expansion of deposits resulting from an injection of new cash to the banking system can be calculated as follows. The change in deposits is equal to
A) the change in loans divided by the sum of the target reserve ratio.
B) the change in reserves divided by the cash-deposit ratio.
C) the change in reserves divided by the target reserve ratio.
D) the change in reserves divided by the sum of the target reserve ratio and the cash-deposit ratio.
E) the change in reserves divided by the sum of excess reserves and cash drain.
D
Suppose that the cash drain in the banking system increases during holiday periods. As a result,
A) the capacity of the banking system to create deposit money is dampened during holiday periods.
B) the capacity of the banking system to create deposit money is increased during holiday periods.
C) commercial banks decrease their target reserve ratios.
D) changes in reserves will result in no change in deposits during holiday periods.
E) the money supply will automatically increase.
A
When discussing the banking system, a cash drain of 5% means that
A) 5% of an initial new deposit to the banking system is paid in banking fees and is therefore not available for the creation of new deposit money.
B) depositors wish to hold 5% of the value of their deposits in cash.
C) 5% of an initial new deposit to the banking system is payable as a financial services tax.
D) 95% of an initial new deposit is maintained as cash reserves by the commercial bank.
E) depositors wish to hold 95% of the value of their deposits in cash.
B
Suppose a student deposits into a downtown bank a $200 cheque that she received from her parents in the suburbs. This transaction alone would
A) decrease the money supply.
B) not change the money supply.
C) increase the money supply by an indeterminate amount.
D) increase the money supply by $1000 if the target reserve ratio was 20%. E) decrease the money supply by $1000 if the target reserve ratio was 20%.
B
The money supply in Canada is measured using M1, M2, M2+, and M3. The reason there are so many measures of the money supply is that
A) the Bank of Canada wants to confuse the general public.
B) different kinds of bank accounts represent different functions of money, and so the various measures are used to reflect these different functions.
C) the money supply is too large to have only one measurement.
D) only the newer and broader measurements are correct but the older measurements are still used so that historical comparisons are possible.
E) it is a convenient way for provincial and federal governments to hide their budgetary surpluses.
B
Until recently, and for many years, the common definition of the money supply used by the Bank of Canada was M1, which included currency in circulation plus
A) chequable deposits at the chartered banks.
B) chequable deposits and savings accounts at the chartered banks.
C) savings accounts and demand loans.
D) term deposits and money market funds.
E) chequable deposits at all financial institutions.
A
The main distinction between M2 and M2+ is that M2+ also includes
A) deposits at trust companies, caisse populaires and foreign-currency accounts. B) coins in circulation.
C) money market mutual funds held by the Bank of Canada.
D) paper currency.
E) deposits at financial institutions other than the chartered banks.
E
The concept of “near money” refers to
A) money substitutes such as credit cards.
B) cheques on demand deposits.
C) financial assets whose capital values are too unstable for them to be classified as money. D) assets that fulfill the temporary store-of-value function but not the medium-of-exchange function.
E) assets that fulfill the medium-of-exchange function but not the store of value function.
D
Credit cards are considered to be “money substitutes” instead of money because A) they are not acceptable to pay for purchases.
B) they cannot serve as a temporary medium of exchange.
C) the only function of money they can perform is to serve as a store of value.
D) money must eventually be used to pay for the transaction. E) credit card accounts are not chequable.
D
When you pay for your $74 purchase at the grocery store with a debit card, you are
A) transferring $74 of currency from your bank account to the grocery store’s bank account. B) withdrawing $74 from your bank account with which you pay for your groceries.
C) transferring your claim on $74 worth of gold to the grocery store.
D) electronically transferring $74 of deposit money from your bank account to the grocery store’s bank account.
E) essentially promising the grocery store that your bank will pay them $74 at the end of the month when debts are settled.
D
The M2 and M2+ definitions of the money supply concentrate on the ________ function of
money.
A) store of value
B) unit of account
C) medium-of-exchange
D) accounting
E) deposit-creation
C
The M2++ and M3 definitions of the money supply include financial assets
A) that serve the store-of-value function and are convertible into a medium of exchange. B) such as deposits at credit unions and caisses populaires.
C) such as deposits at non-bank financial institutions.
D) such as a credit card.
E) such as a government Treasury bill.
A
Developments in the financial industry in recent years have resulted in a multitude of types of deposits. For the purposes of studying the money supply, the most important distinction is between chequing and savings deposits which are ________ and term deposits and other financial assets which are ________.
A) a store of value; not a store a value
B) a unit of account; not a unit of account
C) a component of the money supply; not a component of the money supply
D) media of exchange; not media of exchange
E) money substitutes; near money
D
Other things being equal, bond prices
A) are unaffected by changes in the demand for money.
B) are unaffected by interest-rate changes.
C) vary directly with interest rates.
D) vary inversely with interest rates.
E) vary proportionally with interest rates.
D
The present value of an asset is
A) the most someone would be willing to pay upon maturity of the asset.
B) the most someone would be willing to pay today for the asset.
C) equivalent to the face value of the asset.
D) the amount someone would pay in the future to have the asset today.
E) the amount someone would pay in the future for the current stream of payments from the asset.
B
The present value of a bond is determined by the A) face value and the date of maturity.
B) rate of inflation.
C) market rate of interest only.
D) market rate of interest, the date of maturity, and the face value. E) marginal rate of income tax.
D
If Robert expects interest rates to fall in the near future, he will probably be willing to A) buy bonds now, and hold less money.
B) buy bonds now, but only if their price falls.
C) sell bonds now, and hold less money.
D) put his money under his mattress rather than buy bonds. E) maintain only the current holding of bonds.
A
When Janet expects interest rates to rise in the near future, she will probably be willing to A) buy bonds now, and hold less money.
B) buy bonds now, but only if their price falls.
C) sell bonds now, and hold more money.
D) put her money under her mattress rather than in a bank account. E) maintain only the current holding of bonds.
C
In a competitive financial market, the equilibrium price of an asset will equal the A) present value of the asset.
B) future value of the asset.
C) sum of present value of the asset multiplied by the interest rate.
D) future value of the asset multiplied by the interest rate. E) issue price of the asset.
A
When considering the present value of any financial asset that makes a stream of payments in the future, we know that if the market interest rate falls,
A) the present value of the asset will rise.
B) the future value of the asset will rise.
C) the current value of the asset will fall.
D) the present value of the asset will fall.
E) the present value of the asset is unaffected
A
If the current market price of a bond is less than the present value of the income stream the bond will produce, the price will ________ due to excess ________ of/for the bond.
A) rise; supply
B) fall; supply
C) rise; demand D) fall; demand
C
In order to calculate the present value of the sum of future payments due from a bond, we use the interest rate to ________ those future payments.
A) adjust
B) correct
C) discount
D) inflate
E) maximize
C
When the market price of a bond falls, ceteris paribus, then A) the term to maturity of the bond increases.
B) the term to maturity of the bond decreases.
C) the yield on that bond rises.
D) the yield on that bond also falls. E) the market interest rate rises.
C
Suppose the market interest rate rises from 3% to 4%. This will lead to ________ in bond prices and ________ in bond yields.
A) a fall; a fall
B) a fall; a rise
C) a rise; a fall
D) a rise; a rise
E) no change; no change
B
Suppose the market interest rate falls from 3% to 2%. This will lead to ________ in bond prices and ________ in bond yields.
A) a fall; a fall
B) a fall; a rise
C) a rise; a fall
D) a rise; a rise
E) no change; no change
C
Suppose the market interest rate is stable at 4% and we see a decline in bond prices (and thus a rise in bond yields). One explanation for this is that
A) bond issuers are facing an excess demand for their bonds.
B) bond purchasers perceive a reduction in riskiness and thus a higher expected present value from those bonds.
C) there is no causal relationship between market interest rates and bond prices.
D) bond purchasers perceive an increase in riskiness and thus a lower expected present value from those bonds.
E) there is a positive relationship between interest rates and bond prices.
D
Suppose a Government of Canada bond is being offered in financial markets at a price that is higher than its present value. We can expect that
A) the price of the bond will rise further.
B) the face value of the bond will be adjusted to a lower value.
C) the relatively high demand for the bond will cause its present value to rise. D) the lack of demand for this bond will cause its price to fall.
E) the face value of the bond will be adjusted to a lower value.
D
Suppose a Government of Canada bond is being offered in financial markets at a price that is lower than its present value. We can expect that
A) the lack of demand for this bond will cause its present value to fall.
B) the price of the bond will fall further.
C) the relatively high demand for this bond will cause its price to rise. D) the face value of the bond will be adjusted to a lower value.
E) the face value of the bond will be adjusted to a higher value.
C
The term “demand for money” usually refers to the
A) aggregate demand for money balances in the economy.
B) average person’s desire to hold cash.
C) cash and deposits actually held by firms.
D) sum of all desired holdings of cash.
E) sum of all desired assets, including cash, bonds, and real property.
A
The opportunity cost of holding money rather than bonds is A) the rate of interest earned on bonds.
B) the price level.
C) forgone consumption.
D) forgone liquidity.
E) zero — there is no opportunity cost of holding money.
A
If a person is holding money for the purchase of goods and services, this demand for money is known as
A) speculative demand.
B) precautionary demand.
C) transactions demand.
D) real balance demand.
E) nominal balance demand.
C
The “transactions demand” for money arises from the fact that
A) there is uncertainty in the receipts of income.
B) there is uncertainty about the movement of interest rates.
C) households wish to have all their wealth in the form of money.
D) households decide to hold money in order to make purchases of goods and services. E) households want to keep cash on had to buy bonds if bond prices drop.
D
The “precautionary demand” for money arises from the
A) fear that interest rates will fall.
B) fear that interest rates will rise.
C) need to make predictable purchases of goods and services. D) uncertainty about when some expenditures will be necessary. E) desire to avoid paying interest on credit purchases.
D
Other things being equal, the transactions demand for money tends to increase when A) interest rates rise.
B) interest rates stop rising.
C) national income rises.
D) national income falls. E) the price level falls.
C
Consider the demand for money. If real GDP falls, other things being equal, we can expect A) an increase in the speculative demand for money.
B) an increase in the total demand for money.
C) a decrease in transactions demand for money.
D) an increase in transactions demand for money. E) an increase in precautionary demand for money.
C
Suppose an economic analyst suggests that investors should now hold cash instead of stocks or bonds. The analyst is probably encouraging an increase in money balances for which reason? A) transaction demand
B) precautionary demand
C) speculative demand
D) present value demand
E) portfolio demand
C
A firm that holds cash to avoid penalties associated with the late payment of bills is demonstrating which type of demand for money?
A) transactions demand
B) precautionary demand
C) speculative demand
D) present value demand
E) risk-return demand
B
Among other things, people hold cash balances for which of the following reasons? 1) to meet unforeseen emergencies
2) to maximize their returns on interest-earning assets
3) to guard against the uncertainty of the timing of receipts and payments
A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 1 and 3
E
Speculative demand for money arises from the desire by individuals and firms to hold cash balances
A) for speculative equity purchases.
B) in anticipation of changes in interest rates and bond prices.
C) to meet unforeseen business expenses.
D) in anticipation of investing in capital purchases for the firm. E) to maintain adequate cash flow in case of inflation.
B
In the basic AD/AS macro model, it is assumed that, for any given interest rate, the demand
for money depends on the
A) aggregate demand for goods and services. B) level of government spending.
C) rate of growth of real GDP.
D) level of taxes.
E) level of real GDP and the price level.
E
The demand for money (MD) function defines the relationship between
A) interest rates and bond prices.
B) inflation and bond prices.
C) interest rates and financial assets.
D) the quantity of money demanded and the price level.
E) the quantity of money demanded and the rate of interest.
E
If there are just two assets, bonds and money, then an excess demand for money implies A) an excess supply of bonds.
B) an excess demand for bonds.
C) equilibrium in the bond market.
D) an indeterminate equilibrium in the bond market.
E) nothing about conditions of demand for the other financial asset.
A
Assume there are just two assets, money and bonds. We can expect that an individual with a given level of wealth will
A) hold less money when bond prices rise.
B) hold more money when the current interest rate is very low.
C) not hold money as long as bonds pay a positive rate of interest. D) hold lots of money even at very high interest rates.
E) hold less money when the current interest rate is very low.
B
According to the “liquidity preference” theory of the rate of interest, if the supply of money increases, then, ceteris paribus, bond prices will
A) fall as the rate of interest rises.
B) rise as the rate of interest rises.
C) fall as the rate of interest falls. D) rise as the rate of interest falls. E) stay the same.
D
If the general price level were to increase, other things being equal, the money demand function would
A) not be affected.
B) shift to the left.
C) shift to the right.
D) shift, but the direction of the shift cannot be predicted. E) become steeper but not shift.
C
If the annual market interest rate is 20%, the annual opportunity cost of having $50 cash in your pocket is
A) $0.
B) $2.
C) $10.
D) $50.
E) $1000.
C
Suppose that at a given interest rate and money supply, all firms and households simultaneously try to add to their money balances. They do this by trying to ________, which causes an excess ________, which causes a(n) ________, and finally a(n) ________ in the interest rate.
A) sell bonds; supply of bonds; increase in the price of bonds; decrease
B) buy bonds; supply of bonds; decrease in the price of bonds; increase
C) sell bonds; demand for bonds; increase in the price of bonds; decrease
D) buy bonds; demand for bonds; increase in the price of bonds; decrease
E) sell bonds; supply of bonds; decrease in the price of bonds; increase
E
Suppose that at a given interest rate and money supply, all firms and households simultaneously try to reduce their money balances. They do this by trying to ________, which causes an excess ________, which causes a(n) ________, and finally a(n) ________ in the interest rate.
A) sell bonds; supply of bonds; increase in the price of bonds; decrease
B) buy bonds; supply of bonds; decrease in the price of bonds; increase
C) sell bonds; demand for bonds; increase in the price of bonds; decrease
D) buy bonds; demand for bonds; increase in the price of bonds; decrease
E) sell bonds; supply of bonds; decrease in the price of bonds; increase
D
When there is an excess demand for money balances, monetary equilibrium is established by a process that involves
1) movement down the money demand function;
2) interest rates falling;
3) the price of bonds falling. A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 2 and 3
C
Consider a money market in which there is an excess supply of money at the prevailing interest rate. The likely response is:
A) the corresponding excess supply for bonds will cause the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply.
B) the corresponding excess demand for bonds will cause the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply.
C) the money supply curve will shift to the left until the demand for money equals the supply. D) the money supply curve will shift to the right until the demand for money equals the supply. E) the money demand curve will shift to the right, causing the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply.
B
Consider a money market in which there is an excess demand for money at the prevailing interest rate. The likely response is:
A) the corresponding excess demand of bonds will cause the price of bonds to decrease and the interest rate to rise, until the demand for money equals the supply.
B) the money supply curve will shift to the left until the demand for money equals the supply.
C) the money supply curve will shift to the right until the demand for money equals the supply. D) the money demand curve will shift to the right, causing the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply.
E) the corresponding excess supply of bonds will cause the price of bonds to decrease and the interest rate to rise, until the demand for money equals the supply.
E
When there is an excess supply of money, monetary equilibrium is restored through A) interest rates rising.
B) individuals attempting to sell bonds.
C) the price of bonds falling.
D) the price of bonds increasing. E) the price level falling.
D
Monetary equilibrium occurs when the
A) growth in the money supply is zero.
B) existing supply of money is willingly held by households and firms in the economy at the current rate of interest.
C) nominal rate of interest equals the real rate of interest.
D) the money supply is growing at a constant rate.
E) supply and demand for all goods in the economy are equal at the current rate of interest.
B
If the economy is currently in monetary equilibrium, an increase in the money supply will
A) not change the equilibrium conditions.
B) cause a reduction in the demand for money, leading to a higher rate of interest. C) cause an excess demand for money and a decrease in the rate of interest.
D) cause an increase in the demand for money, leading to a lower rate of interest. E) lead to a movement down the money demand curve to a lower rate of interest.
E
When the price level increases, ceteris paribus, it causes households and firms to try to A) reduce money balances, which drives interest rates down.
B) reduce money balances, which drives interest rates up.
C) reduce money balances, which drives national income up.
D) increase money balances, which drives interest rates down. E) increase money balances, which drives interest rates up.
E
If there are just two assets, bonds and money, then an equilibrium between the supply and demand for money implies
A) an excess supply of bonds.
B) an excess demand for bonds.
C) equilibrium in the bond market.
D) an indeterminant equilibrium in the bond market.
E) nothing about conditions of demand for the other financial asset.
C
How does monetary equilibrium re-establish itself when there is an excess supply of money balances?
A) the interest rate rises
B) individuals attempt to sell bonds
C) the price of bonds falls
D) the price of bonds increases
E) the price level falls
D
The linkage between changes in monetary equilibrium and changes in aggregate demand is called the
A) monetary transmission mechanism.
B) simple multiplier.
C) equilibrium mechanism.
D) transactions mechanism.
E) liquidity preference function
A
Other things being equal, a reduction in the money supply will lead to a A) fall in the rate of interest and an increase in investment expenditure.
B) rise in the rate of interest and in increase in investment expenditure.
C) fall in the rate of interest and a decrease in investment expenditure.
D) rise in the rate of interest and a decrease in investment expenditure. E) rise in the rate of interest and no change in investment expenditure
D
The economy’s investment demand function describes the
A) positive relationship between desired investment, the rate of interest, and aggregate expenditure.
B) positive relationship between desired investment and the rate of interest.
C) negative relationship between the demand for money and the interest rate.
D) negative relationship between desired investment and aggregate expenditure.
E) negative relationship between the interest rate and desired investment.
E
The monetary transmission mechanism can be set in motion when a rise in the price level causes
A) an increased demand for money balances, leading people to sell bonds, which in turn raises the interest rate.
B) an increased demand for money balances, leading people to sell bonds, which in turn decreases the interest rate.
C) an increased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate.
D) a decreased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate.
E) a decreased demand for money balances, leading people to sell bonds, which in turn raises the interest rate.
A
The monetary transmission mechanism describes the process by which changes in A) personal consumption affect real GDP.
B) business investment influence real GDP.
C) monetary equilibrium influence real GDP through changes in desired investment. D) monetary equilibrium influence the interest rate.
E) interest rate affect the demand for money.
C
Which one of the following statements best describes the monetary transmission mechanism? A) An increase in personal consumption leads to an upward shift in the AE curve and thereby increases real GDP.
B) An increase in government spending causes the AE curve to shift upwards, leading to a higher GDP.
C) A decrease in imports causes the AE curve to shift upwards, leading to a higher interest rate. D) An increase in the money supply leads to a lower interest rate, higher investment, an upward shift in the AE curve and a higher GDP.
E) A decrease in the money supply leads to a lower interest rate, higher investment, an upward shift in the AE curve and a higher GDP.
D
Consider monetary equilibrium and the monetary transmission mechanism. An exogenous
fall in the price level will lead to
A) an excess demand for money resulting in a rise in the rate of interest, which shifts the AE function downward and decreases the equilibrium level of income.
B) an excess supply of money resulting in a fall in the rate of interest, which shifts the AE function upward and increases the equilibrium level of income.
C) people being able to buy more with their increased wealth, which will shift the AE function downward and decrease the equilibrium level of income.
D) a movement to the right along the AE function.
E) a movement to the left along the AE function.
B
An increase in the money supply sets the monetary transmission mechanism in motion which results in
A) a rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
B) a fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
C) a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
D) a rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
E) a rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
C
A decrease in the money supply sets the monetary transmission mechanism in motion which results in
A) a rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
B) a fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
C) a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
D) a rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
E) a rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
E
Consider monetary equilibrium and the monetary transmission mechanism. An exogenous decrease in the price level, with no change in the supply of money, will
A) increase the demand for money and increase aggregate expenditure.
B) increase the demand for money and decrease aggregate expenditure.
C) decrease the demand for money and increase real GDP along the aggregate demand curve. D) decrease the demand for money and decrease real GDP along the aggregate demand curve. E) decrease the demand for money and leave aggregate demand unchanged.
C
Consider the monetary transmission mechanism. A disturbance to monetary equilibrium which changes the interest rate will affect aggregate demand through
A) a shift of the investment demand function and a movement along the aggregate expenditure curve.
B) a movement along the investment demand function and a shift of the aggregate expenditure curve.
C) a shift of both the investment demand function and the aggregate expenditure curve.
D) movements along the investment demand function and the aggregate expenditure curve.
E) a movement along the aggregate expenditure curve.
B
A decrease in the money supply is most likely to
A) raise interest rates, investment, and aggregate expenditures.
B) raise interest rates, lower investment, and lower aggregate expenditures. C) lower interest rates, raise investment, and raise aggregate expenditures. D) lower interest rates, investment, and aggregate expenditures.
E) raise interest rates and investment, and lower aggregate expenditures.
B
If the Bank of Canada were to increase the money supply, other things being equal, we would expect the aggregate expenditure curve to shift
A) upward and the aggregate demand curve to shift to the right.
B) upward and the aggregate demand curve to shift to the left.
C) downward and the aggregate demand curve to shift to the right.
D) downward and the aggregate demand curve to shift to the left.
E) downward but the aggregate demand curve will remain unchanged.
A
If the Bank of Canada were to reduce the money supply, other things being equal, we would expect the aggregate expenditure curve to shift
A) upward and the aggregate demand curve to shift to the right.
B) upward and the aggregate demand curve to shift to the left.
C) downward and the aggregate demand curve to shift to the right.
D) downward and the aggregate demand curve to shift to the left.
E) downward but the aggregate demand curve will remain unchanged.
D
If real GDP is greater than potential GDP, the output gap could be eliminated by 1) an increase in government purchases;
2) an upward shift in the AE curve;
3) a reduction in the money supply.
A) 1 only
B) 2 only
C) 3 only
D) 1 or 2
E) 1 or 2 or 3
C
Which of the following explanations for the negative slope of the AD curve is correct? A fall in the price level, with an unchanged money supply, causes the transactions demand for money to
A) decrease, shifting the MD curve downward, lowering the interest rate and increasing desired investment, causing the AE curve to shift upward.
B) decrease, shifting the MD curve upward, raising the interest rate and increasing desired investment, causing the AE curve to shift upward.
C) increase, shifting the MD curve upward, raising the interest rate and decreasing desired
investment, causing the AE curve to shift upward.
D) increase, shifting the MD curve downward, lowering the interest rate and decreasing desired investment, causing the AE curve to shift downward.
E) increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift downward.
A
The monetary transmission mechanism in an OPEN economy is more complicated than it is in a closed economy because the effects of domestic monetary contraction or expansion are
A) strengthened because domestic interest rates must be equal to those in the rest of the world. B) weakened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world.
C) strengthened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world.
D) strengthened because changes in the domestic money supply cause changes in the exchange rate, which then reinforce the changes in desired investment.
E) weakened because changes in the domestic money supply cause changes in the exchange rate which then offset the changes in desired investment.
D
Consider the monetary transmission mechanism in an open economy. Other things being equal, an increase in the domestic money supply leads to
A) an appreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand.
B) a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand.
C) a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
D) an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
E) an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand.
C
Consider the monetary transmission mechanism in an open economy. Other things being equal, a decrease in the domestic money supply leads to
A) an appreciation of the domestic currency, thereby inhibiting net exports and reducing aggregate demand.
B) a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand.
C) a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
D) an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
E) an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand.
A
Which of the following correctly describes the way in which a change in the money supply affects aggregate demand?
A) a shift of the ID curve and a movement along the aggregate demand curve B) a movement along the ID curve and a shift of the aggregate demand curve C) a shift of both the ID curve and the aggregate demand curve
D) movements along the ID curve and the aggregate demand curve E) a movement along the aggregate demand curve
B
Changes in the money supply in an open economy, as compared to a closed economy,
A) are likely to have a greater effect on AD because of the secondary effect that exchange rates have on exports.
B) are likely to have a smaller effect on AD because the secondary effect of exchange rates will offset the changes created by monetary disturbances.
C) are the same in either situation.
D) affect investment to a greater degree because foreign investors can create new investment in an open economy.
E) cannot be determined with the available information.
A
Which of the following phenomena add a second channel to the monetary transmission mechanism?
A) inflation
B) diminishing marginal returns
C) rising productivity
D) open-market operations
E) international capital mobility
E
Consider the monetary transmission mechanism. In an open economy, such as Canada’s, an increase in the money supply leads to a fall in the interest rate. This is followed by
A) an outflow of financial capital and an appreciation of the Canadian dollar.
B) an inflow of financial capital and a depreciation of the Canadian dollar.
C) an outflow of financial capital and a depreciation of the Canadian dollar. D) an inflow of financial capital and an appreciation of the Canadian dollar.
C
Consider the monetary transmission mechanism. In an open economy, such as Canada’s, a decrease in the money supply leads to a rise in the interest rate. This is followed by
A) an outflow of financial capital and an appreciation of the Canadian dollar.
B) an inflow of financial capital and a depreciation of the Canadian dollar.
C) an outflow of financial capital and a depreciation of the Canadian dollar. D) an inflow of financial capital and an appreciation of the Canadian dollar.
D
Other things being equal, a decrease in the money supply will lead to ________ in real interest rates and, in the short run, ________ in real GDP because ________.
A) an increase; an increase; more money is available for investing in bonds from abroad B) an increase; a decrease; of the decline in domestic investment
C) a decrease; an increase; of the increase in domestic investment D) a decrease; a decrease; of the decrease in domestic investment E) a decrease; a decrease, of the decrease in net exports
B
If the economy is experiencing an undesired inflationary gap, the Bank of Canada could
A) increase the supply of money, lowering interest rates, which would shift the AD curve inward. B) decrease the demand for money, lowering interest rates, which would shift the AD curve outward.
C) decrease the supply of money, raising interest rates, which would shift the AD curve inward. D) increase the supply of money, lowering interest rates, which would shift the AD curve outward.
E) shift the investment demand curve to the right by lowering interest rates, which would shift the AD curve outward.
C
The monetary transmission mechanism provides a partial explanation for the downward
slope of the AD curve. For a given vertical MS curve, the explanation for the negative relationship between the price level and aggregate demand is as follows: A rise in the price level
shifts the curve
A) to the right, the interest rate rises and desired investment expenditure rises. B) to the left, the interest rate falls, and desired investment expenditure rises. C) to the right, the interest rate rises and desired investment expenditure falls. D) to the left, the interest rate rises and desired investment expenditure falls. E) to the right, the interest rate falls and desired investment expenditure falls.
C
Which of the following is partly responsible for the negative slope of the aggregate demand
(AD) curve?
A) open-market operations of the Bank of Canada B) the monetary transmission mechanism
C) the multiplier effect
D) the speculative demand for money
E) the precautionary demand for money
B
The view of the Classical economists regarding the “neutrality of money” was that A) the allocation of resources is independent of the distribution of income.
B) the distribution of income is independent of the allocation of resources.
C) the real part of the economy cannot affect the level of money prices.
D) the quantity of money has no effect on any real variables in the economy. E) money is neutral in its effect on absolute prices in the economy.
D
 of the following best represents the view of the Classical economists regarding money?
A) Relative prices are determined by the money supply.
B) The monetary sector influences consumers’ preferences and relative prices.
C) The economy is composed of the real sector and the monetary sector, and the latter does not affect the former.
D) The distribution of income is affected by the money supply.
E) The allocation of resources is affected by the money supply.
C
According to the views of the Classical economists, if the money supply doubles, A) money prices will double.
B) money prices will be halved.
C) relative prices will double.
D) real income will double.
E) there will be no effect on money prices.
A
Classical economists’ belief in the “neutrality of money” led them to argue that
A) absolute prices were determined in the real part of the economy.
B) the allocation of resources was determined by the quantity of money and not by the forces of supply and demand.
C) relative prices have no role in the real allocation of resources.
D) a change in the quantity of money would not affect money prices or relative prices.
E) a change in the quantity of money would change the price level but would not change relative prices.
E
Which of the following statements best describes the difference between the Classical and modern views regarding the role of money in the economy?
A) Both schools of thought accept the neutrality of money within the economy.
B) Unlike modern economists, Classical economists believed that the neutrality of money existed only in the long run.
C) Classical economists argued that relative prices are determined by the supply of money, while modern economists believe that the money supply will never affect relative prices.
D) Both Classical and modern economists accept the neutrality of money in the long run, but modern economists question neutrality in the short run.
E) Both Classical and modern economists accept the neutrality of money in the short run, but modern economists question neutrality in the long run.
D
The long-run neutrality of money implies that
A) changes to the money supply have no effect on either the price level or real GDP.
B) changes to the money supply never have any effect on real GDP.
C) in response to any change in the money supply, the economy’s adjustment process will bring Y back to Y*, which is unaffected by the change in the money supply.
D) the economy’s level of potential output will adjust to accommodate any change in the money supply.
E) in response to any change in the money supply, the demand for money will adjust to cancel out its effects on all macroeconomic variables.
C
