Lecture 15

Question 1

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; a decrease; of the decrease in desired investment
B) a decrease; an increase; of the increase in desired investment
C) an increase; an increase; more money is available for investing in bonds from abroad
D) a decrease; a decrease; of the decrease in desired investment
E) a decrease; a decrease, of the decrease in net exports

Answer 1

A) an increase; a decrease; of the decrease in desired investment

Question 2

Suppose the Canadian economy had a recessionary gap. To increase the level of desired aggregate expenditure, the Bank of Canada could

A) increase its spending.
B) reduce its target for the overnight interest rate.
C) raise the bank rate.
D) increase the reserve requirements of the commercial banks.
E) sell securities in the open market.

Answer 2

B) reduce its target for the overnight interest rate.

Question 3

The Bank of Canada chooses to influence interest rates directly rather than influencing the money supply directly because

A) it is easier to communicate policy actions to the public by setting the interest rate.
B) the former method does not require knowledge of the slope of the money demand curve.
C) the former method does not require knowledge of the position of the money demand curve.
D) the deposit creation mechanism in the banking system is outside the full control of the Bank of Canada.
E) all of the above.

Answer 3

E) all of the above.

Question 4

What is the “bank rate”?

A) It is the same as a margin requirement.
B) The interest rate that the Bank of Canada pays on deposits from the commercial banks.
C) The interest rate that commercial banks charge their best customers.
D) The interest rate at which the Bank of Canada will lend funds to commercial banks.
E) The interest rate at which the Bank of Canada will lend funds to the Canadian government.

Answer 4

D) The interest rate at which the Bank of Canada will lend funds to commercial banks.

Question 5

The term structure of interest rates refers to

A) the variance of the different interest rates available in the economy.
B) the general observation that the yield on 30-year government bonds is less than the yield on 90-day Treasury bills.
C) the variation of the market interest rate over the span of one year.
D) the pattern of interest rates that corresponds to the varying terms to maturity of government securities.
E) the composition of the market interest rate.

Answer 5

D) the pattern of interest rates that corresponds to the varying terms to maturity of government securities.

Question 6

The hypothesis in economics known as hysteresis is that

A) changes in the money supply have a stronger influence on investment demand than do changes in fiscal policy.
B) the role of money in the long run is neutral.
C) the monetary transmission mechanism does not apply in an open-economy setting.
D) the path of real GDP in an economy can influence that economy’s level of potential output.
E) the economy’s adjustment process operates in response to an expansion of the money supply, but not a contraction.

Answer 6

D) the path of real GDP in an economy can influence that economy’s level of potential output.

Question 7

Monetary equilibrium occurs when the

A) nominal rate of interest equals the real rate of interest.
B) existing supply of money is willingly held by households and firms in the economy at the current rate of interest.
C) supply and demand for all goods in the economy are equal at the current rate of interest.
D) growth in the money supply is zero.
E) the money supply is growing at a constant rate.

Answer 7

B) existing supply of money is willingly held by households and firms in the economy at the current rate of interest.

Question 8

Which of the following correctly describes the way in which a change in the money supply affects aggregate demand?

A) movements along the ID curve and the aggregate demand curve
B) a shift of both the ID curve and the aggregate demand curve
C) a shift of the ID curve and a movement along the aggregate demand curve
D) a movement along the aggregate demand curve
E) a movement along the ID curve and a shift of the aggregate demand curve

Answer 8

E) a movement along the ID curve and a shift of the aggregate demand curve

Question 9

Refer to Figure 27-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. The initial effect is

A) a shift of the AD curve to AD1, and then a shift back to AD0 to restore equilibrium at E0.
B) a simultaneous shift of AD to AD1 and AS to AS1, resulting in a new equilibrium at E2.
C) a shift of the AD curve to AD1 and an increase in real GDP to Y1.
D) no change in the short-run equilibrium or level of real GDP.
E) a shift of the AS curve to AS1 and a decrease in real GDP to Y2.

Answer 9

C) a shift of the AD curve to AD1 and an increase in real GDP to Y1.

Question 10

According to the views of the Classical economists, if the money supply doubles,

A) money prices will be halved.
B) money prices will double.
C) real income will double.
D) relative prices will double.
E) there will be no effect on money prices.

Answer 10

E) there will be no effect on money prices.

Question 11

When the Bank of Canada enters the open market and buys or sells government securities, we refer to this as

A) changing the target reserve ratio.
B) monetary policy.
C) commercial lending.
D) open-market operations.
E) setting the target ratio.

Answer 11

D) open-market operations.

Question 12

Refer to Figure 27-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. What is the long-run effect of this change?

A) lower real GDP
B) higher real GDP
C) no change in price level or real GDP
D) a higher price level and higher real GDP
E) a higher price level

Answer 12

E) a higher price level

Question 13

How does the Bank of Canada communicate its target for the overnight interest rate to the public?

A) the target is communicated to the Prime Minister for approval and then released to the public at 8 pre-specified fixed announcement dates (FADs)
B) the target is communicated to the minister of finance for approval and then released to the public on a quarterly basis
C) monthly announcements at fixed announcement dates (FADs)
D) announcements made 8 times per year at pre-specified fixed announcement dates (FADs)
E) in its quarterly publication, “Monetary Policy Report”

Answer 13

D) announcements made 8 times per year at pre-specified fixed announcement dates (FADs)

Question 14

The view of the Classical economists regarding the “neutrality of money” was that

A) the real part of the economy cannot affect the level of money prices.
B) money is neutral in its effect on absolute prices in the economy.
C) the allocation of resources is independent of the distribution of income.
D) the quantity of money has no effect on any real variables in the economy.
E) the distribution of income is independent of the allocation of resources.

Answer 14

D) the quantity of money has no effect on any real variables in the economy.

Question 15

When the Bank of Canada increases the interest rate we call this a contractionary monetary policy. Why?

A) The higher interest rate causes the money supply curve to shift to the right.
B) The higher interest rate leads to a leftward shift of the aggregate demand curve.
C) The higher interest rate causes a contraction of money demand.
D) The higher interest rate causes the money demand curve to shift to the left.
E) The higher interest rate leads to an increase in the level of national saving.

Answer 15

B) The higher interest rate leads to a leftward shift of the aggregate demand curve.

Question 16

Suppose the Bank of Canada announces its target for the overnight interest rate at 2.5%. In that case, the Bank of Canada is willing to lend to commercial banks at ________% and is willing to pay ________% on deposits it receives from commercial banks.

A) 2.25; 2.5
B) 3.5; 1.5
C) 2.5; 2.5
D) 2.5; 2.0
E) 2.75; 2.25

Answer 16

E) 2.75; 2.25

Question 17

If the economy is currently in monetary equilibrium, an increase in the money supply will

A) not change the equilibrium conditions.
B) cause an excess demand for money and a decrease in the rate of interest.
C) lead to a movement down the money demand curve to a lower rate of interest.
D) cause a reduction in the demand for money, leading to a higher rate of interest.
E) cause an increase in the demand for money, leading to a lower rate of interest.

Answer 17

C) lead to a movement down the money demand curve to a lower rate of interest.

Question 18

If there are just two assets, bonds and money, then an equilibrium between the quantity demanded of money and the quantity supplied of money implies

A) an indeterminant equilibrium in the bond market.
B) nothing about conditions of demand for the other financial asset.
C) an excess demand for bonds.
D) equilibrium in the bond market.
E) an excess supply of bonds.

Answer 18

D) equilibrium in the bond market.

Question 19

Any central bank, including the Bank of Canada, can implement its monetary policy by directly influencing either ________ or ________, but not both.

A) the price level; the interest rate
B) money supply; money demand
C) the money supply; the interest rate
D) aggregate supply; aggregate demand
E) aggregate demand; the interest rate

Answer 19

C) the money supply; the interest rate

Question 20

In practice, it is not possible for the Bank of Canada to control the money supply because

A) it does not have the legal power to do so.
B) it cannot control the amount of cash reserves that are injected into or withdrawn from the banking system.
C) it cannot control the process of deposit creation carried out by the commercial banks.
D) the resulting effects on the value of the Canadian dollar are difficult to predict.
E) None of the above—the Bank of Canada could control the money supply if it chose to do so.

Answer 20

C) it cannot control the process of deposit creation carried out by the commercial banks.

Question 21

Refer to Figure 27-6. The famous debate from the the 1950s and 1960s between Keynesians and Monetarists centred around the slopes of the money demand and investment demand curves. The Keynesians believed

A) the diagrams in part (ii) were more realistic than those in part (i), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy.
B) the diagrams in part (i) were more realistic than those in part (ii), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy.
C) the diagrams in part (i) were more realistic than those in part (ii), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy.
D) the diagrams in part (ii) were more realistic than those in part (i), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy.

Answer 21

C) the diagrams in part (i) were more realistic than those in part (ii), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy.

Question 22

Consider the monetary transmission mechanism. Other things being equal, the steeper is the investment demand function, the

A) less responsive is the interest rate to a change in the money supply.
B) less responsive is the demand for money to a change in the interest rate.
C) more responsive is desired investment to a change in the interest rate.
D) less responsive is desired investment to a change in the interest rate.
E) more responsive is the demand for money to a change in the interest rate.

Answer 22

D) less responsive is desired investment to a change in the interest rate.