Question 1

What are the costs of inflation?

Accepted Answer

Inflation in the long run is determined by the growth rate in the money supply. It is the stated goal of many central banks to contain inflation. In Canada, the Bank of Canada has implemented a 1-3% inflation target band. Inflation leads to lost aggregate output, reduced employment and consumption, and a misallocation of resources. Persistent inflation dampens an economy's competitiveness, which results in an overall economic loss for the economy.

Question 2

If an increase in the growth rate of the money supply results in an equal increase in the rate of inflation with no effect on any real variables, we say that

Accepted Answer

A)  the classical dichotomy fails. 
B)  money is neutral. 
C)  money is superneutral. 
D)  money is the most preferred store of value. 
E)  money is not neutral. 
A)  the classical dichotomy fails. 
B)  money is neutral. 
C)  money is superneutral. 
D)  money is the most preferred store of value. 
E)  money is not neutral. C

Question 3

In a bank run, the equilibrium deposit contract in the Diamond-Dybvig model

Accepted Answer

A)  makes both early and late consumers better off. 
B)  makes early consumers no better off and makes late consumers worse off. 
C)  makes early consumers worse off and makes late consumers better off. 
D)  makes both early consumers and late consumers worse off. 
E)  provides an illiquidity transformation service to consumers. 
A)  makes both early and late consumers better off. 
B)  makes early consumers no better off and makes late consumers worse off. 
C)  makes early consumers worse off and makes late consumers better off. 
D)  makes both early consumers and late consumers worse off. 
E)  provides an illiquidity transformation service to consumers. B

Question 4

An asset's liquidity depends upon

Accepted Answer

A)  the absolute size of its value and how long it takes to sell the asset at market value. 
B)  how long it takes to sell the asset at market value and the costs of selling the asset. 
C)  the costs of selling the asset and the fraction of its value that can be obtained if it is sold immediately. 
D)  the fraction of its value that can be obtained if it is sold immediately and the absolute size of its value. 
E)  the value of the asset at time of sale and the costs of selling the asset. 
A)  the absolute size of its value and how long it takes to sell the asset at market value. 
B)  how long it takes to sell the asset at market value and the costs of selling the asset. 
C)  the costs of selling the asset and the fraction of its value that can be obtained if it is sold immediately. 
D)  the fraction of its value that can be obtained if it is sold immediately and the absolute size of its value. 
E)  the value of the asset at time of sale and the costs of selling the asset.

Question 5

Fiat money

Accepted Answer

A)  consists of pieces of paper that are essentially worthless. 
B)  consists of pieces of paper that are essentially worth more than the paper it is printed on. 
C)  is not accepted in the exchange for goods. 
D)  is not accepted in the foreign exchange market. 
E)  consists of coins issued by the Bank of Canada. 
A)  consists of pieces of paper that are essentially worthless. 
B)  consists of pieces of paper that are essentially worth more than the paper it is printed on. 
C)  is not accepted in the exchange for goods. 
D)  is not accepted in the foreign exchange market. 
E)  consists of coins issued by the Bank of Canada.

Question 6

In the monetary intertemporal model, inflation is

Accepted Answer

A)  equal to the money growth rate. 
B)  proportional to the money growth rate but not equal. 
C)  always less than the money growth rate. 
D)  zero. 
E)  always greater than the money growth rate. 
A)  equal to the money growth rate. 
B)  proportional to the money growth rate but not equal. 
C)  always less than the money growth rate. 
D)  zero. 
E)  always greater than the money growth rate.

Question 7

Market exchange is typically an exchange of goods for money as opposed to goods for goods because use of money solves the problem of

Accepted Answer

A)  the absence of a coincidence of wants. 
B)  the absence of a double coincidence of wants. 
C)  a coincidence of needs. 
D)  tax evasion. 
E)  the need for government intervention. 
A)  the absence of a coincidence of wants. 
B)  the absence of a double coincidence of wants. 
C)  a coincidence of needs. 
D)  tax evasion. 
E)  the need for government intervention.

Question 8

The Fisher effect posits a long-run one-to-one relationship between the

Accepted Answer

A)  inflation rate and the nominal interest rate. 
B)  nominal interest rate and the real interest rate. 
C)  real interest rate and the real exchange rate. 
D)  nominal exchange rate and the inflation rate. 
E)  inflation rate and the real interest rate. 
A)  inflation rate and the nominal interest rate. 
B)  nominal interest rate and the real interest rate. 
C)  real interest rate and the real exchange rate. 
D)  nominal exchange rate and the inflation rate. 
E)  inflation rate and the real interest rate.

Question 9

One characteristic of a financial intermediary is that

Accepted Answer

A)  it acts as a broker in the sale of stocks and bonds. 
B)  it intermediates between workers and firms. 
C)  it transforms assets. 
D)  it cannot processes information. 
E)  it is a lending institution only. 
A)  it acts as a broker in the sale of stocks and bonds. 
B)  it intermediates between workers and firms. 
C)  it transforms assets. 
D)  it cannot processes information. 
E)  it is a lending institution only.

Question 10

The Diamond-Dybvig model provides an account of

Accepted Answer

A)  bank runs. 
B)  the role for deposit insurance. 
C)  the role for a central bank. 
D)  the lender of last resort. 
E)  lack of diversification. 
A)  bank runs. 
B)  the role for deposit insurance. 
C)  the role for a central bank. 
D)  the lender of last resort. 
E)  lack of diversification.

Question 11

Bank Runs

Accepted Answer

A)  were a persistent problem in Canada during the Great Depression. 
B)  were eliminated by the CDIC. 
C)  were never a problem in Canada. 
D)  were never a problem in the United States. 
E)  are a problem only in the Diamond-Dybvig model, not in any real economy. 
A)  were a persistent problem in Canada during the Great Depression. 
B)  were eliminated by the CDIC. 
C)  were never a problem in Canada. 
D)  were never a problem in the United States. 
E)  are a problem only in the Diamond-Dybvig model, not in any real economy.

Question 12

In a bank run in the Diamond-Dybvig model, it is in any depositor's interest to request withdrawal of his or her deposit because

Accepted Answer

A)  this avoids the possibility of consuming zero. 
B)  this avoids the possibility of having one unit of consumption. 
C)  government intervention assures that this is optimal behaviour. 
D)  there are plenty of liquid assets to go around. 
E)  the bank suspends withdrawal. 
A)  this avoids the possibility of consuming zero. 
B)  this avoids the possibility of having one unit of consumption. 
C)  government intervention assures that this is optimal behaviour. 
D)  there are plenty of liquid assets to go around. 
E)  the bank suspends withdrawal.

Question 13

To implement the Friedman rule for long-term monetary policy, the monetary authority would need to set the

Accepted Answer

A)  inflation rate equal to zero. 
B)  nominal rate of interest equal to zero. 
C)  real rate of interest equal to zero. 
D)  money growth rate equal to zero. 
E)  output growth rate equal the inflation rate. 
A)  inflation rate equal to zero. 
B)  nominal rate of interest equal to zero. 
C)  real rate of interest equal to zero. 
D)  money growth rate equal to zero. 
E)  output growth rate equal the inflation rate.

Question 14

The Friedman rule for optimal money growth is that

Accepted Answer

A)  inflation and aggregate output grow at the same rate. 
B)  the money supply and aggregate output grow at the same rate. 
C)  the real wage rate and aggregate output grow at the same rate. 
D)  money should grow at a rate that implies that the nominal interest rate is zero. 
E)  money should grow at a rate that implies that the real interest rate is zero. 
A)  inflation and aggregate output grow at the same rate. 
B)  the money supply and aggregate output grow at the same rate. 
C)  the real wage rate and aggregate output grow at the same rate. 
D)  money should grow at a rate that implies that the nominal interest rate is zero. 
E)  money should grow at a rate that implies that the real interest rate is zero.

Question 15

Which asset is least liquid?

Accepted Answer

A)  currency 
B)  a government bond 
C)  a chequing deposit 
D)  a factory 
E)  a savings deposit 
A)  currency 
B)  a government bond 
C)  a chequing deposit 
D)  a factory 
E)  a savings deposit

Question 16

A depository institution can make highly illiquid and long-maturity loans with funds obtained by issuing transaction deposits because

Accepted Answer

A)  depository institutions tend to be owned by individuals with a high tolerance of risk. 
B)  most transaction depositors have very transaction patterns. 
C)  depositors, taken as a group, behave in a predictable manner. 
D)  depository institutions are skilled at evaluating credit risks. 
E)  depository institutions have a large pool of assets to draw from. 
A)  depository institutions tend to be owned by individuals with a high tolerance of risk. 
B)  most transaction depositors have very transaction patterns. 
C)  depositors, taken as a group, behave in a predictable manner. 
D)  depository institutions are skilled at evaluating credit risks. 
E)  depository institutions have a large pool of assets to draw from.

Question 17

The Friedman rule is optimal because which of the following relationships holds in equilibrium?

Accepted Answer

A)  MRS1,c = MRT1,c 
B)  MRS1,c = $ \frac{MRT_{1, c}}{1+R} $ 
C)  MRT1,c = x 
D)  MRS1,c = MRT1,c (1 + R) 
E)  MRS1,c > $ \frac{M R T_{1, c}}{1+R} $ 
A)  MRS1,c = MRT1,c 
B)  MRS1,c = $ \frac{MRT_{1, c}}{1+R} $ 
C)  MRT1,c = x 
D)  MRS1,c = MRT1,c (1 + R) 
E)  MRS1,c > $ \frac{M R T_{1, c}}{1+R} $

Question 18

Banks in the Diamond-Dybvig model can offer depositors increased liquidity because

Accepted Answer

A)  both individual depositors' liquidity needs and average depositor liquidity needs are predictable. 
B)  while individual depositors' liquidity needs are unpredictable, average depositor liquidity needs are predictable. 
C)  while individual depositors' liquidity needs are predictable, average depositor liquidity needs are unpredictable. 
D)  neither individual depositors' liquidity needs nor average depositor liquidity needs are predictable. 
E)  the bank only holds a small amount of illiquid assets. 
A)  both individual depositors' liquidity needs and average depositor liquidity needs are predictable. 
B)  while individual depositors' liquidity needs are unpredictable, average depositor liquidity needs are predictable. 
C)  while individual depositors' liquidity needs are predictable, average depositor liquidity needs are unpredictable. 
D)  neither individual depositors' liquidity needs nor average depositor liquidity needs are predictable. 
E)  the bank only holds a small amount of illiquid assets.

Question 19

An increase in the inflation rate shifts

Accepted Answer

A)  both the aggregate demand and supply curves left. 
B)  only aggregate demand right. 
C)  aggregate demand right and aggregate supply left. 
D)  only aggregate supply left. 
E)  aggregate demand left and aggregate supply right. 
A)  both the aggregate demand and supply curves left. 
B)  only aggregate demand right. 
C)  aggregate demand right and aggregate supply left. 
D)  only aggregate supply left. 
E)  aggregate demand left and aggregate supply right.

Question 20

The phenomenon in which an insured individual takes less care in preventing the event against which he or she is insured is an example of

Accepted Answer

A)  foolish behaviour. 
B)  adverse selection. 
C)  moral hazard. 
D)  double coincidence of wants. 
E)  nondiversifiable risk. 
A)  foolish behaviour. 
B)  adverse selection. 
C)  moral hazard. 
D)  double coincidence of wants. 
E)  nondiversifiable risk.

What are the costs of inflation?

If an increase in the growth rate of the money supply results in an equal increase in the rate of inflation with no effect on any real variables, we say that

In a bank run, the equilibrium deposit contract in the Diamond-Dybvig model

An asset's liquidity depends upon

Fiat money

In the monetary intertemporal model, inflation is

Market exchange is typically an exchange of goods for money as opposed to goods for goods because use of money solves the problem of

The Fisher effect posits a long-run one-to-one relationship between the

One characteristic of a financial intermediary is that

The Diamond-Dybvig model provides an account of

Bank Runs

In a bank run in the Diamond-Dybvig model, it is in any depositor's interest to request withdrawal of his or her deposit because

To implement the Friedman rule for long-term monetary policy, the monetary authority would need to set the

The Friedman rule for optimal money growth is that

Which asset is least liquid?

A depository institution can make highly illiquid and long-maturity loans with funds obtained by issuing transaction deposits because

The Friedman rule is optimal because which of the following relationships holds in equilibrium?

Banks in the Diamond-Dybvig model can offer depositors increased liquidity because

An increase in the inflation rate shifts

The phenomenon in which an insured individual takes less care in preventing the event against which he or she is insured is an example of

Introduction

Measurement

Business Cycle Measurement

Consumer and Firm Behaviour: The Work–Leisure Decision and Profit Maximization

A Closed-Economy One-Period Macroeconomic Model

Search and Unemployment

Economic Growth: Malthus and Solow

Income Disparity among Countries and Endogenous Growth

A Two-Period Model: The Consumption–Savings Decision and Credit Markets

Credit Market Imperfections: Credit Frictions, Financial Crises, and Social Security

A Real Intertemporal Model with Investment

A Monetary Intertemporal Model: Money, Banking, Prices, and Monetary Policy

Business Cycle Models with Flexible Prices and Wages

New Keynesian Economics: Sticky Prices

Inflation: Phillips Curves and Neo-Fisherism

International Trade in Goods and Assets

Money in the Open Economy

Filters

Exam 18: Money, Inflation, and Banking: A Deeper Look

What are the costs of inflation?

If an increase in the growth rate of the money supply results in an equal increase in the rate of inflation with no effect on any real variables, we say that

In a bank run, the equilibrium deposit contract in the Diamond-Dybvig model

An asset's liquidity depends upon

Fiat money

In the monetary intertemporal model, inflation is

Market exchange is typically an exchange of goods for money as opposed to goods for goods because use of money solves the problem of

The Fisher effect posits a long-run one-to-one relationship between the

One characteristic of a financial intermediary is that

The Diamond-Dybvig model provides an account of

Bank Runs

In a bank run in the Diamond-Dybvig model, it is in any depositor's interest to request withdrawal of his or her deposit because

To implement the Friedman rule for long-term monetary policy, the monetary authority would need to set the

The Friedman rule for optimal money growth is that

Which asset is least liquid?

A depository institution can make highly illiquid and long-maturity loans with funds obtained by issuing transaction deposits because

The Friedman rule is optimal because which of the following relationships holds in equilibrium?

Banks in the Diamond-Dybvig model can offer depositors increased liquidity because

An increase in the inflation rate shifts

The phenomenon in which an insured individual takes less care in preventing the event against which he or she is insured is an example of

Introduction

Measurement

Business Cycle Measurement

Consumer and Firm Behaviour: The Work–Leisure Decision and Profit Maximization

A Closed-Economy One-Period Macroeconomic Model

Search and Unemployment

Economic Growth: Malthus and Solow

Income Disparity among Countries and Endogenous Growth

A Two-Period Model: The Consumption–Savings Decision and Credit Markets

Credit Market Imperfections: Credit Frictions, Financial Crises, and Social Security

A Real Intertemporal Model with Investment

A Monetary Intertemporal Model: Money, Banking, Prices, and Monetary Policy

Business Cycle Models with Flexible Prices and Wages

New Keynesian Economics: Sticky Prices

Inflation: Phillips Curves and Neo-Fisherism

International Trade in Goods and Assets

Money in the Open Economy

Filters