Question 1

Assume there are just two assets,money and bonds.We can expect that an individual with a given level of wealth will

Accepted Answer

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. 
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

Question 2

If a person is holding money for the purchase of goods and services,this demand for money is known as

Accepted Answer

A) speculative demand. 
B) precautionary demand. 
C) transactions demand. 
D) real balance demand. 
E) nominal balance demand. 
A) speculative demand. 
B) precautionary demand. 
C) transactions demand. 
D) real balance demand. 
E) nominal balance demand. C

Question 3

A firm that holds cash to avoid penalties associated with the late payment of bills is demonstrating which type of demand for money?

Accepted Answer

A) transactions demand 
B) precautionary demand 
C) speculative demand 
D) present value demand 
E) risk-return demand 
A) transactions demand 
B) precautionary demand 
C) speculative demand 
D) present value demand 
E) risk-return demand B

Question 4

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

Accepted Answer

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. 
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.

Question 5

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

Accepted Answer

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. 
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.

Question 6

If the economy is experiencing an undesired inflationary gap,the Bank of Canada could

Accepted Answer

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. 
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.

Question 7

Speculative demand for money arises from the desire by individuals and firms to hold cash balances

Accepted Answer

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. 
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.

Question 8

Consider the monetary transmission mechanism.In an open economy,such as Canadaʹs,a decrease in the money supply leads to a rise in the interest rate.This is followed by

Accepted Answer

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. 
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.

Question 9

What is the present value of a bond that pays $121.00 one year from today if the interest rate is 10% per year?

Accepted Answer

A) $100.00 
B) $110.00 
C) $121.00 
D) $133.10 
E) $221.00 
A) $100.00 
B) $110.00 
C) $121.00 
D) $133.10 
E) $221.00

Question 10

Which one of the following statements best describes the monetary transmission mechanism?

Accepted Answer

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 desired 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 desired investment,an upward shift in the AE curve and a higher GDP. 
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 desired 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 desired investment,an upward shift in the AE curve and a higher GDP.

Question 11

If the annual market rate of interest is 5%,an asset that promises to pay $100 after each of the next two years has a present value of

Accepted Answer

A) $90.70. 
B) $95.24. 
C) $181.40. 
D) $185.94. 
E) $200.00. 
A) $90.70. 
B) $95.24. 
C) $181.40. 
D) $185.94. 
E) $200.00.

Question 12

A decrease in the money supply is most likely to

Accepted Answer

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. 
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.

Question 13

The linkage between changes in monetary equilibrium and changes in aggregate demand is called the

Accepted Answer

A) monetary transmission mechanism. 
B) simple multiplier. 
C) equilibrium mechanism. 
D) transactions mechanism. 
E) liquidity preference function. 
A) monetary transmission mechanism. 
B) simple multiplier. 
C) equilibrium mechanism. 
D) transactions mechanism. 
E) liquidity preference function.

Question 14

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.

Accepted Answer

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 
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

Question 15

If the annual interest rate is 8%,an asset that promises to pay $160 after each of the next two years has a present value of

Accepted Answer

A) $178.32. 
B) $285.32. 
C) $296.30. 
D) $300.00. 
E) $320.00. 
A) $178.32. 
B) $285.32. 
C) $296.30. 
D) $300.00. 
E) $320.00.

Question 16

Suppose the market interest rate rises from 3% to 4%. This will lead to ________ in bond prices and ________ in bond prices and in bond yields.

Accepted Answer

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 
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

Question 17

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 MD curve

Accepted Answer

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. 
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.

Question 18

If the Bank of Canada were to increase the money supply,other things being equal,we would expect the aggregate expenditure curve to shift

Accepted Answer

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) 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.

Question 19

Monetary policy can have the largest impact on desired aggregate expenditures when the

Accepted Answer

A) investment demand curve and money demand function are both relatively flat. 
B) investment demand curve and money demand function are both relatively steep. 
C) investment demand curve is relatively steep and the money demand function is relatively flat. 
D) investment demand curve is relatively flat and the money demand function is relatively steep. 
E) None of the above - monetary policy is always equally effective. 
A) investment demand curve and money demand function are both relatively flat. 
B) investment demand curve and money demand function are both relatively steep. 
C) investment demand curve is relatively steep and the money demand function is relatively flat. 
D) investment demand curve is relatively flat and the money demand function is relatively steep. 
E) None of the above - monetary policy is always equally effective.

Question 20

Consider monetary equilibrium and the monetary transmission mechanism.An exogenous fall in the price level will lead to

Accepted Answer

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. 
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.

Exam 27: Money, interest Rates, and Economic Activity

Assume there are just two assets,money and bonds.We can expect that an individual with a given level of wealth will

If a person is holding money for the purchase of goods and services,this demand for money is known as

A firm that holds cash to avoid penalties associated with the late payment of bills is demonstrating which type of demand for money?

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

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

If the economy is experiencing an undesired inflationary gap,the Bank of Canada could

Speculative demand for money arises from the desire by individuals and firms to hold cash balances

Consider the monetary transmission mechanism.In an open economy,such as Canadaʹs,a decrease in the money supply leads to a rise in the interest rate.This is followed by

What is the present value of a bond that pays $121.00 one year from today if the interest rate is 10% per year?

Which one of the following statements best describes the monetary transmission mechanism?

If the annual market rate of interest is 5%,an asset that promises to pay $100 after each of the next two years has a present value of

A decrease in the money supply is most likely to

The linkage between changes in monetary equilibrium and changes in aggregate demand is called the

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.

If the annual interest rate is 8%,an asset that promises to pay $160 after each of the next two years has a present value of

Suppose the market interest rate rises from 3% to 4%. This will lead to ________ in bond prices and ________ in bond prices and in bond yields.

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 MD curve

If the Bank of Canada were to increase the money supply,other things being equal,we would expect the aggregate expenditure curve to shift

Monetary policy can have the largest impact on desired aggregate expenditures when the

Consider monetary equilibrium and the monetary transmission mechanism.An exogenous fall in the price level will lead to

Economic Issues and Concepts

Economic Theories, data, and Graphs

Demand, supply, and Price

Elasticity

Price Controls and Market Efficiency

Consumer Behaviour

Producers in the Short Run

Producers in the Long Run

Competitive Markets

Monopoly, cartels, and Price Discrimination

Imperfect Competition and Strategic Behaviour

Economic Efficiency and Public Policy

How Factor Markets Work

Labour Markets and Income Inequality

Market Failures and Government Intervention

The Economics of Environmental Protection

Taxation and Public Expenditure

What Macroeconomics Is All About

The Measurement of National Income

The Simplest Short-Run Macro Model

Adding Government and Trade to the Simple Macro Model

Output and Prices in the Short Run

From the Short Run to the Long Run: the Adjustment of Factor Prices

Long-Run Economic Growth

Money and Banking

Monetary Policy in Canada

Inflation and Disinflation

Unemployment Fluctuations and the Nairu

Government Debt and Deficits

The Gains From International Trade

Exchange Rates and the Balance of Payments

Filters

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.

Suppose the market interest rate rises from 3% to 4%. This will lead to in bond prices and in bond prices and in bond yields.