Question 1

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

Accepted Answer

A) A decrease in the money supply will lower the interest rate, increase investment spending, and increase GDP. 
B) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease GDP. 
C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease GDP. 
D) An increase in the money supply will lower the interest rate, increase investment spending, and increase GDP. 
A) A decrease in the money supply will lower the interest rate, increase investment spending, and increase GDP. 
B) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease GDP. 
C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease GDP. 
D) An increase in the money supply will lower the interest rate, increase investment spending, and increase GDP.

Question 2

The prime interest rate:

Accepted Answer

A) affects investment spending while the overnight rate affects consumption spending. 
B) affects consumption spending while the overnight rate affects investment spending. 
C) has no effect on exchange rates and net exports. 
D) affects investment spending while the overnight rate affects overnight borrowing of bank reserves. 
A) affects investment spending while the overnight rate affects consumption spending. 
B) affects consumption spending while the overnight rate affects investment spending. 
C) has no effect on exchange rates and net exports. 
D) affects investment spending while the overnight rate affects overnight borrowing of bank reserves.

Question 3

A liquidity trap refers to a situation in which:

Accepted Answer

A) taking away liquidity from the banks has a major positive effect on lending. 
B) adding liquidity to banks has major positive effects on lending. 
C) adding liquidity to banks has little or no positive effects on lending. 
D) taking away liquidity to banks has a major negative effect on lending. 
A) taking away liquidity from the banks has a major positive effect on lending. 
B) adding liquidity to banks has major positive effects on lending. 
C) adding liquidity to banks has little or no positive effects on lending. 
D) taking away liquidity to banks has a major negative effect on lending.

Question 4

Quantitative easing refers to:

Accepted Answer

A) the selling of bonds to the private sector by a country's central bank in order to ease the money supply. 
B) the purchasing of private sector assets by a country's central bank in order to provide liquidity to the financial system. 
C) the selling of bonds by a country's central bank to the private sector in order to provide liquidity. 
D) the purchasing of private sector assets by a country's central bank in order to tighten liquidity. 
A) the selling of bonds to the private sector by a country's central bank in order to ease the money supply. 
B) the purchasing of private sector assets by a country's central bank in order to provide liquidity to the financial system. 
C) the selling of bonds by a country's central bank to the private sector in order to provide liquidity. 
D) the purchasing of private sector assets by a country's central bank in order to tighten liquidity.

Question 5

An expansionary monetary policy may be less effective than a restrictive monetary policy because:

Accepted Answer

A) the Bank of Canada is always willing to make loans to chartered banks that are short of reserves. 
B) fiscal policy always works at cross purposes with an expansionary monetary policy. 
C) the circularity or feedback problem complicates an expansionary monetary policy more than it does a restrictive monetary policy. 
D) chartered banks may not be willing to lend their excess reserves to the customers. 
A) the Bank of Canada is always willing to make loans to chartered banks that are short of reserves. 
B) fiscal policy always works at cross purposes with an expansionary monetary policy. 
C) the circularity or feedback problem complicates an expansionary monetary policy more than it does a restrictive monetary policy. 
D) chartered banks may not be willing to lend their excess reserves to the customers.

Question 6

Other things equal, an expansionary monetary policy will shift the economy's aggregate demand curve to the right.

Accepted Answer

A) True 
 B)False

Question 7

To increase the overnight lending rate, the Bank of Canada can:

Accepted Answer

A) buy government bonds from the public. 
B) decrease the bank rate. 
C) decrease the prime interest rate. 
D) sell government bonds to chartered banks. 
A) buy government bonds from the public. 
B) decrease the bank rate. 
C) decrease the prime interest rate. 
D) sell government bonds to chartered banks.

Question 8

Assume the desired reserve ratio is 25 percent and the Winnipeg Bank borrows $10,000 from the Bank of Canada.As a result:

Accepted Answer

A) chartered bank reserves are increased by $10,000. 
B) the supply of money automatically declines by $7,500. 
C) chartered bank reserves are increased by $7,500. 
D) the supply of money is automatically increased by $10,000. 
A) chartered bank reserves are increased by $10,000. 
B) the supply of money automatically declines by $7,500. 
C) chartered bank reserves are increased by $7,500. 
D) the supply of money is automatically increased by $10,000.

Question 9

The following are simplified consolidated balance sheets for the chartered banking system and the Bank of Canada.Do not cumulate your answers; that is, do return to the data given in the original balance sheets in answering each question.Assume a desired reserve ratio of 5 percent for the chartered banks.All figures are in billions of dollars.CONSOLIDATED BALANCE SHEET: CHARTERED BANKING SYSTEM   BALANCE SHEET: BANK OF CANADA
  Refer to the above information.Suppose the Bank of Canada buys $2 in securities from the public.As a result of this transaction, the supply of money will:

Accepted Answer

A) directly increase by $2 and the money-creating potential of the chartered banking system will increase by $38. 
B) directly increase by $40 and the money-creating potential of the chartered banking system will increase by $800. 
C) directly increase by $2 and the money-creating potential of the chartered banking system will be unaffected. 
D) be unaffected but the money-creating potential of the chartered banking system will increase by $40. 
A) directly increase by $2 and the money-creating potential of the chartered banking system will increase by $38. 
B) directly increase by $40 and the money-creating potential of the chartered banking system will increase by $800. 
C) directly increase by $2 and the money-creating potential of the chartered banking system will be unaffected. 
D) be unaffected but the money-creating potential of the chartered banking system will increase by $40.

Question 10

Which of the following is an expansionary monetary policy?

Accepted Answer

A) Increase the money supply to shift the aggregate demand curve rightward. 
B) Increase the money supply to shift the aggregate demand curve leftward. 
C) Increase the money supply to shift the aggregate supply curve leftward. 
D) Decrease the money supply to shift the aggregate demand curve leftward. 
A) Increase the money supply to shift the aggregate demand curve rightward. 
B) Increase the money supply to shift the aggregate demand curve leftward. 
C) Increase the money supply to shift the aggregate supply curve leftward. 
D) Decrease the money supply to shift the aggregate demand curve leftward.

Question 11

If the demand for money and the supply of money both decrease, we can conclude that at the equilibrium:

Accepted Answer

A) interest rate will decline, but we cannot predict the change in the equilibrium quantity of money. 
B) quantity of money and the equilibrium interest rate will both increase. 
C) quantity of money will increase, but we cannot predict the change in the equilibrium interest rate. 
D) quantity of money will decline, but we cannot predict the change in the equilibrium interest rate. 
A) interest rate will decline, but we cannot predict the change in the equilibrium quantity of money. 
B) quantity of money and the equilibrium interest rate will both increase. 
C) quantity of money will increase, but we cannot predict the change in the equilibrium interest rate. 
D) quantity of money will decline, but we cannot predict the change in the equilibrium interest rate.

Question 12

Assume the equation for the total demand for money is L = .4Y + 80 - 4i, where L is the amount of money demanded, Y is gross domestic product, and i is the interest rate.If gross domestic product is $200 and the interest rate is 10 (percent), what amount of money will society want to hold?

Accepted Answer

A) $200 
B) $120 
C) $320 
D) $160 
A) $200 
B) $120 
C) $320 
D) $160

Question 13

A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000.If the price of this bond increases by $2500, the interest rate in effect will:

Accepted Answer

A) decrease by 1 percentage point. 
B) decrease by 2 percentage points. 
C) increase by 1 percentage point. 
D) increase by 2 percentage points. 
A) decrease by 1 percentage point. 
B) decrease by 2 percentage points. 
C) increase by 1 percentage point. 
D) increase by 2 percentage points.

Question 14

In comparison with fiscal policy, monetary policy faces:

Accepted Answer

A) recognition lag, administrative lag, but avoids operational lag. 
B) recognition lag, administrative lag, and operational lag. 
C) recognition lag, operational lag, but avoids administrative lag. 
D) administrative lag, operational lag, but avoids recognition lag. 
A) recognition lag, administrative lag, but avoids operational lag. 
B) recognition lag, administrative lag, and operational lag. 
C) recognition lag, operational lag, but avoids administrative lag. 
D) administrative lag, operational lag, but avoids recognition lag.

Question 15

A monetary policy-caused reduction in the overnight lending rate will:

Accepted Answer

A) increase the prime interest rate. 
B) decrease the size of the monetary multiplier. 
C) increase the Bank of Canada rate. 
D) decrease the prime interest rate. 
A) increase the prime interest rate. 
B) decrease the size of the monetary multiplier. 
C) increase the Bank of Canada rate. 
D) decrease the prime interest rate.

Question 16

If the supply of money is reduced, we would expect:

Accepted Answer

A) the demand for money to increase. 
B) interest rates to fall 
C) bond prices to fall. 
D) none of the above to occur. 
A) the demand for money to increase. 
B) interest rates to fall 
C) bond prices to fall. 
D) none of the above to occur.

Question 17

If the Bank of Canada buys government securities from the chartered banks, which of the following transactions take place?

Accepted Answer

A) The demand deposits of chartered banks are unchanged, but their reserves increase. 
B) The demand deposits and reserves of chartered banks both decrease. 
C) The demand deposits of chartered banks are unchanged, but their reserves decrease. 
D) The demand deposits and reserves of chartered banks are both unchanged. 
A) The demand deposits of chartered banks are unchanged, but their reserves increase. 
B) The demand deposits and reserves of chartered banks both decrease. 
C) The demand deposits of chartered banks are unchanged, but their reserves decrease. 
D) The demand deposits and reserves of chartered banks are both unchanged.

Question 18

It is assumed that households and businesses want to hold for transactions purposes an amount of money equal to one-half of the GDP.The table shows the amounts of money that households and businesses want to hold as an asset at various interest rates.   Refer to the information above.If the GDP is $300 and the supply of money is $230, the equilibrium interest rate will be:

Accepted Answer

A) 8 percent. 
B) 6 percent. 
C) 2 percent. 
D) 4 percent. 
A) 8 percent. 
B) 6 percent. 
C) 2 percent. 
D) 4 percent.

Question 19

On a diagram wherein the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by:

Accepted Answer

A) horizontally adding the transactions and the asset demand for money. 
B) vertically subtracting the transactions demand from the asset demand for money. 
C) horizontally subtracting the asset demand from the transactions demand for money. 
D) vertically adding the transactions and the asset demand for money. 
A) horizontally adding the transactions and the asset demand for money. 
B) vertically subtracting the transactions demand from the asset demand for money. 
C) horizontally subtracting the asset demand from the transactions demand for money. 
D) vertically adding the transactions and the asset demand for money.

Question 20

Refer to the above diagram.The asset demand for money is shown by:

Accepted Answer

A) D1. 
B) D2. 
C) D3. 
D) none of the above. 
A) D1. 
B) D2. 
C) D3. 
D) none of the above.

Exam 15: Part B: Interest Rates and Monetary Policy

Which of the following best describes the cause-effect chain of an expansionary monetary policy?

The prime interest rate:

A liquidity trap refers to a situation in which:

Quantitative easing refers to:

An expansionary monetary policy may be less effective than a restrictive monetary policy because:

Other things equal, an expansionary monetary policy will shift the economy's aggregate demand curve to the right.

To increase the overnight lending rate, the Bank of Canada can:

Assume the desired reserve ratio is 25 percent and the Winnipeg Bank borrows $10,000 from the Bank of Canada.As a result:

Which of the following is an expansionary monetary policy?

If the demand for money and the supply of money both decrease, we can conclude that at the equilibrium:

Assume the equation for the total demand for money is L = .4Y + 80 - 4i, where L is the amount of money demanded, Y is gross domestic product, and i is the interest rate.If gross domestic product is $200 and the interest rate is 10 (percent), what amount of money will society want to hold?

A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000.If the price of this bond increases by $2500, the interest rate in effect will:

In comparison with fiscal policy, monetary policy faces:

A monetary policy-caused reduction in the overnight lending rate will:

If the supply of money is reduced, we would expect:

If the Bank of Canada buys government securities from the chartered banks, which of the following transactions take place?

On a diagram wherein the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by:

Refer to the above diagram.The asset demand for money is shown by:

Part A: Limits, Alternatives, and Choices

Part B: Limits, Alternatives, and Choices

Part A: The Market System and the Circular Flow

Part B: The Market System and the Circular Flow

Part A: Demand, Supply, and Market Equilibrium

Part B: Demand, Supply, and Market Equilibrium

Part A: Market Failures: Public Goods and Externalities

Part B: Market Failures: Public Goods and Externalities

Part A: Governments Role and Government Failure

Part B: Governments Role and Government Failure

Part A: An Introduction to Macroeconomics

Part B: An Introduction to Macroeconomics

Part A: Measuring the Economys Output

Part B: Measuring the Economys Output

Part A: Economic Growth

Part B: Economic Growth

Part A: Business Cycles, Unemployment, and Inflation

Part B: Business Cycles, Unemployment, and Inflation

Part A: Basic Macroeconomic Relationships

Part B: Basic Macroeconomic Relationships

Part A: The Aggregate Expenditures Model

Part B: The Aggregate Expenditures Model

Part A: Aggregate Demand and Aggregate Supply

Part B: Aggregate Demand and Aggregate Supply

Part A: Fiscal Policy, Deficits, Surpluses, and Debt

Part B: Fiscal Policy, Deficits, Surpluses, and Debt

Part A: Money, Banking, and Money Creation

Part B: Money, Banking, and Money Creation

Part A: Interest Rates and Monetary Policy

Part A: Long-Run Macroeconomic Adjustments

Part B: Long-Run Macroeconomic Adjustments

Part A: International Trade

Part B: International Trade

Part C: Financial Economics

Part A: The Balance of Payments and Exchange Rates

Part B: The Balance of Payments and Exchange Rates

The Economics of Developing Countries

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