Question 1

FIGURE 27-1
-Refer to Figure 27-1.Given the money demand curve,   ,a decrease in the quantity of money demanded from   can be caused by

Accepted Answer

A) an increase in the price level. 
B) a decrease in the price level. 
C) an increase in real GDP. 
D) an increase in the rate of interest. 
E) a decrease in the rate of interest. 
A) an increase in the price level. 
B) a decrease in the price level. 
C) an increase in real GDP. 
D) an increase in the rate of interest. 
E) a decrease in the rate of interest. D

Question 2

How does monetary equilibrium re-establish itself when there is an excess supply of money balances?

Accepted Answer

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 
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

Question 3

FIGURE 27-2
-Refer to Figure 27-2.Suppose the market interest rate is   .The situation in this market is as follows:

Accepted Answer

A) firms and households are attempting to increase their money holdings by selling bonds. 
B) firms and households are attempting to decrease their money holdings by selling bonds. 
C) firms and households are attempting to increase their money holdings by buying bonds. 
D) firms and households are attempting to decrease their money holdings by buying bonds. 
E) the market is in equilibrium and no change will occur. 
A) firms and households are attempting to increase their money holdings by selling bonds. 
B) firms and households are attempting to decrease their money holdings by selling bonds. 
C) firms and households are attempting to increase their money holdings by buying bonds. 
D) firms and households are attempting to decrease their money holdings by buying bonds. 
E) the market is in equilibrium and no change will occur. A

Question 4

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

Accepted Answer

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 (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. 
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 (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. 
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 (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. 
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 (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.

Question 5

The economy's investment demand function describes the

Accepted Answer

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. 
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.

Question 6

27.4 The Strength of Monetary Forces   FIGURE 27-6
-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

Accepted Answer

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 (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. 
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 (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. 
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 (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. 
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 (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.

Question 7

FIGURE 27-4
-Refer to Figure 27-4.The economy begins in equilibrium at E0.Now consider an expansion of the money supply.What is the adjustment toward the new long-run equilibrium?

Accepted Answer

A) The AD curve shifts to AD1.The inflationary gap causes prices to rise,AS shifts to AS1 and equilibrium is restored at E3. 
B) The AD curve shifts to AD1.The inflationary gap causes wages to rise,AS shifts to AS1 and equilibrium is restored at E2. 
C) The AS curve shifts to AS1 which causes the AD curve to shift to AD1,resulting in a new equilibrium at E2. 
D) The AD curve shifts to AD1.The increased money supply causes an increase in potential output and a new long-run equilibrium at E1. 
E) The AD and AS curves shift to AD1 and AS1 simultaneously.The increased price level pushes them back to AD0 and AS0 and equilibrium is restored at E0. 
A) The AD curve shifts to AD1.The inflationary gap causes prices to rise,AS shifts to AS1 and equilibrium is restored at E3. 
B) The AD curve shifts to AD1.The inflationary gap causes wages to rise,AS shifts to AS1 and equilibrium is restored at E2. 
C) The AS curve shifts to AS1 which causes the AD curve to shift to AD1,resulting in a new equilibrium at E2. 
D) The AD curve shifts to AD1.The increased money supply causes an increase in potential output and a new long-run equilibrium at E1. 
E) The AD and AS curves shift to AD1 and AS1 simultaneously.The increased price level pushes them back to AD0 and AS0 and equilibrium is restored at E0.

Question 8

The "transactions demand" for money arises from the fact that

Accepted Answer

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. 
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.

Question 9

Monetary policy will be least effective in changing aggregate demand 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 10

If the annual market interest rate is 20%,the annual opportunity cost of having $50 cash in your pocket is

Accepted Answer

A) $0. 
B) $2. 
C) $10. 
D) $50. 
E) $1000. 
A) $0. 
B) $2. 
C) $10. 
D) $50. 
E) $1000.

Question 11

Ceteris paribus,a rightward shift of the money demand curve could indicate which of the following:
1)an increase in demand for bonds;
2)an increase in the price level;
3)an increase in real GDP.

Accepted Answer

A) 1 only 
B) 2 only 
C) 3 only 
D) 1 and 2 only 
E) 2 and 3 only 
A) 1 only 
B) 2 only 
C) 3 only 
D) 1 and 2 only 
E) 2 and 3 only

Question 12

Changes in the money supply in an open economy,as compared to a closed economy,

Accepted Answer

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) 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.

Question 13

The "precautionary demand" for money arises from the

Accepted Answer

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. 
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.

Question 14

Consider a Government of Canada bond with a face value of $1000,and a present value of $925.If this bond is offered for sale at $960,then

Accepted Answer

A) the excess demand for the bond at $960 will drive the price up to the face value of the bond. 
B) individuals will purchase the bond at the offer price which will drive the market rate of interest up. 
C) individuals will purchase the bond at the offer price which will drive the market rate of interest down. 
D) the equilibrium market price of this bond has been achieved. 
E) the lack of demand for this bond will drive the price down until it reaches its equilibrium market price of $925. 
A) the excess demand for the bond at $960 will drive the price up to the face value of the bond. 
B) individuals will purchase the bond at the offer price which will drive the market rate of interest up. 
C) individuals will purchase the bond at the offer price which will drive the market rate of interest down. 
D) the equilibrium market price of this bond has been achieved. 
E) the lack of demand for this bond will drive the price down until it reaches its equilibrium market price of $925.

Question 15

Consider the monetary transmission mechanism.A relatively steep investment demand curve and a relatively flat money demand curve

Accepted Answer

A) make it impossible for the Bank of Canada to change the money supply. 
B) increase the effectiveness of expansionary monetary policy. 
C) imply that large increases in the money supply have little effect on aggregate expenditure. 
D) make the money supply a particularly powerful policy instrument. 
E) are believed by many monetarists to be realistic descriptions of the economy. 
A) make it impossible for the Bank of Canada to change the money supply. 
B) increase the effectiveness of expansionary monetary policy. 
C) imply that large increases in the money supply have little effect on aggregate expenditure. 
D) make the money supply a particularly powerful policy instrument. 
E) are believed by many monetarists to be realistic descriptions of the economy.

Question 16

Which of the following is partly responsible for the negative slope of the aggregate demand (AD)curve?

Accepted Answer

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 
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

Question 17

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

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 18

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 19

When there is an excess supply of money,monetary equilibrium is restored through

Accepted Answer

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. 
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.

Question 20

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.

Accepted Answer

A) 1 only 
B) 2 only 
C) 3 only 
D) 1 or 2 
E) 1 or 2 or 3 
A) 1 only 
B) 2 only 
C) 3 only 
D) 1 or 2 
E) 1 or 2 or 3

Exam 27: Money, Interest Rates, and Economic Activity

FIGURE 27-1 -Refer to Figure 27-1.Given the money demand curve, ,a decrease in the quantity of money demanded from can be caused by

How does monetary equilibrium re-establish itself when there is an excess supply of money balances?

FIGURE 27-2 -Refer to Figure 27-2.Suppose the market interest rate is .The situation in this market is as follows:

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

The economy's investment demand function describes the

27.4 The Strength of Monetary Forces FIGURE 27-6 -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

FIGURE 27-4 -Refer to Figure 27-4.The economy begins in equilibrium at E0.Now consider an expansion of the money supply.What is the adjustment toward the new long-run equilibrium?

The "transactions demand" for money arises from the fact that

Monetary policy will be least effective in changing aggregate demand when the

If the annual market interest rate is 20%,the annual opportunity cost of having $50 cash in your pocket is

Ceteris paribus,a rightward shift of the money demand curve could indicate which of the following: 1)an increase in demand for bonds; 2)an increase in the price level; 3)an increase in real GDP.

Changes in the money supply in an open economy,as compared to a closed economy,

The "precautionary demand" for money arises from the

Consider a Government of Canada bond with a face value of $1000,and a present value of $925.If this bond is offered for sale at $960,then

Consider the monetary transmission mechanism.A relatively steep investment demand curve and a relatively flat money demand curve

Which of the following is partly responsible for the negative slope of the aggregate demand (AD)curve?

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

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

When there is an excess supply of money,monetary equilibrium is restored through

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.

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

Interest Rates and the Capital Market

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

Trade Policy

Exchange Rates and the Balance of Payments

Filters

FIGURE 27-4 -Refer to Figure 27-4.The economy begins in equilibrium at E₀.Now consider an expansion of the money supply.What is the adjustment toward the new long-run equilibrium?