Deck 13: Monetary Policy

Question 1

How do income and interest rates affect the quantity of money that households and businesses will demand?

A)Demand increases if income rises but decreases if interest rates rise.
B)Demand increases if income rises and increases if interest rates rise.
C)Demand decreases if income rises but increases if interest rates rise.
D)Demand decreases if income rises and decreases if interest rates rise.

Answer 1

Demand increases if income rises but decreases if interest rates rise.

Question 2

What is the impact on real interest rates and investment spending when the money supply decreases,other things being equal?

A)real interest rates fall, and investment spending rises
B)real interest rates fall, and investment spending falls
C)real interest rates rise, and investment spending rises
D)real interest rates rise, and investment spending falls

Answer 2

real interest rates rise, and investment spending falls

Question 3

What will happen to the demand for money if real GDP rises?

A)It depends on what happens to interest rates.
B)It will be unchanged.
C)It will decrease.
D)It will increase.

Answer 3

It will increase.

Question 4

What will an open market purchase of government bonds by the Bank of Canada NOT tend to result in,other things being equal?

A)an increase in the price level
B)a reduction in the volume of loans issued by the chartered banking system
C)a decrease in interest rates
D)an increase in bank reserves

Question 5

If interest rates rise,what will happen to demand for money?

A)It will decrease; people want to avoid inflationary losses.
B)Nothing; the money market can sustain long periods of disequilibrium.
C)It will increase.
D)Nothing; the economy will move to a new quantity demanded at a new interest rate.

Question 6

What would the result be if the income stream of the average family suddenly became more unpredictable?

A)Households would want to hold larger cash balances.
B)Demand for money would shift to the left.
C)Households would want to hold smaller cash balances.
D)The money supply would shift to the right.

Question 7

What is the impact on nominal interest rates and investment spending when the money supply increases,other things being equal?

A)nominal interest rates rise, and investment spending rises
B)nominal interest rates fall, and investment spending rises
C)nominal interest rates rise, and investment spending falls
D)nominal interest rates fall, and investment spending falls

Question 8

What does the money demand curve illustrate?

A)the various amounts of money that individuals will hold at different price levels
B)the quantity of bonds that the Bank of Canada will buy at different price levels
C)the various amounts of money that individuals will spend at different levels of GDP
D)the various amounts of money that individuals will hold at different interest rates

Question 9

Why is the money supply curve almost perfectly inelastic?

A)As interest rates rise, people will want to be supplied with more loans.
B)The Bank of Canada makes more money available in response to higher interest rates.
C)The Bank of Canada lowers the bank rate as interest rates rise so that more money is injected in the banking system.
D)Banks generally find loans more profitable than keeping their assets as cash in their vaults or reserve deposits at the Bank of Canada

Question 10

What effect would lowering the bank rate,other things being equal,tend to have?

A)It would increase the dollar volume of loans made by the banking system.
B)It would decrease aggregate demand.
C)It would increase SRAS.
D)It would decrease the money supply.

Question 11

How would an economist describe the supply of money with respect to interest rates?

A)It is almost perfectly inelastic.
B)It is inelastic.
C)It is elastic.
D)It is almost perfectly elastic.

Question 12

If a reduction in the money supply were desired to slow inflation,what action might the Bank of Canada take?

A)decrease the bank rate
B)raise the bank rate
C)lower tax rates
D)buy government bonds on the open market

Question 13

When the Bank of Canada increases the money supply,why will it cause an increase in aggregate demand?

A)because the dollar will appreciate on the foreign exchange market, leading to an increase in net exports
B)because interest rates will fall, stimulating business investment and consumer purchases
C)because consumers will expect prices to rise and will increase current consumption
D)because lower interest rates will tend to decrease asset prices, which increases wealth and thereby stimulates current consumption

Question 14

What does the quantity of money demanded vary inversely with?

A)real GDP
B)the interest rate
C)the prime rate
D)the inflation rate

Question 15

What will the combination of an increase in the bank rate and an open market sale of government securities by the Bank of Canada tend to result in?

A)higher bond prices
B)a higher loan volume issued by the chartered banking system
C)a lower price level
D)a decrease in unemployment rates

Question 16

If money supply and money demand both fell,but money supply fell more than money demand,what would be the effect on interest rates and investment?

A)Interest rates would decrease, and investment would decrease.
B)Interest rates would decrease, and investment would increase.
C)Interest rates would increase, and investment would increase.
D)Interest rates would increase, and investment would decrease.

Question 17

What effect will contractionary monetary policy tend to have?

A)It will tend to decrease the money supply and increase interest rates.
B)It will tend to decrease the money supply and lower interest rates.
C)It will tend to increase the money supply and lower interest rates.
D)It will tend to increase the money supply and increase interest rates.

Question 18

If money supply and money demand both increased,what would be the effect on interest rates and investment?

A)Interest rates would increase, and investment would decrease.
B)The change in interest rates and investment would be indeterminate.
C)Interest rates would increase, and investment would increase.
D)Interest rates would decrease, and investment would increase.

Question 19

When money demand decreases,what action should the Bank of Canada take?

A)It should either decrease interest rates or decrease the supply of money.
B)It should either increase interest rates or decrease the supply of money.
C)It should either decrease interest rates or increase the supply of money.
D)It should either increase interest rates or increase the supply of money.

Question 20

What effect will expansionary monetary policy tend to have?

A)It will tend to decrease the money supply and increase interest rates.
B)It will tend to decrease the money supply and lower interest rates.
C)It will tend to increase the money supply and increase interest rates.
D)It will tend to increase the money supply and lower interest rates.

Question 21

If policy makers wanted to use both monetary and fiscal policy to help reduce a high rate of inflation,which of the following would be most appropriate?

A)a larger budget deficit, the purchase of securities in the open market by the Bank of Canada, and a higher bank rate
B)a government budget surplus, the purchase of securities in the open market by the Bank of Canada, and a lower bank rate
C)a larger government budget deficit, the sale of securities in the open market by the Bank of Canada, and a lower bank rate
D)a government budget surplus, the sale of securities in the open market by the Bank of Canada, and a higher bank rate

Question 22

What impact will an increase in the money supply have on the economy?

A)It will probably result in inflation if the economy is fully employed.
B)It will shift the aggregate demand curve to the left, decreasing demand.
C)It will definitely result in inflation if unemployment is high and there is much unused industrial capacity.
D)It will cause interest rates to rise.

Question 23

Which of the following would tend to reduce the price level?

A)a chartered bank using excess reserves to extend a loan to a customer
B)an decrease in the bank rate
C)a chartered bank purchasing government securities from an individual as an investment
D)the bank of Canada selling bonds on the open market

Question 24

Suppose the Bank of Canada purchases $100 million of government bonds from the public.If the desired reserve ratio is 20 percent and all banks keep zero excess reserves,what will the total impact of this action on the money supply be?

A)$100 million decrease in the money supply
B)$100 million increase in the money supply
C)$200 million increase in the money supply
D)$500 million increase in the money supply

Question 25

Assume a starting position of macroeconomic equilibrium at the full-employment level of real GDP.In the short run,what effect will a decrease in the money supply have?

A)It will lower real interest rates, raise the price level, and increase real GDP.
B)It will raise real interest rates, lower the price level, and leave real GDP unchanged.
C)It will raise nominal interest rates, lower the price level, and leave real GDP unchanged.
D)It will raise real interest rates, lower the price level, and reduce real GDP.

Question 26

What the relationship among money,interest rates,and inflation?

A)Money, interest rates, and inflation are directly related.
B)Money, interest rates, and inflation are weakly related.
C)Money, interest rates, and inflation are unrelated.
D)Money, interest rates, and inflation are related, but the relationship is difficult to predict.

Question 27

Assume the Bank of Canada sells $1000 worth of government bonds to Paul,who deposits the money in the First National Bank.If the desired reserve ratio is 25 percent,what effect will this transaction have?

A)It will decrease the excess reserves of the Trust National Bank by $750, and eventually decrease the money supply by $4000.
B)It will decrease the excess reserves of the Trust National Bank by $1000, and eventually decrease the money supply by $4000.
C)It will decrease the excess reserves of the Trust National Bank by $1000, and eventually decrease the money supply by $1000.
D)It will decrease the excess reserves of the Trust National Bank by $750, and eventually decrease the money supply by $1000.

Question 28

Which of the following would tend to decrease unemployment in the short run?

A)chartered banks calling in loans to build up their excess reserves
B)a chartered bank purchasing government securities from the Bank of Canada as an investment
C)the Bank of Canada increasing the bank rate
D)the Bank of Canada buying government securities from investment dealers

Question 29

When the economy is experiencing an inflationary gap,how can monetary policy affect real output and the price level?

A)A contractionary monetary policy can result in increased real output and a lower price level.
B)A contractionary monetary policy can result in decreased real output and an increased price level.
C)A contractionary monetary policy can result in decreased real output and a lower price level.
D)A contractionary monetary policy can result in increased real output and an increased price level.

Question 30

Under what circumstances is profitable investment most effectively promoted?

A)when inflation is rising rapidly
B)when monetary policy is unanticipated
C)when the money supply and price level are stable
D)when persistent inflation increases uncertainty

Question 31

Which one of the following would be the most appropriate stabilization policy if the economy is operating beyond its long-run potential capacity?

A)an increase in government purchases, holding taxes constant
B)a purchase of bonds by the Bank of Canada
C)an increase in the bank rate
D)a reduction in taxes, holding government purchases constant

Question 32

If policy makers wanted to use both monetary and fiscal policy to stimulate demand and reduce a high rate of unemployment,which of the following would be most appropriate?

A)a larger government surplus and a reduction in the bank rate
B)a government surplus and the sale of securities in the open market by the Bank of Canada
C)a larger government deficit and an increase in the bank rate
D)a larger budget deficit and the purchase of securities in the open market by the Bank of Canada

Question 33

If the Bank of Canada sells bonds,what will be included in the short run impact of this policy?

A)an increase in the inflation rate
B)a reduction in unemployment
C)an increase in real output
D)an increase in real interest rates

Question 34

When the economy is in a recession,how can monetary policy affect real output?

A)An expansionary monetary policy can potentially result in increased real output in both the short run and long run.
B)A contractionary monetary policy can potentially result in increased real output in both the short run and long run.
C)A contractionary monetary policy can potentially result in increased real output, but only in the short run.
D)An expansionary monetary policy can potentially result in increased real output, but only in the short run.

Question 35

If the Bank of Canada sells bonds,what will the short-run impact of this policy tend to include?

A)an increase in the inflation rate
B)an increase in real interest rates
C)an increase in real output
D)a reduction in unemployment

Question 36

In the long run,what is the most likely effect of a sustained increase in money supply growth relative to the growth rate of potential real output?

A)It will cause the real interest rate to fall.
B)It will cause the nominal interest rate to fall.
C)It will reduce the natural rate of unemployment.
D)It will increase the price level.

Question 37

When the economy is initially above full employment,how can monetary policy affect real output?

A)An expansionary monetary policy can potentially result in an increased price level.
B)A contractionary monetary policy can potentially result in an increased price level.
C)An expansionary monetary policy can potentially result in increased real output by shifting the LRAS.
D)A contractionary monetary policy can potentially result in increased real output, but only in the short run.

Question 38

Which of the following interest rates will an expansionary monetary policy have its greatest direct effect on?

A)home mortgage
B)long-term business loans
C)ten-year bond
D)the bank rate

Question 39

What is the problem associated with the Bank of Canada targeting money supply as a method of monetary policy?

A)Interest rates will be too low and create a recession.
B)Interest rates will fluctuate depending on the demand for money.
C)The Bank of Canada will print too much money.
D)Interest rates will be too low and increase prices.

Question 40

Starting from an initial equilibrium with a recessionary gap,what effect would a shift to more expansionary monetary policy tend to have?

A)Increased prices and unemployment in the long run.
B)Increased real output in both the long run and the short run.
C)Increased real output in the long run but not the short run.
D)Increased real output in the short run but not in the long run.

Question 41

If the Canadian economy is operating in the relatively flat portion of the SRAS and the U.S.government imposes a tariff on oil from the Alberta oil sands,what would the appropriate response of the Canadian authorities be?

A)imposing an export tariff on Canadian electricity
B)increasing profits taxes on oil companies operating in Canada
C)reducing employment subsidies
D)reducing the bank rate

Question 42

What does the slope of the Phillips curve indicate?

A)that the opportunity cost of decreasing unemployment increases as unemployment decreases
B)that the opportunity cost of decreasing unemployment decreases as unemployment increases
C)that the opportunity cost of decreasing inflation decreases as inflation decreases
D)that the opportunity cost of decreasing inflation or unemployment is constant

Question 43

What can we conclude the flatter the SRAS curve?

A)the easier it is for monetary policy to change real GDP in the long run
B)the harder it is for fiscal policy to change real GDP in the short run
C)the easier it is for monetary policy to change real GDP in the short run
D)the harder it is for monetary policy to change real GDP in the short run

Question 44

Which of the following would tend to increase AD?

A)an increase in the bank rate
B)a decrease in the money supply
C)a chartered bank using excess reserves to extend a loan to a customer
D)a chartered bank purchasing government bonds from the Bank of Canada as an investment

Question 45

What will a decrease in the bank rate when the SRAS is relatively flat likely lead to?

A)a large increase in the price level and an increase in unemployment
B)a large increase in the price level and an increase in real GDP
C)a small increase in the price level and a decrease in real GDP
D)a small increase in the price level and a decrease in unemployment

Question 46

Which of the following statements describes an important limitation of monetary policy?

A)When the Bank of Canada tries to buy bonds, it is often unable to find a seller.
B)It must be conducted through the chartered banking system, and the Bank of Canada cannot always make banks do what it wants them to do.
C)When the Bank of Canada tries to sell bonds, it is often unable to find a buyer.
D)It is conducted by people in Parliament who are under pressure to get re-elected.

Question 47

If the Canadian economy is operating close to full employment and the U.S.government engages in expansionary fiscal policy,what would the appropriate response of the Canadian authorities be?

A)imposing tariffs on U.S. products
B)raising the bank rate
C)buying government securities from the chartered banks
D)reducing the GST

Question 48

Which of the following statements comparing fiscal policy with monetary policy as a means of attaining macroeconomic goals is the most accurate?

A)The effects of monetary and fiscal policy are both immediate.
B)The effects of monetary policy are certain and predictable, while the effects of fiscal policy are not.
C)The implementation of monetary policy is not slowed down by the same budgetary process as fiscal policy.
D)It takes a long time for fiscal policy to have an effect on the economy, but the effects of monetary policy are immediate.

Question 49

If the Bank of Canada buys government securities from the chartered banks when the SRAS is relatively flat,what should we expect to happen to the price level and real GDP?

A)Price level should fall a little and real GDP should rise a little.
B)Price level should rise a little and real GDP should fall a little.
C)Price level should fall a little and real GDP should rise substantially.
D)Price level should rise a little and real GDP should rise substantially.

Question 50

Which of the following statements does NOT describe a real limitation to monetary policy?

A)The world has become global in all markets, including financial markets, and the Bank of Canada does not have control over international banks.
B)It is essentially very difficult to get a policy decision enacted because the Bank of Canada is controlled by Parliament.
C)Monetary policy has to be carried out through the chartered banking system.
D)Fiscal policy is sometimes at odds with monetary policy.

Question 51

If the unemployment rate and the inflation rate both increase simultaneously,what curve will shift right?

A)the Phillips curve
B)the SRAS
C)the LRAS
D)the AD

Question 52

When is an expansionary monetary policy likely to increase real output more than just temporarily?

A)when actual output is beyond the economy's long-run capacity
B)at virtually any output level
C)when the economy is at full employment
D)when the economy operates at less than capacity

Question 53

Under what circumstances will employment be affected by inflation?

A)only if the inflation rate gets above a certain level
B)only if the inflation rate is different from what was expected
C)only if the inflation is expected
D)only if unemployment is above the natural rate

Question 54

If employees and employers always accurately forecast inflation,what is the shape of the Phillips curve?

A)It is upward sloping in the short run, and horizontal in the long run.
B)It is vertical in the short run, and upward sloping in the long run.
C)It is vertical in the short run and in the long run.
D)It is downward sloping in the short run, and vertical in the long run.

Question 55

What will an increase in the bank rate when the SRAS is relatively steep likely lead to?

A)a large drop in real GDP and a large drop in the price level
B)a small drop in real GDP and a large drop in the price level
C)a small drop in real GDP and a small increase in the price level
D)a small increase in real GDP and a large increase in the price level

Question 56

If inflation is underestimated by decision makers in the economy when it is rising,what will the shape of the SRAS curve tend to be?

A)downward sloping
B)horizontal
C)upward sloping
D)vertical

Question 57

If,in a bid to get re-elected,politicians decide to decrease taxes when there is an inflationary gap,what action might the Bank of Canada decide to take?

A)increase the money supply
B)sell government securities to the chartered banks
C)buy government securities from the general public
D)reduce the bank rate

Question 58

The steeper the SRAS curve,what can we conclude?

A)The more unemployment will change in the short run for a given change in AD.
B)The more real output will change in the short run for a given change in AD.
C)The more real output, unemployment, and the price level will change in the short run for a given change in AD.
D)The more the price level will change in the short run for a given change in AD.

Question 59

If the Bank of Canada sells government securities from the chartered banks when the SRAS is relatively steep,what should we expect to happen to interest rates and real GDP?

A)Interest rates will rise and real GDP will fall a little.
B)Interest rates will fall and real GDP will rise a little.
C)Interest rates will fall and real GDP will rise substantially.
D)Interest rates will rise and real GDP will fall substantially.

Question 60

When the economy is experiencing an inflationary gap,how can monetary policy affect real output and the price level?

A)An expansionary monetary policy can result in increased real output and an increased price level.
B)An expansionary monetary policy can result in increased real output and a lower price level.
C)An expansionary monetary policy can result in decreased real output and an increased price level.
D)An expansionary monetary policy can result in decreased real output and a lower price level.

Question 61

A one-percentage-point change in the desired reserve ratio would change the money supply by roughly one percent,other things being equal.

Question 62

What is the Phillips curve consistent with?

A)the AD shifting along a stationary SRAS
B)the AD shifting along the LRAS
C)the LRAS shifting along a stationary AD
D)the SRAS shifting along a stationary AD

Question 63

The money supply is very sensitive to changes in the rate of interest.

Question 64

If increased inflation exceeds forecast inflation in the short run but NOT in the long run,what are the shapes of the aggregate supply curves?

A)AS is upward sloping in the short run and vertical in the long run.
B)AS is vertical in the short run and in the long run.
C)AS is vertical in the short run, and upward sloping in the long run.
D)AS is upward sloping in the short run and horizontal in the long run.

Question 65

Higher rates of interest increase the opportunity cost of holding money balances.

Question 66

Other things being constant,an increase in nominal GDP will generally increase the demand for money.

Question 67

What affects the demand for money?

Question 68

The shape of the Phillips curve suggests that policies that are aimed at reducing unemployment are likely to cause inflation.

Question 69

The SRAS becomes steeper as the economy approaches the full employment level.

Question 70

Why is the time lag for fiscal policy changes longer than for monetary policy changes?

Question 71

Monetary policy can influence interest rates,which in turn can change spending.

Question 72

The SRAS curve is relatively flat when there is considerable excess capacity.

Question 73

Your roommate has just run into the room in a panic.Her study group asked her about monetary policy tools.Since she knew you were studying for a midterm exam in your class with Dr.Sexton,briefly outline to her the policy choices for contractionary and expansionary options of the Bank of Canada.

Question 74

When money demand increases,the Bank of Canada cannot keep the money supply from rising and the interest rate from rising at the same time.

Question 75

How will an expansionary monetary policy affect the GDP when the economy is at less than full employment? At full employment?

Question 76

To what extent should monetary policy be used to fine-tune the economy?

Question 77

The Phillips curve shows that there is a negative relationship between the unemployment rate and real output.

Question 78

You have the assignment of making a recommendation to the governor of the Bank of Canada during a period of persistent,high inflation.What could you do to restore stable prices?

Question 79

The Phillips curve shows the same relationship as an upward sloping SRAS.

Question 80

The problem of time lags in making policy changes is less acute for monetary policy than it is for fiscal policy.