Deck 15: Monetary Policy

Question 1

The money demand curve is _____ because a lower interest rate _____ the opportunity cost of holding money.

A) upward sloping;increases
B) downward sloping;increases
C) upward sloping;decreases
D) downward sloping;decreases

Answer 1

downward sloping;decreases

Question 2

The amount of money that people demand is:

A) positively related to the interest rate.
B) independent of the interest rate.
C) negatively related to the interest rate.
D) positively or negatively related to the interest rate depending on the state of the economy.

Answer 2

negatively related to the interest rate.

Question 3

An individual who decides to hold money instead of other assets:

A) is giving up the interest that other assets could have earned.
B) is likely to be subject to money illusion.
C) is not affected by unanticipated inflation.
D) can maintain a higher standard of living.

Answer 3

is giving up the interest that other assets could have earned.

Question 4

People forgo interest and hold money:

A) because they are required to.
B) to reduce their transaction costs.
C) because there are no substitutes for money.
D) because banks are too risky.

Question 5

If a chequing account has an interest rate of 1% and a Treasury bill has an interest rate of 3%,the opportunity cost of holding cash in a chequing account is:

A) 0%.
B) 0.02%.
C) 1%.
D) 2%.

Question 6

The opportunity cost of holding money is:

A) zero.
B) the interest rate when someone uses a credit card.
C) the difference between interest rates on monetary assets and those on non-monetary assets.
D) the bank rate.

Question 7

The Bank of Canada can influence financial crises because it:

A) determines tax rates.
B) determines government spending.
C) conducts monetary policy.
D) is responsive to the people who elected its members to office.

Question 8

We hold money to:

A) earn interest.
B) reduce transaction costs.
C) increase transaction costs
D) protect our purchasing power.

Question 9

In a graph of a money demand curve,the _____ is plotted on the vertical axis.

A) interest rate on liquid assets such as short-term GICs
B) interest rate on 10-year Treasury bills
C) rate of inflation
D) rate of return in the stock market

Question 10

The interest earnings one gives up to hold more liquid assets are a(n):

A) opportunity cost.
B) transaction cost.
C) asset of the company.
D) liability of the company.

Question 11

In 2013,Mark Carney,the Governor of the Bank of Canada,was succeeded by:

A) Stephen Poloz.
B) Tiff Macklem.
C) Jim Flaherty.
D) Gordon Fisher.

Question 12

Generally,the more liquid an asset is,the:

A) lower its purchasing power.
B) lower its rate of return.
C) higher its capacity to store value over time.
D) higher its rate of return.

Question 13

The governor of the Bank of Canada during the 2008 financial crisis was:

A) Stephen Poloz.
B) Tiff Macklem.
C) Jim Flaherty.
D) Gordon Fisher.

Question 14

If during 2016 the interest rate on 1-month Treasury bills was 2.5% and during 2017 it was 2%,the opportunity cost of holding money,assuming the inflation rate remained constant,:

A) decreased.
B) became negative.
C) increased.
D) did not change.

Question 15

Short-term interest rates apply to financial assets due within:

A) 24 hours.
B) 3 months.
C) 6 months.
D) 1 year.

Question 16

If a chequing account has an interest rate of 1% and a Treasury bill has an interest rate of 2%,the opportunity cost of holding the chequing account as money is:

A) 0%.
B) 0.02%.
C) 1%.
D) 2%.

Question 17

Stephen Poloz is:

A) Governor of the Bank of Canada.
B) an AIG executive who received large bonuses.
C) a Supreme Court justice who ruled that budget deficits are unconstitutional.
D) a financial adviser of CIBC Wood-Gundy acting as special advisor to the Minister of Finance.

Question 18

When the short-term interest rate _____,the opportunity cost of holding money _____,and the quantity of money individuals want to hold _____.

A) falls;falls;falls
B) falls;falls;rises
C) rises;falls;falls
D) rises;falls;rises

Question 19

The money demand curve is _____ because the opportunity cost of holding money is _____ related to the interest rate.

A) downward sloping;inversely
B) downward sloping;directly
C) upward sloping;inversely
D) upward sloping;directly

Question 20

The short-term interest rate applies to financial assets that mature:

A) in less than a year.
B) within a year or more.
C) within 2 years.
D) within 5 years.

Question 21

An increase in the aggregate price level _____ the demand for money.

A) increases
B) decreases
C) does not affect
D) left-shifts

Question 22

The fact that many stores in Canada have found it economical to accept credit cards has:

A) increased the demand for money.
B) decreased the demand for money.
C) increased the demand for credit card transactions but has not affected the demand for money.
D) decreased the demand for credit card transactions but has not affected the demand for money.

Question 23

A 30% increase in the aggregate price level will:

A) increase money demand by 30%.
B) increase money demand by the money multiplier.
C) decrease money demand by 30%.
D) not affect the demand for money.

Question 24

If inflation increases from 2% to 5%,the money demand curve will:

A) remain constant.
B) remain constant,but the quantity of money demanded will decrease.
C) shift to the left.
D) shift to the right.

Question 25

If the federal government imposes a $5 tax on each ATM transaction,the demand for money will likely:

A) increase.
B) decrease.
C) fluctuate randomly.
D) be unaffected.

Question 26

An increase in interest rates causes the demand for money to:

A) increase.
B) decrease.
C) stay the same.
D) shift to the right.

Question 27

An increase in real aggregate spending will shift the money:

A) demand curve rightwards.
B) demand curve leftwards.
C) supply curve rightwards.
D) supply curve leftwards.

Question 28

An increase in the demand for money would result from a(n):

A) decrease in nominal GDP.
B) decrease in real GDP.
C) decrease in the price level.
D) increase in the price level.

Question 29

Suppose that Canadian banks did not offer interest on chequing accounts until the beginning of the 1980s.If subsequent banking regulations changed,allowing banks to pay interest on chequing account funds,the _____ money _____ and shifted the money demand curve to the _____.

A) supply of;fell;left
B) demand for;fell;left
C) demand for;rose;right
D) supply of;rose;right

Question 30

A 20% increase in the aggregate price level will increase the quantity of money demanded by:

A) 20%.
B) the money multiplier.
C) 10%.
D) half of the money multiplier.

Question 31

A decrease in the demand for money would result from a(n):

A) increase in income.
B) increase in real GDP.
C) decrease in the price level.
D) increase in nominal GDP.

Question 32

If the federal government places a $5 tax on each ATM transaction,there will likely be a:

A) movement up a stationary money demand curve.
B) movement down a stationary money demand curve.
C) shift to the left of the money demand curve.
D) shift to the right of the money demand curve.

Question 33

A decrease in the demand for money would result from a(n):

A) increase in income.
B) decrease in real GDP.
C) increase in the price level.
D) increase in nominal GDP.

Question 34

Improvements in information technology have:

A) shifted the demand for cash to the right.
B) decreased the demand for money.
C) not affected the demand for money.
D) increased the demand for money.

Question 35

Which one event does NOT decrease the demand for money?

A) an increase in the aggregate price level
B) the emergence of ATMs
C) the ability of the stores to process credit cards
D) a fall in real GDP

Question 36

Suppose that Canadian banks did not offer interest on chequing accounts until the beginning of the 1980s.From this we can surmise that before the early 1980s:

A) the opportunity costs of keeping funds in chequing accounts was zero.
B) the opportunity costs of keeping funds in chequing accounts was lower.
C) the opportunity costs of keeping funds in chequing accounts was higher.
D) people kept money under their mattress.

Question 37

Now that fast food places such as McDonald's are accepting credit card payments,the:

A) demand for money has increased.
B) demand for money has decreased.
C) demand for money has not been affected.
D) supply of money has increased,as some cash is unused.

Question 38

The slope of the demand curve for money is:

A) vertical.
B) horizontal.
C) positive.
D) negative.

Question 39

If the aggregate price level doubles:

A) the money supply will also double.
B) neither money demand nor the money supply will rise.
C) both money demand and the money supply will rise proportionally.
D) money demand at any given interest rate will also double.

Question 40

The introduction of ATMs:

A) increased the demand for cash because it made cash easier to get.
B) decreased the demand for cash because it reduced the cost of moving from other assets into cash.
C) did not change the demand for cash because it is proportional to the price level.
D) did not change the demand for cash,as ATMs do not affect public spending habits.

Question 41

Which reason is NOT one for which the Japanese tend to keep large amounts of cash?

A) Banks have invested heavily in credit card technology.
B) Japan has a low crime rate.
C) Interest rates in Japan have been below 1% since the 1990s.
D) Japan's retail sector is dominated by mom-and-pop stores that don't accept credit cards.

Question 42

A high demand for money (as in Japan)would result from:

A) a decrease in nominal GDP and a high crime rate.
B) a decrease in real GDP and a preference from businesses to accept only debit cards.
C) a decrease in the price level.
D) low crime rates and widespread lack of capacity to accept non-cash payments.

Question 43

The demand for money is higher in Japan than in Canada because:

A) telecommunications and information technology is more advanced in Canada than in Japan.
B) Japanese consumers use credit cards more than those in Canada.
C) Japanese interest rates are higher than those in Canada.
D) Japanese interest rates are lower than those in Canada.

Question 44

Suppose that the economy enters a recession and real GDP falls.All else being equal,we would expect:

A) the money demand curve to shift inwards.
B) the money demand curve to shift outwards.
C) a downward movement along a fixed money demand curve.
D) an upward movement along a fixed money demand curve.

Question 45

If the quantity of money demanded is $300 billion and the quantity of money supplied is $200 billion,then the interest rate will:

A) fall.
B) rise.
C) remain unchanged.
D) be in equilibrium.

Question 46

The factors that could cause money demand to shift do NOT include:

A) real aggregate spending.
B) institutional constraints in the banking system.
C) technology of transactions.
D) interest rates.

Question 47

If the equilibrium interest rate in the money market is 5%,then at an interest rate of 2%,the quantity of money demanded is _____ than the quantity of money supplied.

A) less than
B) greater than
C) equal to
D) It is impossible to predict which is greater,money demanded or money supplied.

Question 48

According to the liquidity preference model,if the interest rate rises above its equilibrium value,the quantity of non-monetary interest-bearing financial assets demanded _____,and this leads to a _____ in the interest rate.

A) decreases;rise
B) increases;fall
C) decreases;fall
D) increases;rise

Question 49

In the liquidity preference model,the money supply is represented by a(n):

A) vertical line.
B) upward-sloping curve with a slope of 1/V.
C) horizontal line.
D) downward-sloping curve with a slope of 1/k.

Question 50

The demand for money is higher in Japan than in Canada because:

A) Japanese banks pay interest on chequing accounts.
B) most stores in Japan do not accept credit cards.
C) the ATMs are open all night.
D) the average price level is lower in Japan.

Question 51

The overnight rate is the interest rate on _____,and it is influenced by the _____.

A) loans from the Bank of Canada to banks;Governing Council
B) reserves that banks lend to each other;Governing Council
C) loans from the Bank of Canada to banks;prime minister and the federal government
D) reserves that banks lend to each other;prime minister and the federal government

Question 52

Suppose that a typical basket of goods is now more expensive than it used to be.All else being equal,we would expect:

A) the demand for money to shift inwards.
B) a downward movement along a fixed money demand curve.
C) the demand for money to shift outwards.
D) an upward movement along a fixed money demand curve.

Question 53

If the interest rate on GICs rises from 5% to 10%,the opportunity cost of holding money will _____ and the quantity of money demanded will _____.

A) increase;decrease
B) increase;increase
C) decrease;increase
D) decrease;decrease

Question 54

The demand curve for money will shift to the right because of a:

A) fall in the interest rate.
B) rise in real GDP.
C) rise in the interest rate.
D) fall in real GDP.

Question 55

Changes in _____ will NOT shift the money demand curve.

A) inflation
B) the real GDP
C) the aggregate price level
D) the interest rate

Question 56

Every year more and more purchases are made with credit cards on the Internet.Given this trend,all else being equal,we would expect:

A) the money demand curve to shift outwards.
B) the money demand curve to shift inwards.
C) a downward movement along a fixed money demand curve.
D) an upward movement along a fixed money demand curve.

Question 57

A change in _____ does NOT shift the money demand curve.

A) the interest rate
B) the price level
C) banking technology
D) real GDP

Question 58

The quantity demanded of money is negatively related to _____,and the demand for money is positively related to _____.

A) the interest rate;real GDP
B) the interest rate;unemployment
C) real GDP;the interest rate
D) real GDP;the money supply

Question 59

The liquidity preference model uses the demand for and supply of money to determine:

A) GDP.
B) the price level.
C) the interest rate.
D) nominal output.

Question 60

If the quantity of money demanded is $100 billion and the quantity of money supplied is $200 billion,then the interest rate will:

A) fall.
B) rise.
C) remain unchanged.
D) be in equilibrium.

Question 61

According to the liquidity preference model,the equilibrium interest rate is determined by the:

A) supply of and demand for loanable funds.
B) supply of and demand for money.
C) level of investment spending and saving.
D) International Monetary Fund.

Question 62

Use the following to answer questions:
(Figure: Equilibrium in the Money Market)Refer to Figure: Equilibrium in the Money Market.If the interest rate is above equilibrium,there will be an excess _____ money and the interest rate will _____.

A) demand for;rise
B) supply of;fall
C) demand for;fall
D) supply of;rise

Question 63

Use the following to answer questions:
(Figure: Equilibrium in the Money Market)Refer to Figure: Equilibrium in the Money Market.Equilibrium will occur at interest rate _____ and quantity of money _____.

A) i₂;Q₀
B) i₀;Q₂
C) i₁;Q₁
D) i₁;Q₂

Question 64

A decrease in the supply of money with no change in demand for money will lead to a(n)_____ in the equilibrium quantity of money and a _____ in the equilibrium interest rate.

A) increase;rise
B) increase;fall
C) decrease;rise
D) decrease;fall

Question 65

If the interest rate is below the equilibrium rate,the:

A) quantity of non-monetary financial assets supplied is greater than the quantity demanded.
B) quantity of non-monetary financial assets demanded is greater than the quantity supplied.
C) quantity of money demanded is equal to the quantity of money supplied.
D) quantity of money supplied is greater than the quantity of money demanded.

Question 66

An increase in the demand for money with no change in supply will lead to _____ in the equilibrium quantity of money and _____ in the equilibrium interest rate.

A) no change;a rise
B) no change;a fall
C) a decrease;a rise
D) an increase;a fall

Question 67

If the equilibrium interest rate in the money market is 5%,at an interest rate of 2% the quantity of non-monetary interest-bearing financial assets demanded is _____ the quantity supplied.

A) less than
B) greater than
C) equal to
D) irrelevant to

Question 68

Use the following to answer questions:
(Figure: Changes in the Money Supply)Refer to Figure: Changes in the Money Supply.If the supply of money shifts from MS₁ to MS₂,the Bank of Canada must have _____ Treasury bills in the open market.

A) sold
B) bought
C) issued new
D) borrowed

Question 69

An increase in the supply of money with no change in demand will lead to a(n)_____ in the equilibrium quantity of money and a _____ in the equilibrium interest rate.

A) increase;rise
B) increase;fall
C) decrease;rise
D) decrease;fall

Question 70

Suppose that the Bank of Canada buys Treasury bills.We can expect this transaction to _____ the money supply,_____ Treasury bill prices,and _____ interest rates.

A) reduce;increase;lower
B) increase;lower;lower
C) increase;raise;lower
D) reduce;reduce;raise

Question 71

The idea that the interest rate is determined by the supply and demand for money is known as:

A) the liquidity preference model.
B) the quantity theory of money.
C) the monetarist theory.
D) the loanable funds theory.

Question 72

At interest rates below equilibrium,people will want to:

A) shift their wealth into Treasury bills.
B) shift their wealth into money.
C) decrease the amount of money that they hold.
D) make no changes to their assets.

Question 73

If the Bank of Canada wants to lower the interest rate,it will:

A) decrease the money supply.
B) increase the money supply.
C) keep the money supply unchanged.
D) mandate a lower interest rate.

Question 74

If the equilibrium interest rate in the money market is 5%,then at an interest rate of 2% sellers of interest-bearing financial assets _____ interest rates to find willing buyers.

A) must offer higher
B) can offer lower
C) can offer 2%
D) Sales of financial assets do not depend on the rate offered.

Question 75

The money supply curve is:

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

Question 76

Use the following to answer questions:
(Figure: Changes in the Money Supply)Refer to Figure: Changes in the Money Supply.If the Bank of Canada has a policy to increase the supply of money,hence to lower the interest rate from 6% to 4%,it is accomplished by an action that ________ Treasury bills.

A) lowers the price of
B) increases the interest rate on
C) increases the demand for
D) increases the supply of

Question 77

Use the following to answer questions:
(Figure: Equilibrium in the Money Market)Refer to Figure: Equilibrium in the Money Market.If the rate of interest is below equilibrium,there will be an excess _____ money and the interest rate will _____.

A) demand for;rise
B) supply of;fall
C) demand for;fall
D) supply of;rise

Question 78

According to the liquidity preference model:

A) an increase in the money supply lowers the equilibrium rate of interest.
B) a decrease in the money supply lowers the equilibrium rate of interest.
C) the money supply curve is a horizontal line.
D) the demand for money curve is a vertical line.

Question 79

Suppose that the Bank of Canada sells Treasury bills.We can expect this transaction to _____ the money supply,_____ Treasury bill prices,and _____ interest rates.

A) reduce;increase;lower
B) increase;lower;lower
C) increase;raise;lower
D) reduce;reduce;raise

Question 80

A sale of Treasury bills by the Bank of Canada _____ interest rates and _____ the money supply.

A) raises;increases
B) raises;reduces
C) lowers;reduces
D) lowers;increases