Question 1

Over what period of time is the liquidity-preference theory most relevant,and what does it suppose?

Accepted Answer

A) short run; it supposes that the price level adjusts to bring money supply and money demand into balance 
B) short run; it supposes that the interest rate adjusts to bring money supply and money demand into balance 
C) long run; it supposes that the price level adjusts to bring money supply and money demand into balance 
D) long run; it supposes that the interest rate adjusts to bring money supply and money demand into balance

Question 2

Explain why the interest rate is the opportunity cost of holding currency.What is the benefit of holding currency?

Accepted Answer

The answer of Explain why the interest rate is the...

Question 3

In this question,we try to find out whether using the bank rate as a monetary policy tool is consistent with the liquidity-preference theory.Theoretically,when the Bank of Canada changes the bank rate and implicitly the money supply,the market interest rate would change to become equal to the bank rate AND to equate the new money supply with the money demand.But is this double role of the market interest rate possible? Let us give an example and see what happens.Assume the money demand curve is MD=150 - 15r,and the money supply curve is MS = 100 - 10R,where r is the market interest rate and R is the bank rate announced by the Bank of Canada.
a)Show that,for a given value of bank rate R,the equilibrium market rate is different from R.What does this example show?
b)Given the money demand equation MD=150 - 15r,find a money supply equation such that,for any value of R,the equilibrium market interest rate r is equal to R.
c)For the money supply equation MS = 100 - 10R and a given bank rate R,show how the market could balance at the market interest rate r = R (show what the Bank of Canada should do to balance the money market).
d)What have we learned from this exercise?

Accepted Answer

The answer of In this question,we try to find out...

Question 4

Which of the following defines the government purchases multiplier?

Accepted Answer

A) MPC 
B) 1 - MPC 
C) 1/MPC 
D) 1/(1 - MP
C)

Question 5

According to liquidity-preference theory,when would the money-supply curve shift right?

Accepted Answer

A) if the money-demand curve shifted right 
B) only if the Bank of Canada chose to increase the money supply 
C) if the interest rate increased 
D) if the price level fell or the interest rate decreased

Question 6

If there is crowding out,which of the following might decrease as government expenditures increase?

Accepted Answer

A) the overall change in real GDP 
B) the demand for money curve 
C) interest rates 
D) the demand for capital goods

Question 7

Which of the following is the most liquid asset?

Accepted Answer

A) capital goods 
B) stocks and bonds with a low risk 
C) stocks and bonds with a high risk 
D) funds in a chequing account

Question 8

Figure 15-1
 
-Refer to the Figure 15-1.At an interest rate of 4 percent,how much is the excess money demand or supply?

Accepted Answer

A)  There is an excess money demand equal to the distance between a and b. 
B)  There is an excess money demand equal to the distance between b and c. 
C)  There is an excess money supply equal to the distance between b and a. 
D)  There is an excess money supply equal to the distance between c and b.

Question 9

In recent years,the Bank of Canada has conducted policy by setting a target for which of the following?

Accepted Answer

A) bank reserves 
B) the monetary growth rate 
C) the exchange rate 
D) the bank rate

Question 10

According to liquidity-preference theory,how does a decrease in the price level affect the interest rate and output demanded,respectively?

Accepted Answer

A) The interest rate increases, and output demanded increases. 
B) The interest rate increases, and output demanded decreases. 
C) The interest rate decreases, and output demanded increases. 
D) The interest rate decreases, and output demanded decreases.

Question 11

The economy is in long-run equilibrium.Suppose that automatic teller machines become cheaper and more convenient to use,and as a result the demand for money falls.Other things being equal,what would we expect will happen to the price level and real GDP in the short and long run?

Accepted Answer

A) In the short run, the price level and real GDP would rise, but in the long run they would both be unaffected. 
B) In the short run, the price level and real GDP would rise, but in the long run the price level would rise and real GDP would be unaffected. 
C) In the short run, the price level and real GDP would fall, but in the long run they would both be unaffected. 
D) In the short run, the price level and real GDP would fall, but in the long run the price level would fall and real GDP would be unaffected.

Question 12

Which of the following is consistent with the supply-side theories?

Accepted Answer

A) When there is a recession, the Bank of Canada should decrease the money supply. 
B) A shift in aggregate supply leads to a permanent increase in the natural rate of output. 
C) The government should periodically increase the minimum wage and unemployment insurance benefits. 
D) Aggregate demand does not shift in the short run.

Question 13

An increase in the price level shifts the money-demand curve to the left,making interest rates rise.

Accepted Answer

A) True 
 B)False

Question 14

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

Accepted Answer

The answer of Describe the process in the money market...

Question 15

When the government reduces taxes,all other things being equal,which of the following decrease?

Accepted Answer

A) consumption 
B) take-home pay 
C) household saving 
D) government surplus

Question 16

The government buys a bridge.The owner of the company that builds the bridge pays her workers.The workers increase their spending.Firms that the workers buy goods from increase their output.Which of the following does this type of effect on spending illustrate?

Accepted Answer

A) the multiplier effect 
B) the crowding-out effect 
C) the marginal propensity to consume effect 
D) the catch-up effect

Question 17

Figure 15-1
 
-Refer to the Figure 15-1.Which of the following will happen if the current interest rate is 2 percent?

Accepted Answer

A) There will be excess money supply. 
B) People will sell more bonds, which drives interest rates up. 
C) As the money market moves to equilibrium, people will buy more goods. 
D) People will sell more bonds, which drives the interest rates down.

Question 18

According to the theory of liquidity preference,what does an increase in the price level cause the interest rate and investment to do?

Accepted Answer

A) It causes both the interest rate and investment to rise. 
B) It causes both the interest rate and investment to fall. 
C) It causes the interest rate to rise and investment to fall. 
D) It causes the interest rate to fall and investment to rise.

Question 19

Figure 15-2
 
-Refer to the Figure 15-2.Which of the following can happen in a closed economy?

Accepted Answer

A)  Unemployment falls as the economy moves from a to b. 
B)  Fiscal policy is ineffective to move the economy from b to a. 
C)  If the economy is left alone, then as the economy moves from b to long-run equilibrium, the price level will increase. 
D)  An increase in money supply increases both output and prices.

Question 20

Which of the following best defines the multiplier effect?

Accepted Answer

A) the multiplied impact on the money supply of a given increase in government purchases 
B) the multiplied impact on tax revenues of a given increase in government purchases 
C) the multiplied impact on investment of a given increase in interest rates 
D) the multiplied impact on aggregate demand of a given increase in government purchases

Exam 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand