Question 1

Which of the following is an example of an expansionary monetary policy?

Accepted Answer

A)   Government purchases of goods and services decline. 
B)   Government purchases of goods and services increase. 
C)   The bank rate is lowered. 
D)   The bank rate is increased.

Question 2

In order for interest rates to remain stable during economic contractions, what action should monetary authorities take?

Accepted Answer

A)   They should reduce the demand for money. 
B)   They should match the rate of growth in the money supply to the rate of growth in nominal GDP. 
C)   They should reduce the rate of growth in the money supply to below the rate of growth in the demand for money. 
D)   They should slow the growth of the money supply, or even let the money supply shrink.

Question 3

How does a reduction in money supply affect the aggregate demand curve?

Accepted Answer

A)   The curve shifts leftward, lowering real GDP and the price level. 
B)   The curve shifts leftward, raising real GDP and the price level. 
C)   The curve shifts rightward, lowering real GDP but raising the price level. 
D)   The curve shifts rightward, raising real GDP and the price level.

Question 4

Suppose the money supply is $1,000, the price level is 3, and real income (or output)  is $5,000.What is the velocity of money?

Accepted Answer

A)   0.2 
B)   0.6 
C)   1.67 
D)   15

Question 5

Which of the following would cause a downward movement along the money demand curve?

Accepted Answer

A)   an increase in the interest rate 
B)   a decrease in the interest rate 
C)   a decrease in real GDP 
D)   an increase in real GDP

Question 6

Suppose the money supply decreases.How is GDP affected?

Accepted Answer

A)   GDP increases because the resulting increase in the interest rate leads to a decrease in investment. 
B)   GDP increases because the resulting decrease in the interest rate leads to an increase in investment. 
C)   GDP decreases because the resulting increase in the interest rate leads to a decrease in investment. 
D)   GDP decreases because the resulting decrease in the interest rate leads to an increase in investment.

Question 7

Suppose the economy is in long-run equilibrium at the level of potential output.What will be the long-run effect of an expansionary monetary policy?

Accepted Answer

A)   a higher price level 
B)   a lower price level 
C)   a higher level of real output 
D)   a lower level of real output

Question 8

Suppose the short-run aggregate supply curve is positively sloped and the money supply increases.What is the effect on aggregate demand?

Accepted Answer

A)   Aggregate demand increases, which increases real GDP and increases the price level. 
B)   Aggregate demand increases, which decreases real GDP and decreases the price level. 
C)   Aggregate demand falls, which increases real GDP and increases the price level. 
D)   Aggregate demand falls, which decreases real GDP and increases the price level.

Question 9

What is the opportunity cost of holding money rather than some other financial asset?

Accepted Answer

A)   forgone interest income 
B)   forgone utility 
C)   forgone leisure 
D)   forgone profit

Question 10

If the price level rises, all things equal, how will the demand for money be affected?

Accepted Answer

A)   Demand for money will increase. 
B)   Demand for money will decrease. 
C)   Quantity of money demanded will increase. 
D)   Quantity of money demanded will decrease.

Question 11

In order for monetary policy to be effective in changing planned investment spending, what must investment be sensitive to?

Accepted Answer

A)   interest rates 
B)   gross domestic product 
C)   consumption 
D)   the spending multiplier

Question 12

What does an increase in the money supply lead to?

Accepted Answer

A)   a decline in interest rates, an increase in investment, and an increase in aggregate demand 
B)   a decline in interest rates, a decrease in investment, and an increase in aggregate demand 
C)   a decline in interest rates, an increase in investment, and a decline in aggregate demand 
D)   an increase in interest rates, an increase in investment, and an increase in aggregate demand

Question 13

In 1975 the Bank of Canada announced that it would focus on a particular economic factor.What was that factor?

Accepted Answer

A)   interest rates 
B)   unemployment rates 
C)   the long-run equilibrium price level 
D)   the growth of the money supply

Question 14

Suppose the interest rate increases.How are opportunity cost of holding money and quantity of money demanded affected?

Accepted Answer

A)   The opportunity cost of holding money increases, therefore the quantity of money demanded increases. 
B)   The opportunity cost of holding money increases, therefore the quantity of money demanded decreases. 
C)   The opportunity cost of holding money decreases, therefore the quantity of money demanded increases. 
D)   The opportunity cost of holding money decreases, therefore the quantity of money demanded decreases.

Question 15

Suppose the Bank of Canada sells Canadian government securities in order to drain reserves from banks.Which of the following will probably occur?

Accepted Answer

A)   The interest rate will fall, and the quantity of money demanded will increase. 
B)   The interest rate will rise, and the quantity of money demanded will fall. 
C)   The money supply will decrease, and the interest rate will fall. 
D)   The money supply will increase, and the interest rate will fall.

Question 16

In order for interest rates to remain stable during economic expansions, how should the money supply change?

Accepted Answer

A)   The money supply should decrease at a faster rate than money demand. 
B)   The money supply should grow at the same rate as money demand. 
C)   The money supply should grow at a faster rate than money demand. 
D)   The money supply should grow at a slower rate than money demand.

Question 17

Exhibit 14-5
 
-Refer to the graph in the exhibit.Suppose the economy is in equilibrium, where AD = SRAS.How will the price level be affected, assuming no monetary action is taken?

Accepted Answer

A)   Prices will increase. 
B)   Prices will decrease. 
C)   Prices will remain as they are indefinitely. 
D)   Prices will likely go into negative territory.

Question 18

What does the money demand curve describe?

Accepted Answer

A)   how the quantity of money demanded varies with nominal GDP 
B)   how the quantity of money demanded varies with real GDP 
C)   how the quantity of money demanded varies with the price level 
D)   how the quantity of money demanded varies with the interest rate

Question 19

Which monetary policy would be appropriate for closing a recessionary gap?

Accepted Answer

A)   a tax cut 
B)   a decrease in government purchases 
C)   the sale of Canadian government securities by the Bank of Canada 
D)   the purchase of government securities by the Bank of Canada

Question 20

Suppose real output and velocity are stable and predictable.What simple relationship can be derived by the equation of exchange?

Accepted Answer

A)   a relationship between the money supply and the price level 
B)   a relationship between the money supply and the interest rate 
C)   a relationship between the money supply and the foreign exchange rate 
D)   a relationship between velocity and real GDP

Exam 15: Monetary Theory and Policy in an Open Economy

What is the opportunity cost of holding money rather than some other financial asset?

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In order for monetary policy to be effective in changing planned investment spending, what must investment be sensitive to?

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Suppose the interest rate increases.How are opportunity cost of holding money and quantity of money demanded affected?

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Suppose real output and velocity are stable and predictable.What simple relationship can be derived by the equation of exchange?

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Which monetary policy would be appropriate for closing a recessionary gap?

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How does a reduction in money supply affect the aggregate demand curve?

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Exhibit 14-5 -Refer to the graph in the exhibit.Suppose the economy is in equilibrium, where AD = SRAS.How will the price level be affected, assuming no monetary action is taken?

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In order for interest rates to remain stable during economic expansions, how should the money supply change?

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Which of the following would cause a downward movement along the money demand curve?

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Suppose the economy is in long-run equilibrium at the level of potential output.What will be the long-run effect of an expansionary monetary policy?

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In order for interest rates to remain stable during economic contractions, what action should monetary authorities take?

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In 1975 the Bank of Canada announced that it would focus on a particular economic factor.What was that factor?

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Which of the following is an example of an expansionary monetary policy?

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What does the money demand curve describe?

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If the price level rises, all things equal, how will the demand for money be affected?

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Suppose the money supply decreases.How is GDP affected?

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Suppose the Bank of Canada sells Canadian government securities in order to drain reserves from banks.Which of the following will probably occur?

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Suppose the short-run aggregate supply curve is positively sloped and the money supply increases.What is the effect on aggregate demand?

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Suppose the money supply is $1,000, the price level is 3, and real income (or output) is $5,000.What is the velocity of money?

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What does an increase in the money supply lead to?

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