Question 1

Which one of the following would be most compatible with the goals of the government to both improve economic growth and reduce the trade deficit?

Accepted Answer

A)   a restrictive monetary policy
B)   an expansionary monetary policy
C)   a contractionary fiscal policy
D)   an expansionary fiscal policyE) A) and B)
F) A) and C)

Question 2

t is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. If the interest rate was 4 percent, the asset demand for money would be: A)  $125. B)  $175. C)  $200. D)  $225." class="answers-bank-image d-inline" rel="preload" >
-Refer to the above graph, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. If the interest rate was 4 percent, the asset demand for money would be:

Accepted Answer

A)   $125.
B)   $175.
C)   $200.
D)   $225.E) B) and C)
F) A) and B)

Question 3

The economy is experiencing high unemployment and a low rate of economic growth and the Bank of Canada decides to pursue an expansionary monetary policy. Which action by the Bank of Canada would be most consistent with this policy?

Accepted Answer

A)   buying government securities
B)   selling government securities
C)   raising the desired reserve ratio
D)   raising the bank rateE) A) and B)
F) B) and C)

Question 4

A restrictive monetary policy reduces investment spending and shifts the economy's aggregate demand curve to the right.

Accepted Answer

A) True 
 B)False

Question 5

The economy is experiencing high unemployment and a low rate of economic growth and the Bank of Canada decides to pursue an expansionary monetary policy. Which action by the Bank of Canada would be most consistent with this policy?

Accepted Answer

A)   buying government securities
B)   selling government securities
C)   raising the desired reserve ratio
D)   raising the bank rateE) B) and D)
F) B) and C)

Question 6

The bank rate is the rate of interest at which

Accepted Answer

A)   chartered banks lend to large corporations.
B)   the Bank of Canada lends to large corporations.
C)   savings and loan associations lend to home builders.
D)   the Bank of Canada lends to chartered banks.E) C) and D)
F) A) and C)

Question 7

The major purpose of the Bank of Canada buying and selling government securities in open market operations is to:

Accepted Answer

A)   achieve the desired interest rate.
B)   raise money for government spending.
C)   reduce the amount of government securities it holds.
D)   raise money for a future tax cut.E) A) and B)
F) A) and D)

Question 8

Assume the Bank of Canada creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of:

Accepted Answer

A)   cyclical asymmetry.
B)   a restrictive monetary policy.
C)   the net export effect.
D)   a decrease in the velocity of money.E) C) and D)
F) None of the above

Question 9

Because of the liquidity trap, the Bank of Canada's creation of billions of dollars in excess reserves during the great recession had:

Accepted Answer

A)   little or no effect on lending by the chartered banks.
B)   a significant effect on lending by the chartered banks.
C)   the effect of increasing the overnight lending rate.
D)   the effect of increasing the bank rate.E) B) and D)
F) C) and D)

Question 10

Which of the following is correct?

Accepted Answer

A)   The asset demand for money is downward sloping because the opportunity cost of holding money declines as the interest rate rises.
B)   The asset demand for money is downward sloping because the opportunity cost of holding money increases as the interest rate rises.
C)   The transactions demand for money is downward sloping because the opportunity cost of holding money varies inversely with the interest rate.
D)   The asset demand for money is downward sloping because bond prices and the interest rate are directly related.E) C) and D)
F) B) and C)

Question 11

The following information for a bond having no expiration date: bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent.
-Refer to the above information. If the price of this bond increases to $1,250, the interest rate in effect will:

Accepted Answer

A)   fall to 9 percent.
B)   fall to 8 percent.
C)   rise to 11 percent.
D)   rise to 12 percent.E) A) and B)
F) A) and C)

Question 12

m and Sm, an interest rate of i3 is not sustainable because: A)  the supply of bonds in the bond market will decline and the interest rate will rise. B)  the supply of bonds in the bond market will increase and the interest rate will decline. C)  the demand for bonds in the bond market will decline and the interest rate will rise. D)  the demand for bonds in the bond market will rise and the interest rate will fall." class="answers-bank-image d-inline" rel="preload" >
-Refer to the above market for money diagram. Given Dm and Sm, an interest rate of i3 is not sustainable because:

Accepted Answer

A)   the supply of bonds in the bond market will decline and the interest rate will rise.
B)   the supply of bonds in the bond market will increase and the interest rate will decline.
C)   the demand for bonds in the bond market will decline and the interest rate will rise.
D)   the demand for bonds in the bond market will rise and the interest rate will fall.E) A) and C)
F) None of the above

Question 13

-A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000. If the price of this bond decreases by $2000, the interest rate in effect will:

Accepted Answer

A)   decrease by 1.5 percentage points.
B)   decrease by 2.5 percentage points.
C)   increase by 1.5 percentage points.
D)   increase by 2.5 percentage points.E) A) and B)
F) A) and C)

Question 14

Open-market operations change:

Accepted Answer

A)   the size of the monetary multiplier, but not chartered bank reserves.
B)   chartered bank reserves, but not the size of the monetary multiplier.
C)   neither chartered bank reserves nor the size of the monetary multiplier.
D)   both chartered bank reserves and the size of the monetary multiplier.E) B) and D)
F) B) and C)

Question 15

If during a certain period the Bank of Canada's policy target was to stabilize the money supply, we would expect:

Accepted Answer

A)   less inflation than if the Bank of Canada's policy was to stabilize interest rates.
B)   tax revenues to fall.
C)   interest rates to be quite volatile.
D)   interest rates to be unusually stable.E) B) and D)
F) B) and C)

Question 16

-The price of a bond having no expiration date is originally $8000 and has a fixed annual interest payment of $800. A fall in the price of the bond by $3,000 will provide a new buyer of the bond an interest rate of:

Accepted Answer

A)   10 percent.
B)   12 percent.
C)   14 percent.
D)   16 percent.E) None of the above
F) A) and B)

Question 17

Which of the following is an expansionary monetary policy?

Accepted Answer

A)   Increase the money supply to shift the aggregate demand curve rightward.
B)   Increase the money supply to shift the aggregate demand curve leftward.
C)   Increase the money supply to shift the aggregate supply curve leftward.
D)   Decrease the money supply to shift the aggregate demand curve leftward.E) A) and B)
F) A) and C)

Question 18

The easy money of Japan during the 1990s and early 2000s:

Accepted Answer

A)   was effective in reducing high inflation.
B)   was effective in stimulating the economy.
C)   suffered from cyclical asymmetry.
D)   resulted in an increase in aggregate supply.E) A) and B)
F) A) and C)

Question 19

Assume that the Bank of Canada's policy is to keep the price level from either rising or falling. If aggregate supply increases in the economy, the Bank of Canada:

Accepted Answer

A)   will have to increase interest rates to keep the price level from falling.
B)   will have to reduce the money supply to keep the price level from rising.
C)   will have to increase the money supply to keep the price level from falling.
D)   can keep the price level stable without altering the money supply or interest rate.E) A) and B)
F) A) and C)

Question 20

The purpose of an expansionary monetary policy is to shift the:

Accepted Answer

A)   aggregate expenditures curve downward.
B)   aggregate demand curve rightward.
C)   aggregate supply curve leftward.
D)   investment demand curve leftward.E) A) and B)
F) A) and C)

Exam 13: Interest Rates and Monetary Policy

A restrictive monetary policy reduces investment spending and shifts the economy's aggregate demand curve to the right.

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The following information for a bond having no expiration date: bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent. -Refer to the above information. If the price of this bond increases to $1,250, the interest rate in effect will:

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The purpose of an expansionary monetary policy is to shift the:

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Which one of the following would be most compatible with the goals of the government to both improve economic growth and reduce the trade deficit?

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The major purpose of the Bank of Canada buying and selling government securities in open market operations is to:

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The economy is experiencing high unemployment and a low rate of economic growth and the Bank of Canada decides to pursue an expansionary monetary policy. Which action by the Bank of Canada would be most consistent with this policy?

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-Refer to the above market for money diagram. Given Dm and Sm, an interest rate of i3 is not sustainable because:

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-A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000. If the price of this bond decreases by $2000, the interest rate in effect will:

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-The price of a bond having no expiration date is originally $8000 and has a fixed annual interest payment of $800. A fall in the price of the bond by $3,000 will provide a new buyer of the bond an interest rate of:

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Which of the following is correct?

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The bank rate is the rate of interest at which

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Assume the Bank of Canada creates excess reserves in the banking system by buying government bonds, but banks do not make more loans because economic conditions are bad. This situation is a problem of:

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The economy is experiencing high unemployment and a low rate of economic growth and the Bank of Canada decides to pursue an expansionary monetary policy. Which action by the Bank of Canada would be most consistent with this policy?

Correct AnswerverifiedShow Answer

Which of the following is an expansionary monetary policy?

Correct AnswerverifiedShow Answer

Because of the liquidity trap, the Bank of Canada's creation of billions of dollars in excess reserves during the great recession had:

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The easy money of Japan during the 1990s and early 2000s:

Correct AnswerverifiedShow Answer

If during a certain period the Bank of Canada's policy target was to stabilize the money supply, we would expect:

Correct AnswerverifiedShow Answer

Assume that the Bank of Canada's policy is to keep the price level from either rising or falling. If aggregate supply increases in the economy, the Bank of Canada:

Correct AnswerverifiedShow Answer

-Refer to the above graph, in which Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. If the interest rate was 4 percent, the asset demand for money would be:

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Open-market operations change:

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-Refer to the above market for money diagram. Given D_m and S_m, an interest rate of i₃ is not sustainable because:

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-Refer to the above graph, in which D_t is the transactions demand for money, D_m is the total demand for money, and S_m is the supply of money. If the interest rate was 4 percent, the asset demand for money would be:

Correct Answer
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