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How do open-market purchases affect the price level and real GDP?


A) They increase the price level and real GDP.
B) They decrease the price level and real GDP.
C) They increase the price level and decrease real GDP.
D) They decrease the price level and increase real GDP.

E) A) and C)
F) A) and B)

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Which of the following is NOT a potential tool a central bank would have if the zero lower bound has been reached?


A) raising inflation expectations
B) quantitative easing
C) increasing the target inflation rate
D) increasing tax rates

E) All of the above
F) C) and D)

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Which of the following is the most liquid asset?


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

E) A) and B)
F) None of the above

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When the Bank of Canada buys government bonds, how do the reserves of the banking system change and what happens to the money supply?


A) The reserves increase, so the money supply increases.
B) The reserves increase, so the money supply decreases.
C) The reserves decrease, so the money supply increases.
D) The reserves decrease, so the money supply decreases.

E) A) and B)
F) B) and C)

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Which of the following is a cost of having a flexible exchange rate?


A) uncertainty with export pricing for international markets
B) shortages of domestically produced goods
C) constantly high interest rates
D) the permanent shift left of the aggregate demand curve

E) None of the above
F) B) and D)

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Compare the classical model of money market with the liquidity preference model. a. Are they consistent with each other? b. Draw the classical money-demand curve in a Price-Quantity-of-money diagram. c. How does your money-demand curve shift when income, Y, increases? d. Use your classical money-demand diagram to derive an aggregate-demand curve.

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a. Both models use a money-demand and a ...

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If there is excess money supply, what will people do and what happens to the interest rate?


A) People will deposit more into interest-bearing accounts, and the interest rate will fall.
B) People will deposit more into interest-bearing accounts, and the interest rate will rise.
C) People will withdraw money from interest-bearing accounts, and the interest rate will fall.
D) People will withdraw money from interest-bearing accounts, and the interest rate will rise.

E) C) and D)
F) B) and C)

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The theory of liquidity preference assumes that the nominal supply of money is determined by which of the following?


A) the level of real GDP
B) the rate of inflation
C) the Ministry of Finance
D) the central bank

E) B) and C)
F) A) and D)

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Figure 15-1 Figure 15-1 -Refer to Figure 15-1. At which interest rate is there an excess money demand? A) 2 percent B) 3 percent C) 4 percent D) 5 percent -Refer to Figure 15-1. At which interest rate is there an excess money demand?


A) 2 percent
B) 3 percent
C) 4 percent
D) 5 percent

E) B) and D)
F) B) and C)

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


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.

E) A) and B)
F) A) and C)

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C

Which theory is the most appropriate to analyze the effects of interest rate changes in the short run?


A) the aggregate-demand and aggregate-supply theory
B) the classical theory
C) the liquidity-preference theory
D) the general theory of employment

E) B) and D)
F) B) and C)

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When the Bank of Canada increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand so the aggregate-demand curve shifts to the right.

A) True
B) False

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According to liquidity preference theory, when do people demand fewer goods and services?


A) when the price level or interest rate increase
B) when the price level or interest rate decrease
C) when the price level increases or the interest rate decreases
D) when the price level decreases or the interest rate increases

E) B) and C)
F) A) and D)

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A

Which of the following shifts money demand to the left?


A) an increase in the price level and the interest rate
B) an increase in the price level and a decrease in the interest rate
C) a decrease in the price level but not a change in the interest rate
D) an increase in the interest rate but not a change in the price level

E) A) and D)
F) B) and C)

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When the Bank of Canada lowers the growth rate of the money supply, what must it take into account?


A) the short-run effects on production and inflation
B) the long-run effects on production and inflation
C) the long-run effect on production and the short-run effect on inflation
D) the short-run effect on production and the long-run effect on inflation

E) All of the above
F) B) and D)

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How does the interest rate change when the price level falls and when the money supply falls?


A) The interest rate rises both when the price level falls and when the money supply falls.
B) The interest rate rises when the price level falls and falls when the money supply falls.
C) The interest rate falls when the price level falls and rises when the money supply falls.
D) The interest rate falls both when the price level falls and when the money supply falls.

E) A) and B)
F) B) and C)

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According to the theory of liquidity preference, how is the money supply affected by the interest rate?


A) inversely
B) negatively
C) not affected
D) directly

E) A) and D)
F) A) and C)

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According to liquidity-preference theory, if the quantity of money supplied is greater than the quantity demanded, what will happen to the interest rate and the quantity of money demanded?


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

E) A) and B)
F) A) and C)

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D

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

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The nominal interest rate on currency is...

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For approximately how long has the Bank of Canada been maintaining a flexible exchange rate policy?


A) 5 years
B) 10 years
C) 50 years
D) 100 years

E) None of the above
F) A) and B)

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