ECON 23-32 - Assignment Essays

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Which of the following are the defining assumptions of the short run in macroeconomics?
a. Factor prices are exogenous, and technology and factor supplies are changing.
b. Factor prices adjust to output gaps, and technology and factor supplies are constant.
c. Factor prices are exogenous, and technology and factor supplies are constant.
d. Factor prices adjust to output gaps, and technology and factor prices are changing.
e. Factor prices are exogenous, technology and factor prices are endogenous.

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Which of the following are the defining assumptions of the long run in macroeconomics?
a. Factor prices are exogenous, and technology and factor supplies are changing.
b. Factor prices adjust to output gaps, and technology and factor supplies are constant.
c. Factor prices are exogenous, and technology and factor supplies are constant.
d. Factor prices have fully adjusted to output gaps, and technology and factor supplies are changing.
e. Factor prices are exogenous, technology and factor prices are exogenous.

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In macroeconomic analysis, the assumption that potential output (Y*) is changing is a characteristic of
a. The short run.
b. The adjustment process.
c. The national accounts model.
d. The long run.
e. The business cycle model.

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Which of the following is a defining assumption of the AD/AS macro model in the short run?
a. Factor supplies are assumed to be flexible
b. Technology used in production is endogenous and variable
c. The level of potential output fluctuates with the price level
d. Factor prices are assumed to be exogenous
e. Firms cannot operate near their normal capacity

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In the basic AD/AS model, which of the following is a defining assumption of the adjustment process that takes the economy from the short run to the long run?
a. Factor supplies are assumed to be varying
b. Technology used in production is endogenous
c. The level of potential output is changing
d. Factor prices respond to output gaps
e. Firms cannot operate near their normal capacity

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Which of the following is a defining assumption of the AD/AS macro model in the long run?
a. Factor supplies are assumed to be fixed
b. Technology used in production is constant
c. The level of potential output is constant
d. Factor prices are assumed to be fixed
e. Changes in real GDP are determined by the changes in potential output

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When we study the adjustment process in macroeconomics, what assumption are we making about potential output, Y*?
a. Potential output is adjusting to changes in factor prices
b. Potential output is adjusting to changes in factor supplies
c. Potential output is adjusting to changes in technology
d. Potential output is constant
e. Potential output is not relevant to the analysis of the adjustment process

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When we study the adjustment process in macroeconomics, we are analyzing the process by which
a. Potential output is adjusting to changes in factor supplies
b. Potential output is adjusting to changes in technology
c. Real GDP returns to the level of potential output.
d. Real GDP expands over time.
e. Changes in technology affect the level of real GDP.

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The economy's output gap is defined as the
a. Difference between actual GDP and potential GDP.
b. Level of total output that would be produced if capacity utilization is at its normal rate.
c. Difference between actual national income and desired aggregate expenditure.
d. Result of economic growth.
e. Difference between nominal GDP and real GDP.

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Which of the following best describes the concept of potential output?
a. The total output that can be produced when all factors of production (land, labour, and capital) are fully employed.
b. The total output that can be produced when the economy is in short-run economic equilibrium.
c. The total output that can be produced when all productive resources (land, labour, and capital) are used at their maximum capacity.
d. The total output that could be produced in the future when technological advances allow for a higher level of output.
e. The total output that could be produced if no productive resource (land, labour, and capital) was ever left idle.

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An inflationary output gap occurs when
a. Actual GDP exceeds potential GDP.
b. Nominal GDP exceeds real GDP.
c. Demand for labour services is very low.
d. Equilibrium national income is below potential national income.
e. Potential GDP exceeds actual GDP.

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An inflationary output gap implies that
a. The demand for all factor services will be relatively low.
b. The intersection of AD and AS occurs at real GDP below potential output.
c. The economy's resources are being used beyond their normal capacity.
d. There is a pressure for wages to decrease.
e. There is excess supply of most factors of production.

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A recessionary output gap implies that
a. The demand for all factor services will be relatively low.
b. The intersection of AD and AS occurs where real GDP exceeds potential output.
c. The economy's resources are being used at more than their normal capacity.
d. There is upward pressure on wages.
e. There is excess demand for most factors of production.

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An adjustment "asymmetry" in aggregate supply is
a. The concave shape of the AS curve.
b. The convex shape of the AS curve.
c. The difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps).
d. The difference in speed of increases in factor prices versus wage rates.
e. The difference in speed of decreases in output levels.

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An inflationary output gap would generate which of the following conditions in the economy?
a. Firms are making low profits.
b. Workers have relatively more bargaining power with employers.
c. There is an unusually small demand for labour.
d. There is downward pressure on wages.
e. There is much idle capacity.

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Consider the AD/AS macro model. An important asymmetry in the behaviour of aggregate supply is the
a. Changing slope of the aggregate demand curve.
b. Difference between actual and potential output.
c. Different relative sizes of inflationary versus recessionary gaps.
d. Economy's path of potential output as a result of labour force growth.
d. Eifferent speeds at which factor prices adjust to positive and negative output gaps.

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An inflationary output gap is characterized by
a. Falling prices.
b. Constant prices.
c. Real output that varies one-for-one with aggregate demand.
d. Real GDP exceeding potential output.
e. Real GDP falling below potential output.

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A recessionary output gap is characterized by
a. Rising prices.
b. Constant prices.
c. Real output that varies one-for-one with aggregate demand.
d. Real GDP exceeding potential output.
e. Real GDP falling below potential output.

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An economy may not quickly and automatically eliminate a recessionary output gap because wages
a. Never change in response to changes in the demand for labour.
b. Have a tendency to be sticky downward.
c. Have a tendency to fall too quickly.
d. Have a tendency to rise too quickly.
e. Are flexible but prices have a tendency to be sticky downward.

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Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap?
a. Falling prices
b. Increasing investment
c. Declining government purchases
d. Rising wages
e. Increasing tax rates

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Consider the AD/AS macro model. The wage-adjustment process is asymmetrical because
a. Factor prices fluctuate more frequently than goods prices.
b. Goods prices rise more quickly than factor prices.
c. Employers delay wage increases in a boom but lay off workers quickly during a slump.
d. Taxes rise quickly in a boom but do not fall during a slump.
e. Wages rise quickly in a boom but fall slowly during a slump.

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Consider the AD/AS macro model. An important asymmetry in the behaviour of the AS curve is that
a. Prices are sticky but wages are not.
b. Positive output gaps can persist for a long time without causing increases in wages and prices, whereas negative output gaps lead to immediate reductions in wages and prices.
c. Negative output gaps can persist for a while without causing large decreases in wages and prices, whereas positive output gaps lead more quickly to increases in wages and prices.
d. Wages are very flexible in the downward direction, but not in the upward direction.
e. Wages and prices are equally sticky in both directions.

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Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap?
a. Rising prices
b. Decreasing investment
c. Increasing government purchases
d. Falling tax rates
e. Decreasing wages

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If the short-run macroeconomic equilibrium occurs with real GDP less than Y*, the economy is
a. At its full-employment level of output.
b. Experiencing a recessionary gap.
c. Experiencing an inflationary gap.
d. Threatened with an acceleration of inflation.
e. Operating at full capacity.

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If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output, the economy is
a. At its full-employment level of output.
b. Experiencing a recessionary output gap.
c. Experiencing an inflationary output gap.
d. Threatened with a demand shock.
e. Operating at full capacity.

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Suppose that the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate decreases and the price level decreases. We can conclude that ________ has increased and there is now a(n) ________ gap.
a. Aggregate supply; inflationary
b. Aggregate demand; recessionary
c. Aggregate supply; recessionary
d. Aggregate demand; inflationary

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If wages rise faster than increases in labour productivity, then unit labour costs will
a. Fall and the AS curve will shift left.
b. Fall and the AS curve will shift right.
c. Rise and the AS curve will shift left.
d. Rise and the AS curve will shift right.
e. Not change because only total labour costs change.

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A common assumption among macroeconomists is that when real GDP exceeds potential output, factor prices rise and the
a. AS curve shifts to the left.
b. AD curve shifts to the right.
c. AS curve shifts to the right very rapidly.
d. AD curve shifts to the left rapidly.
e. None of the above — the AS curve remains unchanged.

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Suppose that the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate increases and the price level decreases. We can conclude that ________ has decreased and there is now a(n) ________ gap.
a. Aggregate supply; inflationary
b. Aggregate demand; recessionary
c. Aggregate supply; recessionary
d. Aggregate demand; inflationary

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Suppose that the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate increases and the price level increases. We can conclude that ________ has decreased and there is now a(n) ________ gap.
a. Aggregate supply; inflationary
b. Aggregate demand; recessionary
c. Aggregate supply; recessionary
d. Aggregate demand; inflationary

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A common assumption among macroeconomists is that when real GDP is less than potential output, factor prices adjust and the
a. AS curve shifts to the left fairly rapidly.
b. AS curve shifts to the right only very slowly.
c. AS curve shifts to the right very rapidly.
d. AD curve shifts to the left rapidly.
e. None of the above — the AS curve remains unchanged.

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Suppose the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate decreases and the price level increases. We can conclude that ________ has increased and there is now a(n) ________ gap.
a. Aggregate supply; inflationary
b. Aggregate demand; recessionary
c. Aggregate supply; recessionary
d. Aggregate demand; inflationary

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If the economy is experiencing an inflationary output gap, the adjustment process operates as follows:
a. Wages do not adjust, but the AD curve shifts to the right.
b. Wages fall, unit costs fall, and the AD curve shifts rightward.
c. Wages rise, unit costs rise, and the AS curve shifts leftward.
d. Wages rise, unit costs rise, and the AS curve shifts rightward.
e. Wages fall, unit costs fall, and the AS curve shifts rightward.

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If an economy is experiencing neither a recessionary gap nor an inflationary gap, the real output of the economy will be reflected by
a. The aggregate supply curve shifting to the left.
b. The aggregate demand curve shifting to the left.
c. The aggregate expenditure curve shifting upward.
d. The intersection of the AD and AS curves at potential output.
e. A point to the right of the aggregate supply curve at potential GDP.

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Refer to Table 24-1. In which economy is there the most unused capacity?
a. Economy A
b. Economy B
c. Economy C
d. Economy D
e. Economy E

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Refer to Table 24-1. Which of the following statements explains why wages are rising in Economy E?
a. The inflationary gap generates lower profits for firms because workers are demanding higher wages.
b. The inflationary gap generates excess demand for labour, which causes wages to rise.
c. The aggregate supply curve is shifting to the right, which is causing wages to rise.
d. The aggregate demand curve is shifting to the right, causing wages to rise.
e. Potential output is rising, putting upward pressure on wages.

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Refer to Figure 24-1. If the economy is currently in a short-run equilibrium at Y0, the economy is experiencing
a. A recessionary output gap.
b. An inflationary output gap.
c. A labour shortage.
d. A long-run equilibrium.
e. Potential output growth.

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Refer to Table 24-1. How is the adjustment asymmetry demonstrated when comparing Economy A to Economy E?
a. The size of the output gap is the same in Economies A and E, but wages are rising in A and falling in E.
b. The output gap is larger in Economy A, yet wages are changing more slowly.
c. The output gap is much larger in Economy E, so wages are changing at a faster rate.
d. The size of the output gap is the same in Economies A and E but wages are falling more slowly in A than they are rising in E.
e. There is insufficient data with which to observe the adjustment asymmetry.

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Refer to Figure 24-1. If the economy is currently producing output of Y0, the economy's automatic adjustment process will have the
a. AS curve shifting to the right until point A is reached.
b. Vertical line at Y* shifting to the left until it gets to Y0.
c. AD curve shifting to the right until point B is reached.
d. Economy remaining where it is.
e. Level of potential output falling.

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Refer to Figure 24-1. If the economy is currently producing output of Y0 and wages are sticky downwards, then the
a. Economy will eventually move to point B.
b. Economy will move only slowly toward point A as wages slowly adjust.
c. Economy will quickly move to point A.
d. Level of output will decrease below Y0.
e. AD curve will eventually shift to the right and return the economy to its full-employment level of output.

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Refer to Table 24-1. Which of the following statements best describes the situation facing Economy B?
a. There is a recessionary gap of $40 billion and wages are falling slowly.
b. There is an inflationary gap of $40 billion and wages are rising.
c. There is a recessionary gap of $20 billion and wages are falling slowly.
d. There is no output gap and wages are stable.
e. There is an output gap of $20 billion and wages are rapidly adjusting.

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Refer to Table 24-1. Consider Economy E. Which of the following best describes the positions of the aggregate demand and aggregate supply curves in this economy?
a. The AD curve has shifted to the right and the economy is in a short-run disequilibrium position.
b. The AS curve has shifted to the left and the economy is in a short-run disequilibrium position.
c. The intersection of the AD and AS curves is to the right of Y*.
d. The intersection of the AD and AS curves is to the left of Y*.
e. The intersection of the AD and AS curves coincide with the long-run aggregate supply curve.

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Refer to Figure 24-2. Suppose the economy is in equilibrium at Y1. The economy's automatic adjustment process will restore potential output, Y*, through
a. Wage increases and a leftward shift of the AS curve.
b. Wage increases and a rightward shift in the AS curve.
c. Wage decreases and a rightward shift of the AD curve.
d. An increase in potential GDP to intersect both the AD and AS curves at B.
e. A leftward shift of the AD to intersect both the AS and potential GDP at A.

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Refer to Figure 24-2. If the economy is currently in a short-run equilibrium at , the economy is experiencing
a. Potential output growth.
b. A long-run equilibrium.
c. An excess supply of labour.
d. An inflationary output gap.
e. A recessionary output gap.

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Refer to Table 24-1. Which of the economies are experiencing an inflationary gap?
a. Economies A and B
b. Economies B and C
c. Economies C and D
d. Economies D and E
e. None of the economies

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The Phillips curve describes the relationship between
a. Aggregate expenditure and aggregate demand.
b. The money supply and interest rates.
c. Unemployment and the rate of change of wages.
d. Inflation and interest rates.
e. The output gap and potential GDP.

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Refer to Table 24-1. Which of the economies is operating at its long-run equilibrium?
a. Economy A
b. Economy B
c. Economy C
d. Economy D
e. Economy E

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As the macro economy adjusts from the short run to the long run,
a. Wages and other factor prices adjust to close output gaps.
b. Potential output is adjusting to close inflationary or recessionary gaps.
c. Wages and other factor prices remain constant.
d. Aggregate demand shocks cause deviations from potential output.
e. Aggregate supply shocks cause deviations from potential output.

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The Phillips curve provides a theoretical link between
a. The liquidity preference and investment demand schedules.
b. Labour markets and foreign-exchange markets.
c. The goods market and productivity.
d. The goods market and the labour market.
e. Inflation and the demand for money.

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Suppose the following conditions are present in the economy:
- firms are increasing output to meet strong demand for their goods
- workers are able to demand higher wages as firms try to bid workers away from other firms
Which of the following statements describes the adjustment that will happen in the AD/AS macro model?
a. There is an inflationary output gap; aggregate demand will continue to increase, causing the AD curve to shift to the right. The price level will rise until equilibrium is restored at Y*.
b. The economy is in equilibrium at Y*, but wages are rising. The AS curve will shift to the left until a new equilibrium is reached at a higher price level.
c. There is a recessionary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at Y*.
d. There is an inflationary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at Y*.
e. There is a recessionary output gap; aggregate demand will rise, causing the AD curve to shift to the right until equilibrium is restored at Y*.

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Suppose the following conditions are present in the economy:
- Firms are facing lower-than normal sales and have reduced output
- There is an excess supply of labour and firms are starting to reduce their workforces
Which of the following statements describes the adjustment that will happen in the AD/AS macro model?
a. Output is below potential; aggregate demand will fall, causing the AD curve to shift to the left. The price level will fall until equilibrium is restored at Y*.
b. The economy is in equilibrium at Y*, but wages are falling. The AS curve will shift to the right until a new equilibrium is reached at a lower price level.
c. Output is below potential; wages will eventually fall; the AS curve will slowly shift to the right until equilibrium is restored at Y*.
d. Output is above potential; wages will fall, causing the AS curve to shift to the right until equilibrium is restored at Y*.
e. Output is above potential; aggregate demand will fall, causing the AD curve to shift to the left until equilibrium is restored at Y*.

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Which of the following describes the distinction between the Phillips curve and the AS curve?
a. The AS curve has the price level on the vertical axis whereas the Phillips curve has the interest rate on the vertical axis.
b. The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of change in the interest rate on the vertical axis.
c. The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis.
d. The AS curve has the rate of price inflation on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis.
e. There is no distinction: the two curves are essentially the same thing.

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Following any AD or AS shock, economists typically assume that the adjustment process continues until
a. The AD and AS curves intersect each other at the correct price level.
b. Real GDP returns to Y*.
c. Factor prices have returned to their levels previous to the shock.
d. Y* adjusts to its long-run equilibrium level.
e. The output gap is at a stable level.

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Consider the basic AD/AS diagram. The vertical line at Y* shows the relationship between the price level and the amount of output ________ have adjusted to output gaps.
a. Demanded by households after all factor prices
b. Supplied by firms after all factor prices
c. Demanded by households before all factor prices
d. Supplied by firms before all factor prices
e. Supplied by firms after all output prices

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If the economy in the short run is experiencing a recessionary gap, we are likely to see
a. Severe and widespread labour shortages.
b. Quickly rising output prices.
c. An increase in the number of workers receiving employment-insurance benefits.
d. The number of employment-insurance recipients the lowest ever.
e. Consumers optimistic about the future.

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Which of the following statements about output gaps is true?
a. When actual GDP is below potential GDP, there is upward pressure on wages.
b. When actual GDP is below potential GDP, there is upward pressure on output prices.
c. When actual GDP is above potential GDP, there is downward pressure on wages.
d. When actual GDP is above potential GDP, there is downward pressure on output prices.
e. When actual GDP is above potential GDP, there is upward pressure on wages.

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Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will
a. Allow a stable expansion of real income over time.
b. Always reverse itself.
c. Be negated in the long run, through the economy's adjustment process.
d. Result in a price level lower than that preceding the demand shock.
e. Set off an endless cycle of price rises and increases in unemployment.

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Consider an AD/AS model in long-run equilibrium. An output gap, caused by a leftward shift of the AD curve, will be eliminated if
a. Wages rise quickly.
b. The AS curve shifts upward.
c. Wages and other factor prices fall sufficiently.
d. Real national income decreases.
e. Prices rise quickly.

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Consider an economy with a relatively steep AS curve. If there is a shift to the right in the AD curve, there will be a ________ in the price level and ________ in national output.
a. Small increase; a large increase
b. Small increase; a large decrease
c. Large increase; a small increase
d. Large increase; a small decrease
e. Large increase; no change

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Which of the following provides the best explanation for why GDP may increase over long periods of time?
a. Increase in capital stock
b. Increase in emigration
c. Increase in mortality rates
d. Increase in interest rates
e. Increase in unemployment

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Consider an economy with a relatively steep AS curve. If the AD curve shifts to the left, then the price level will ________ and national output will ________.
a. Increase slightly; significantly increase
b. Increase slightly; significantly decrease
c. Increase sharply; increase slightly
d. Fall sharply; will not change.
e. Fall sharply; decrease slightly.

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When an economy experiences sustained growth in real GDP,
a. Actual GDP is greater than potential GDP.
b. Actual GDP is less than potential GDP.
c. Potential GDP is likely to be increasing.
d. Factor prices are likely to be decreasing.
e. Wage rates will decrease slowly as factor-utilization rates decrease.

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Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in world demand for Canada's goods. In the short run, ________. In the long run, ________.
a. Real GDP and the price level both fall; real GDP is below its original level with a lower price level
b. Real GDP and the price level both rise; real GDP is above its original level with a higher price level
c. Real GDP and the price level both rise; real GDP returns to its original level with a higher price level
d. Real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
e. Real GDP falls and the price level rises; real GDP is below its original level with a higher price level

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The study of the long run in macroeconomics focuses
a. On changes to actual GDP but not on changes in potential GDP.
b. Equally on potential GDP and actual GDP.
c. Primarily on changes to potential GDP.
d. Primarily on changes to the output gap, with a constant level of potential output.
e. Solely on the supply of factors of production.

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Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an unexpected and sharp reduction in desired business investment expenditure. In the short run, ________. In the long run, ________.
a. Real GDP and the price level both fall; real GDP is at its original level with a lower price level
b. Real GDP and the price level both fall; real GDP is above its original level with a higher price level
c. Real GDP and the price level both rise; real GDP returns to its original level with a higher price level
d. Real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
e. Real GDP falls and the price level rises; real GDP is below its original level with a higher price level

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In the basic AD/AS macro model, permanent increases in real GDP are possible only if
a. Potential output is increasing.
b. The correct fiscal policy is implemented.
c. The economy's automatic stabilizers are allowed to operate.
d. The aggregate supply curve is vertical.
e. Aggregate demand responds positively to demand shocks.

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Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output will ________.
a. Decrease; decrease; decrease further; decrease further
b. Decrease; decrease; decrease further; be restored to potential output
c. Increase; increase; increase further; increase further
d. Increase; decrease; increase further; be restored to potential output
e. Increase; increase; increase further; be restored to potential output

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Consider the AD/AS macro model. The main source of increases in material living standards over the long term is the
a. Maintenance of a continuous inflationary gap.
b. Continual avoidance of recessionary gaps.
c. Continuous outward shift of aggregate demand.
d. Continual increase in potential national income.
e. Positive slope of the aggregate supply curve.

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Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock would have ________ output effect in the short run and ________ output effect in the long run.
a. A positive; no
b. A positive; a positive
c. No; a positive
d. No; no
e. Not enough information to know

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Suppose the economy begins in a long-run equilibrium with Y = Y*. A permanent increase in aggregate demand will have its short-run effect on real GDP reversed in the long run with a ________ shift of ________.
a. Rightward; the aggregate supply curve
b. Rightward; the aggregate demand curve
c. Leftward; the aggregate supply curve
d. Leftward; the aggregate demand curve
e. Rightward; Y*

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Consider the basic AD/AS macro model in long-run equilibrium. A permanent expansionary AD shock has ________ price-level effect in the short run and ________ price-level effect in the long run.
a. A positive; no
b. A negative; no
c. Positive; an even larger
d. A positive; a smaller
e. A negative; a positive

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In the long run in the AD/AS macro model we can say that
a. Both real GDP and the price level are determined by aggregate demand.
b. Both real GDP and the price level are determined by Y*.
c. Long-run real GDP is determined by Y* and the long-run price level by the AD curve.
d. Real GDP is determined by aggregate demand and the price level by Y*.
e. Long-run real GDP is determined by aggregate demand and the price level is determined solely by the AS curve.

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Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in the Canadian-dollar price of all imported raw materials. In the short run, ________. In the long run, ________.
a. Real GDP and the price level both fall; real GDP is below its original level with a lower price level
b. Price level both rise; real GDP is above its original level with a higher price level
c. Real GDP and the price level both rise; real GDP returns to its original level with a higher price level
d. Real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
e. Real GDP falls and the price level rises; real GDP and the price level return to their original levels

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Consider the AD/AS macro model. The study of short-run cyclical fluctuations usually assumes, for simplicity, that there are no changes in
a. The AS curve.
b. Potential GDP.
c. Either the AS curve or potential GDP.
d. Either the AD or AS curves.
e. The intersection of the AD and AS curves.

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Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is a decrease in the Canadian price of all imported raw materials. In the short run, ________. In the long run, ________.
a. Real GDP and the price level both fall; real GDP is below its original level with a lower price level
b. Real GDP and the price level both rise; real GDP is above its original level with a higher price level
c. Real GDP and the price level both rise; real GDP returns to its original level with a higher price level
d. Real GDP rises and the price level falls; real GDP and the price level return to their original levels
e. Real GDP falls and the price level rises; real GDP is below its original level with a higher price level

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Refer to Figure 24-5. If the economy is currently in equilibrium at E3, the concept of asymmetrical adjustment of the AS curve suggests that
a. The economy will attain potential output faster if there is no intervention by the government.
b. A decrease in the price level will induce a rightward shift of AS.
c. The return of the economy to potential output may be very slow without government intervention.
d. The economy will never return to potential output.
e. The price level is constant regardless of the level of equilibrium income.

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Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from AD1 to AD2. The initial effect is
a. A recessionary output gap of 100.
b. A recessionary output gap of 300.
c. A recessionary output gap of 550.
d. An inflationary output gap of 200.
e. An inflationary output gap of 100.

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Refer to Figure 24-5. Following a positive demand shock that takes the economy from E0 to E1, the movement of the economy from E1 to E2 indicates that
a. A demand shock can keep real GDP above potential output permanently.
b. An increase in the price level causes the AS curve to shift to the left.
c. An increase in the price level causes the AD curve to shift to the left.
d. The economy cannot return to potential output without government intervention.
e. The output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted.

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Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from to . At the new short-run equilibrium, the price level is ________ and real GDP is ________.
a 90; 900
b. 110; 800
c. 60; 1000
d. 60; 700
e. 90; 1250

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Refer to Figure 24-5. The economy is not in long-run equilibrium at E1 because the
a. AD1 curve will shift back to AD0 due to an increase in the price level.
b. AD1 curve will shift back to the left due to a fall in current consumption.
c. AS will shift to the left due to an increase in wages.
d. AS will shift to the left due to an increase in the price level.
e. AS will shift to the right due to a decrease in the price level.

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Refer to Figure 24-3. Which of the following events could have shifted the AD curve from AD1 to AD2?
a. An increase in net exports
b. An increase in government purchases
c. An increase in desired investment
d. An increase in autonomous household saving
e. An increase in autonomous consumption

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Consider the AD/AS model after factor prices have fully adjusted to output gaps. An increase in the level of potential output, with aggregate demand constant, will
a. Affect only the price level.
b. Decrease real GDP and the price level.
c. Affect only the level of real GDP.
d. Increase real GDP and lower the price level.
e. Decrease real GDP and raise the price level.

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Refer to Figure 24-3. After the negative aggregate demand shock shown in the diagram (from AD1 to AD2), which of the following describes the adjustment process that would return the economy to its long-run equilibrium?
a. Wages would eventually fall, causing the AD curve to shift to the right, returning to the original equilibrium at point A.
b. Wages would eventually fall, causing the AS curve to shift slowly to the right, reaching a new equilibrium at point E.
c. Wages would increase, causing the AS curve to shift to the right, reaching a new equilibrium at point E.
d. Wages would increase, causing the AD curve to shift to the right, returning to the original equilibrium at point A.
e. Potential output would decrease from 1000 to 900 and a new long-run equilibrium would be established at point D.

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Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction in the level of potential output, with aggregate demand constant, will
a. Leave real output unaffected and increase the price level.
b. Decrease real output and decrease the price level.
c. Decrease real output and leave the price level unchanged.
d. Decrease real output and increase the price level.
e. Increase real output and decrease the price level.

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Refer to Figure 24-3. Following the negative AD shock shown in the diagram (from AD1 to AD2 ), the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________.
a. 110; 1000
b. 60; 1000
c. 90; 900
d. 110; 800
e. 90; 1250

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Consider the AD/AS model. Since output in the long run is determined by Y*, the only role of the AD curve is to determine the price level. This is true because
a. Y* is independent of the price level.
b. The aggregate demand curve is vertical.
c. The aggregate demand curve is horizontal.
d. Y* depends on the price level.
e. The AS curve is upward sloping.

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Consider the AD/AS model, and suppose that the economy begins at potential output. The effect of a positive AS shock on real GDP will be reversed in the long run with a ________ shift in ________.
a. Rightward; AS
b. Rightward; AD
c. Leftward; AS
d. Leftward; AD
e. Leftward; Y*

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Consider the AD/AS model. In the long run, after factor prices have fully adjusted to any output gaps, real GDP
a. And the price level are determined by aggregate demand.
b. And the price level are determined by "long-run aggregate supply."
c. Is determined by aggregate demand and the price level by potential output.
d. Is determined by potential output and the price level by aggregate demand.
e. Is determined by AD and the price level is determined by the AS curve.

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Consider the AD/AS model and suppose the economy begins at potential output. The effect of a negative AS shock on real GDP will be reversed in the long run with a ________ shift in ________.
a. Rightward; AS
b. Rightward; AD
c. Leftward; AS
e. Leftward; Y*

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The "long-run aggregate supply curve," vertical at Y*, shows that
a. Potential output will rise as prices rise.
b. Potential output will fall as prices rise.
c. Potential output is compatible with any price level.
d. Potential output is compatible with one particular price level.
e. Prices will always rise in the long run.

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What is meant by the term "stagflation"?
a. The combination of falling real GDP and a rising price level
b. A persistent inflationary gap
c. A persistent recessionary gap
d. The sluggish downward wage adjustment in response to a recessionary gap
e. The combination of inflation and rising real GDP

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What is sometimes called the "long-run aggregate supply curve" shows the relationship between the price level and aggregate supply over a time period long enough to permit
a. Changes in the capital stock.
b. Wages and other factor prices to adjust.
c. Changes in technology to occur.
d. Changes in the size of the resource base to occur.
e. Population to increase.

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In the basic AD/AS macro model, which of the following events could cause a negative AS shock?
a. A large decrease in wages
b. A large increase in business confidence
c. A large decrease in the net tax rate
d. A widespread outbreak of a serious infectious disease
e. A large increase in labour productivity

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What economists sometimes call the "long-run aggregate supply curve" is
a. Vertical.
b. Horizontal.
c. Nonlinear.
d. Negatively sloped.
e. Positively sloped.

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In the basic AD/AS macro model, which of the following events would cause stagflation?
a. A large decrease in wages
b. A large increase in business confidence
c. A large increase in the net tax rate
d. A large increase in the price of raw materials
e. A large increase in labour productivity

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The curve that is sometimes called the "long-run aggregate supply curve" (vertical Y*) relates the aggregate price level to real GDP
a. In the short run.
b. When wages are in adjustment but prices are unstable.
c. When national income is at less than potential income.
d. When technology is allowed to change.
e. After factor prices have fully adjusted to eliminate output gaps.

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Consider the basic AD/AS macro model in long-run equilibrium. A negative AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________.
a. Decrease; decrease; decrease further; will decrease further
b. Decrease; decrease; decrease further; will be restored to potential output
c. Increase; decrease; decrease; will be restored to potential output
d. Increase; decrease; increase further; will be restored to potential output
e. Increase; increase; increase further; will be restored to potential output

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Consider the basic AD/AS macro model, initially in a long-run equilibrium. A positive AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________.
a. Decrease; decrease; decrease further; will decrease further
b. Decrease; increase; decrease further; will be restored to potential output
c. Decrease; increase; return to its initial level; will be restored to potential output
d. Increase; increase; decrease; will be restored to potential output
e. Increase; increase; return to its initial level; will be restored to potential output

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Refer to Figure 24-4. The initial effect of the positive AS shock shown in the diagram results in
a. A recessionary output gap of 250.
b. A recessionary output gap of 450.
c. An inflationary output gap of 200.
d. An inflationary output gap of 300.
e. An inflationary output gap of 550.

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Refer to Figure 24-4. Following the positive AS shock shown in the diagram, the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________.
a. 60; 1000
b. 60; 1300
c. 90; 750
d. 90; 1200
e. 110; 1000

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Refer to Figure 24-4. The positive aggregate supply shock shown in the diagram results in a new short-run equilibrium where the price level is ________ and real GDP is ________.
a. 60; 1000
b. 60; 1300
c. 90; 750
d. 90; 1200
e. 110; 1300

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Refer to Figure 24-4. After the positive aggregate supply shock shown in the diagram, which of the following would shift the AS curve leftward during the economy's adjustment process?
a. An increase in factor supplies
b. An increase in the unemployment rate
c. A decrease in wages and other factor prices
d. An increase in labour productivity
e. An increase in wages and other factor prices

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Fiscal policy refers to the
a. Government's attempts to maintain a vertical AS curve so as to stabilize output.
b. Government's use of spending and taxing policies to influence equilibrium real GDP.
c. Government's use of trade-related policy tools to influence the net export function, thereby influencing GDP.
d. Business sector's influence on investment and GDP.
e. Households' attempts to change saving to encourage growth.

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Refer to Figure 24-1. If the economy is currently producing output of Y0 and the government initiates an expansionary fiscal policy adequate to close the output gap, the result is intended to be
a. The vertical line at Y* will shift to the left, intersecting the AS and AD curves at Y0.
b. No change in either price level or output, since expansionary fiscal policy is ineffective.
c. That the AS curve will shift to the right until point A is reached.
d. That the AS curve and the AD curve will shift left simultaneously.
e. That the AD curve will shift to the right until point B is reached.

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Refer to Figure 24-1. Suppose the economy is currently in a short-run equilibrium with output of Y0. An appropriate fiscal policy response, to attain potential output (Y*), is
a. An increase in personal income taxes.
b. A reduction in government purchases of goods and services.
c. An increase in corporate income taxes.
d. An increase in government purchases.
e. An increase in interest rates to encourage increased saving.

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Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. An appropriate fiscal policy for closing the output gap is
a. A decrease in personal income taxes.
b. A decrease in government purchases.
c. An increase in current interest rates.
d. An increase in government purchases.
e. A decrease in corporate income-tax rates.

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Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. An appropriate fiscal policy for attaining potential output (Y*) is a(n)
a. Increase in personal and corporate tax rates.
b. Increase in government spending.
c. Increase in current consumption.
d. Decrease in personal and corporate taxes.
e. Decrease in current imports.

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Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1. A contractionary fiscal policy would restore the economy to potential output (Y*) by shifting the
a. AS curve to the left to intersect AD at C.
b. AS curve to the right.
c. Potential GDP and the AS curve to the left.
d. AD curve to the right.
e. AD to the left to intersect AS at point A.

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One advantage of using expansionary fiscal policy rather than relying on automatic adjustment to recover from a recessionary gap is that
a. The economy will overshoot potential GDP and a boom will be underway.
b. Inflation will not be as stimulated.
c. Price level will rise higher than otherwise.
d. The recovery may be more rapid.
e. The recovery will be slower, thereby causing less disruption.

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Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts right unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP.
a. Too weak; stay below
b. Too weak; rise above
c. Too strong; stay below
d. Too strong; rise above
e. Appropriate; equal

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Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts leftward unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP.
a. Too weak; stay below
b. Too weak; rise above
c. Too strong; stay below
d. Too strong; rise above
e. Appropriate; equal

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Suppose the economy has a high level of unemployment and a low level of aggregate output. Which of the following policies could the government implement to alleviate these conditions?
a. An expansionary fiscal policy that increases tax rates
b. A contractionary fiscal policy that increases government purchases
c. Automatic fiscal stabilizers
d. A contractionary fiscal policy that increases tax rates
e. An expansionary fiscal policy that increases government purchases

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Refer to Figure 24-6. In the initial short-run equilibrium, there is ________ output gap of ________ but this gap could be closed by a ________.
a. A recessionary; 100; fiscal contraction
b. A recessionary; 200; fiscal expansion
c. A recessionary; 200; fiscal contraction
d. An inflationary; 100; fiscal contraction
e. An inflationary; 200; fiscal expansion

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Refer to Figure 24-6. If the government takes no action to change the short-run macro equilibrium in this economy, then
a. The AD curve will shift downward until it intersects with the AS curve at point E.
b. The AD curve will shift upward until it intersects with the AS curve at point C.
c. The AS curve will shift to the left until it intersects with the AD curve at point D.
d. The AS curve will shift to the right until it intersects with the AD curve at point B.
e. The AS curve can either shift to the right or left depending on the fiscal policy.

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Refer to Figure 24-6. The government could close the existing output gap by
a. Increasing the net tax rate.
b. Decreasing the net tax rate.
c. Decreasing government purchases.
d. Decreasing government transfer payments.
e. Implementing a contractionary fiscal policy.

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Consider Figure 24-7. At the initial short-run equilibrium, there is ________ output gap of ________. This gap could be closed by a ________.
a. A recessionary; 100; fiscal contraction
b. A recessionary; 200; fiscal expansion
c. An inflationary; 100; fiscal contraction
d. An inflationary; 200; fiscal contraction
e. An inflationary; 350; fiscal expansion

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Refer to Figure 24-7. If the government takes no action to close the existing output gap, then
a. The AD curve will shift down until it intersects with the AS curve at point D.
b. The AD curve will shift up until it intersects with the AS curve at point B.
c. The AS curve will shift to the left until it intersects with the AD curve at point C.
d. The AS curve will shift to the right until it intersects with the AD curve at point E.
e. The AS curve can either shift to the right or left depending on the fiscal policy.

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Refer to Figure 24-7. The government could close the existing output gap by
a. Increasing the net tax rate.
b. Decreasing the net tax rate.
c. Increasing government purchases.
d. Decreasing government transfer payments.
e. Implementing an expansionary fiscal policy.

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Suppose the economy is experiencing an inflationary gap in the short run. The advantage of using a contractionary fiscal policy rather than allowing the economy's natural adjustment process to operate is that
a. It will reduce the upward pressure on the price level that would otherwise occur.
b. If private-sector expenditures increase on their own, the policy will stabilize real GDP.
c. It will shorten what might otherwise be a long recession.
d. It will reduce the downward pressure on the price level that would otherwise occur.
e. It will close the output gap.

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As a global recession began in late 2008, the governments of all major economies searched for policy responses to dampen the effects of the recession. In general, governments were aiming to
a. Shift the AD curve to the left by decreasing tax rates.
b. Increase potential GDP.
c. Shift the AS curve to the right through large increases in government spending.
d. Shift the AD curve to the right through large increases in government spending.
e. Shift the AS curve to the left by increasing wage rates.

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Consider the global recession that began in late 2008. In terms of the AD/AS model, which of the following statements best describes the macroeconomic effect on Canada's economy?
a. The AD curve shifted to the right due to reduced demand for Canadian exports, which created a recessionary gap.
b. The AD curve shifted to the left due to reduced demand for Canadian exports, which created a recessionary output gap.
c. The AS curve shifted to the right due to increased factor prices, which created a recessionary gap.
d. The AS curve shifted to the left due to increased factor prices, which created a recessionary gap.
e. Potential GDP fell, which reduced actual national income.

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Income taxes in Canada can be considered to be automatic stabilizers because tax
a. Revenues increase when income increases, thereby offsetting some of the increase in aggregate demand.
b. Revenues decrease when income increases, thereby intensifying the increase in aggregate demand.
c. Structures can be changed when the Minister of Finance brings down a budget.
d. Revenues are changed through discretionary fiscal policy to keep the budget balanced.
e. Revenues are changed through discretionary fiscal policy to create surpluses in recessions.

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An important automatic fiscal stabilizer in Canada is
a. The exchange rate.
b. the marginal propensity to consume.
c. The marginal propensity to import.
d. The income-tax system.
e. Government purchases of goods and services.

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Automatic fiscal stabilizers are most helpful in
a. Making discretionary fiscal policy effective.
b. Removing persistent output gaps.
c. Promoting economic growth.
d. Eliminating price fluctuations in the economy.
e. Reducing the intensity of business cycles.

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"Automatic fiscal stabilization" in the economy refers to
a. The properties of government spending and taxation that cause the simple multiplier to be increased.
b. The discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap.
c. The properties of government spending and taxation that cause the simple multiplier to be reduced.
d. The discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap.
e. All discretionary fiscal policies.

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Net tax revenues that rise with national income act as an automatic stabilizer by ________ the marginal propensity to spend and thereby causing the simple multiplier to ________.
a. Increasing; increase
b. Increasing; decrease
c. Decreasing; equal one
d. Decreasing; decrease
e. Decreasing; increase

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Consider the simplest macro model with demand-determined output. Other things being equal, the ________ the value of the simple multiplier, the ________ stable is real GDP in response to shocks to autonomous spending.
a. Larger; more
b. Larger; less
c. Smaller; more
d. Smaller; less
e. Both B and C are correct

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Consider a simple macro model with demand-determined output. Which of the following parameters will produce the most stable real GDP in the face of autonomous expenditure shocks?
a. MPC = 0.8, t = 0.2, m = 0.3
b. MPC = 0.7, t = 0.3, m = 0.2
c. MPC = 0.7, t = 0.1, m = 0.4
d. MPC = 0.9, t = 0.2, m = 0.4
e. MPC = 0.8, t = 0.1, m = 0.2

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Consider a simple macro model with demand-determined output. Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks?
a. MPC = 0.8, t = 0.2, m = 0.3
b. MPC = 0.7, t = 0.3, m = 0.2
c. MPC = 0.7, t = 0.1, m = 0.4
d. MPC = 0.9, t = 0.2, m = 0.4
e. MPC = 0.8, t = 0.1, m = 0.2

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Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since government's net tax revenues ________ during booms and ________ during recessions.
a. Magnify; increase; decrease
b. Magnify; decrease; increase
c. Dampen; increase; decrease
d. Dampen; decrease; increase
e. Does not affect; are constant; are constant

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Suppose the government implements a permanent reduction in the net tax rate in an effort to increase real GDP. One disadvantage of this policy is that
a. The effect of economic shocks on government revenues becomes more volatile, while the economy becomes more stable.
b. Further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer.
c. Private investment is crowded out, which may reduce the future growth rate of potential output.
d. The effect of the automatic stabilizer is reduced and the economy will be more unstable.
e. Both C and D are correct.

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The "paradox of thrift" refers to the understandable tendency of people who are worried about their economic situation to ________ their saving, but in aggregate this behaviour causes a ________ recession.
a. Decrease; more severe
b. Decrease; less severe
c. Increase; more severe
d. Increase; less severe
e. Increase; shorter

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In the long run, aggregate demand is ________ for determining real GDP, and the paradox of thrift ________.
a. Not important; applies
b. Not important; does not apply
c. The only influence; applies
d. The most important influence; does not apply
e. Stable and important; applies

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The paradox of thrift does not exist in the long run because
a. Not everyone increases saving in the long run.
b. Aggregate supply has an impact on real GDP only in the short run.
c. Everyone increases consumption in the long run.
d. Changes in aggregate demand have no impact on real GDP in the long run.
e. Potential output is determined by changes in the price level.

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In the basic AD/AS macro model, the "paradox of thrift" is only a short-run phenomenon because
a. Consumers exhibit cyclical consumption behaviour.
b. In the long run output is determined by potential output.
c. Savings are transformed into expenditures in the long run.
d. The marginal propensity to consume is fixed in the long run.
e. Consumers base their consumption expenditures only on their lifetime income.

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Many economists think discretionary fiscal policy is of limited effectiveness in stabilizing the economy because
- The multiplier effects associated with fiscal policy take a long time;
- Changes in government spending and taxation are too small in relation to the size of the economy to have much effect;
- There are long and uncertain lags in implementing fiscal policy.
a. 1 only
b. 2 only
c. 3 only
d. 1 and 2
e. 1 and 3

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Given current limitations, fiscal policy as a macroeconomic stabilizer is more defensible the ________ the output gap being suffered, an argument supporting ________.
a. Larger; fine tuning
b. Larger; gross tuning
c. Smaller; fine tuning
d. Smaller; crowding out
e. Larger; crowding out

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Suppose the economy is experiencing a significant recessionary gap, but it has taken the government six months to determine that it will change fiscal policy. This is an example of
a. An execution lag.
b. Fine tuning.
c. Gross tuning.
d. A decision lag.
e. Automatic fiscal stabilizers.

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Which of the following statements about fiscal policy is the best description of "fine tuning"?
a. The government continuously alters its spending and taxing plans to hold real GDP at potential.
b. The government cuts taxes to remove a large and persistent recessionary gap.
c. The government increases its spending to reduce an inflationary gap.
d. The government decreases tax rates to decrease an inflationary gap.
e. The government uses automatic stabilizers to reduce any output gaps.

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Which of the following statements about fiscal policy is the best example of "gross tuning"?
a. The government continuously alters its spending and taxing plans to hold real GDP at potential.
b. The government cuts taxes to remove a large and persistent recessionary gap.
c. The government increases its spending to reduce an inflationary gap.
d. The government decreases tax rates to decrease an inflationary gap.
e. The government uses automatic stabilizers to reduce any output gaps.

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Suppose the government had made a decision to change fiscal policy, but it then took nine months to implement a tax reduction. This is an example of
a. A decision lag.
b. Fine tuning.
c. Gross tuning.
d. Automatic fiscal stabilizers.
e. An execution lag.

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An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and, as a result, the future growth rate of ________.
a. Rises to an unsustainable level; real GDP is reduced
b. Is crowded out; corporate tax revenue is reduced
c. Increases; aggregate demand increases
d. Increases; net exports increases
e. Is crowded out; potential output is reduced

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Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long-run effects on potential output?
a. The growth rate of potential output may be reduced due to the crowding out of private investment.
b. Potential output will adjust to the new higher level achieved with the expansionary fiscal policy.
c. Potential output will drop below its starting point because of the crowding out of investment.
d. The growth rate of potential output will rise due to the higher level of aggregate demand.
e. The level of potential output is fixed and will not be affected by fiscal policy.

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In any decision about stimulating the economy with a fiscal expansion (increasing government purchases), the government must weigh the short-run benefits of ________ against the long-run costs of ________.
a. A higher price level; unemployment
b. Increased potential output; a higher price level
c. A higher price level; lower real GDP
d. Increased real GDP; higher economic growth
e. Increased economic activity; lower economic growth

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The growth rate of potential output might be decreased by an expansionary fiscal policy if
a. The budget deficits are persistent.
b. The simple multiplier is small.
c. The policy crowds out private investment.
d. Public investment has high productivity.
e. The composition of output is not altered.

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A reduction in the net tax rate might lead to an increase in the growth rate of potential output if
a. The simple multiplier is large.
b. The tax cuts stimulate private investment.
c. Firms are operating at their normal capacity.
d. Households are not forward looking.
e. The marginal propensity to consume is large.

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The use of government purchases (G) as a fiscal policy tool can have an effect on long-run growth in the economy. Under what circumstances might an increase in G cause the level of potential output ( ) to increase?
a. If the increase in G crowds out private investment.
b. If the increase in G causes a permanent increase in the marginal propensity to consume, which causes a permanent rightward shift of the AD curve.
c. If the increase in G is spent on public infrastructure that increases the productivity of private-sector production.
d. If the increase in G leads to a permanent increase in the level of autonomous saving in the economy.
e. If the increase in G is offset by an equal decrease in C, I, and NX.

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In our macro model, the level of aggregate output is determined in the short run by ________ but in the long run by the level of ________.
a. The output gap; factor productivity
b. The AD curve; interest rates
c. The AS curve; potential output
d. The AD and AS curves; Y*
e. The AD and AS curves; factor utilization

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Fiscal policies typically affect the short-run level of GDP because they cause shifts in the ________ but they will not generally have any long-run effects on real GDP unless they affect ________.
a. AS curve; factor-utilization rates
b. AS curve; factor supplies or factor productivity
c. AD curve; factor-utilization rates
d. AD curve; the unemployment rate
e. AD curve; the level of potential output

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The function of money in an economy is to serve as
- A unit of account;
- A store of value;
- A medium of exchange.
a. 1 and 2
b. 2 and 3
c. 1 and 3
d. 1, 2, and 3
e. 3 only

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Money is commonly defined as
a. A generally accepted medium of exchange.
b. Gold.
c. Foreign-exchange reserves.
d. Paper currency.
e. The Canadian dollar.

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In order to be considered "money," paper currency must be
a. Convertible into a precious metal.
b. Impossible to counterfeit.
c. Issued by a chartered bank.
d. Issued by a government agency.
e. Generally acceptable as a medium of exchange.

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Doug is saving money in order to purchase a new snowboard next winter. This represents using money as
a. A medium of exchange.
b. A store of value.
c. A unit of account.
d. A medium of deferred payment.
e. Method of barter.

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Other things being equal, a rise in the price level will
a. Increase the value of money.
b. Decrease the purchasing power of money.
c. Stabilize the value of money.
d. Increase the purchasing power of money.
e. Have no effect on the value of money.

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Other things being equal, the purchasing power of money is
a. Inversely related to the level of aggregate demand.
b. Inversely related to the price level.
c. Directly related to the price level.
d. Directly related with the cost of living.
e. Directly related to the level of aggregate demand.

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When you are estimating your monthly income and expenses, money is being used as
a. A medium of exchange.
b. A store of value.
c. A unit of account.
d. A standard unit of deferred payment.
e. A money substitute.

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Doug compares the unit price of chocolate bars in order to get the "best buy." This represents using money as
a. A medium of exchange.
b. A store of value.
c. A unit of account.
d. A unit of deferred payment.

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The major advantage of using money rather than barter is that
a. In the barter system there is no way to express values of commodities.
b. Money is the only convenient way to store one's wealth.
c. Money has more value than real goods.
d. Money stays where you put it, whereas a cow often has to be fenced in.
e. The use of money significantly reduces transactions costs.

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The biggest disadvantage of a barter system compared to one that uses money is that
a. It is difficult to find goods to trade in a barter system that satisfy the needs of society.
b. A standardized unit of account cannot exist in a barter system.
c. All commodities are difficult to transport and therefore inefficient for exchange.
d. Each trade requires a double coincidence of wants.
e. Commodities are difficult to use as a store of value.

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Which of the following is an example of the use of money as a medium of exchange?
a. Dave keeps $250 in his drawer for a "rainy day."
b. Mike gets a friend to give him a beer today in return for promising to give the friend two beer when Mike gets paid at the end of the month.
c. Judy lends her car to a friend who signs a promissory note that she will pay Judy $10 a day for the use of the car after she returns the car to Judy.
d. Barry pays $275 with his bank debit card for tickets for an NHL play-off game.
e. ABC Investments Inc. enters in its account books that it owes Nallai $20 for his last month's investment income.

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If a majority of Canadian households and businesses refused to accept Canadian dollars in exchange for goods and services, the value of the Canadian dollar would
a. Fall.
b. Rise since less would be in circulation.
c. Stay constant since the value does not depend on its acceptability by people.
d. Stay constant since its value is determined only by the Bank of Canada.
e. Stay constant since its value is determined only by the Government of Canada.

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In order for money to be successfully used as a medium of exchange, it must
- Be readily acceptable;
- Be easily divisible;
- Have a high value-weight ratio.
a. 1 only
b. 2 only
c. 3 only
d. 1 and 2
e. 1, 2, and 3

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The use of money in an economy does which of the following?
a. Creates the necessity for a double coincidence of wants
b. Solves the problem of inflation
c. Creates a problem of trading a portion of indivisible commodities such as a ship
d. Promote specialization and the division of labour
e. Promotes the use of barter

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When metal coins, such as gold and silver, were used as money, a technique which helped to prevent the reduction of their value through clipping was
a. Basing.
b. Re-minting.
c. Milling.
d. Debasement.
e. Sweating.

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Historically, when gold and silver coins were used as money, their debasement resulted in
a. Deflation.
b. An increase in the supply of money.
c. An increase in the amount of gold bullion.
d. An increase in the desire to store wealth by holding coins.
e. A decrease in the money supply.

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Gresham's law predicts that
a. Good money drives out bad money.
b. Debased money will circulate with undebased money.
c. Undebased money will be driven from circulation.
d. Debased money will be driven from circulation.
e. Money is neutral in the long run.

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Which of the following is consistent with the predictions of Gresham's law?
a. An increase in the money supply will be followed by inflation.
b. The increased circulation of U.S. coins in Canada during periods when the Canadian dollar is worth significantly less than the U.S. dollar.
c. Debasement of a metallic money will be followed by inflation.
d. Increases in the money supply led to the hyperinflation of the 1920s in Germany.
e. The disappearance of U.S. coins circulating in Canada during periods when the Canadian dollar is worth less than the U.S. dollar.

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Suppose you come into possession of two "silver" dollars, one minted in the 1950s which contains a lot of silver, the other minted in the 2000s which contains no silver at all. The legal exchange rate between the coins is fixed at one for one. According to Gresham's law, the 1950s silver dollar
a. Is considered "bad" money.
b. Will drive out of circulation the 1990s silver dollar.
c. Is more likely to be used as a medium of exchange.
d. Is less likely to be used as a medium of exchange.
e. Is less likely to be used as a store of value because it will appear old fashioned.

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Which of the following was the most important initial step in the evolution of paper currency?
a. The acceptance of bank notes
b. The acceptance of goldsmiths' receipts
c. The acceptance of metallic coins
d. The issuance of currency by governments
e. The use of the Gold Standard

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Suppose an economy has two types of money — gold and silver coins — that are both legal tender but have different non-monetary values. Gresham's law has come into effect when
a. People refuse to use the coins of lesser value.
b. The value of the coins is in the same ratio as their non-monetary values.
c. The lower-valued coin is taken out of circulation.
d. The higher-valued coin is taken out of circulation.
e. People use the higher-valued coins for exchange and the lower-valued for savings.

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What do we mean in our current banking system when we say that a currency is "fractionally backed"?
a. Banks have many more claims outstanding against them than they have reserves available to pay those claims.
b. The currency is partially backed by the nation's supply of gold.
c. A bank's currency is fractionally backed by its supply of gold.
d. All paper currency is convertible to gold.
e. Banks maintain a fixed fraction of their outstanding deposits as cash deposits with the central bank.

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Which of the following statements about deposit money is true?
a. The quantity of fiat money in the Canadian economy far exceeds the quantity of deposit money.
b. Deposit money can legally be created solely by the Bank of Canada.
c. Deposit money is the paper money or coinage that is decreed by the government to be accepted as legal tender.
d. Deposit money is recorded as an asset on the balance sheet of a commercial bank.
e. The quantity of deposit money in the Canadian economy far exceeds the quantity of fiat money in circulation.

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The major problem of a currency that is fractionally backed and convertible into a precious metal is that of
a. Cipping, which debases the metal coins.
b. Counterfeiting.
c. Maintaining its convertability into the metal.
d. Paper money being less durable than gold.
e. Perennial shortages of paper currency.

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answer

In recent years, the use of debit cards issued by commercial banks has skyrocketed. When you pay for a purchase at a store using a debit card, you are
a. Authorizing the transfer of cash from your bank account to the merchant's bank account.
b. Creating an electronic debt to the merchant.
c. Authorizing an electronic transfer of a money substitute from you to the merchant.
d. Authorizing an electronic transfer of deposit money from you to the merchant.
e. Authorizing the transfer of bank notes from you to the merchant.

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Most Canadians accept Canadian dollars in payment for goods and services in Canada because they have confidence that the dollar
a. Will be accepted in the future.
b. Is fully convertible into gold.
c. Is accepted by foreigners as more stable than their own currency.
d. Is fully convertible into American dollars at a set exchange rate.
e. Is fully backed by the British pound sterling.

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Debit cards that are issued by commercial banks can be characterized as
a. An example of near money.
b. An electronic version of a cheque.
c. Deposit money.
d. Fiat money.
e. A store of value.

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Fiat money has value because it
a. Can be manufactured at will by the issuing government.
b. Has intrinsic value equal to its face value.
c. Is fully backed by gold at a fixed ratio.
d. Is only fractionally backed by gold.
e. Is generally accepted.

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Which of the following illustrates the use of fiat money?
a. Exchanging Canadian dollars for a T-shirt
b. Exchanging money-market funds for gold
c. Exchanging money-market funds for insurance
d. Keeping gold as a hedge against inflation
e. Bartering goods for services

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For a country to be on a "gold standard," it must
a. Use gold coins as money.
b. Use gold coins as money and promise never to debase its coins.
c. Use gold as money, but not necessarily in the form of gold coins.
d. Make its currency convertible into gold at a fixed rate of exchange.
e. Use gold as fiat money.

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The currency that is in circulation in Canada today is
a. Fully backed by gold held at the central bank.
b. Backed by the U.S. dollar.
c. Backed by the euro.
d. Fractionally backed by gold.
e. Not officially backed by anything.

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If most individuals accept paper currency in transactions, and paper currency is convertible into gold, then banks can safely issue
a. No more paper currency than the value of the gold they hold.
b. More paper currency than the value of the gold they hold.
c. As much paper currency as they please.
d. Paper currency equal to a fraction of the gold they hold.
e. Paper currency equal to the bank's commercial debt divided by their gold reserves.

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The largest element of the Canadian money supply today is
a. Coins.
b. Paper money.
c. Bank deposits.
d. Gold.
e. The debt of the federal government.

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answer

The functions of the Bank of Canada include
a. Acting as the lender of last resort for the largest private corporations.
b. Acting as banker for the commercial banks.
c. Regulating both the money market and stock market.
d. Setting the exchange rate for the Canadian dollar on world markets.
e. Providing deposit insurance at Canadian commercial banks.

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Basic functions of the Bank of Canada include
- Acting as lender of last resort to private non-financial corporations;
- Acting as banker for the chartered banks.
- Regulating the money supply.
a. 1 only
b. 2 only
c. 3 only
d. 2 and 3
e. 1, 2, and 3

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answer

The largest component of the assets of the Bank of Canada is
a. Government of Canada securities.
b. Government of Canada deposits.
c. Notes and coins in circulation.
d. Loans to commercial banks.
e. Loans to private individuals.

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answer

The largest component of the liabilities of the Bank of Canada is
a. Government of Canada securities.
b. Government of Canada deposits.
c. Canadian currency in circulation.
d. Deposits of commercial banks and other financial institutions.
e. Loans to private individuals.

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In the event of a sudden loss in confidence in the ability of the commercial banks to redeem deposits, the Bank of Canada would probably
a. Take over the operation of any banks in severe difficulties.
b. Lend reserves to the commercial banks.
c. Offer to sell government bonds to the chartered banks.
d. Suspend operation of the banking system until the panic subsided.
e. Impose severe financial penalties on the commercial banks by charging them interest at higher than the Bank rate.

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Suppose the rare event occurs that a major Canadian commercial bank is on the verge of insolvency and collapse due to volatile world credit markets. The likely initial response is
a. A bankruptcy filing overseen by the Superintendent of Financial Institutions.
b. The adoption of all of the bank's liabilities by the Bank of Canada as the "lender of last resort."
c. The sale of the bank's assets to the remaining commercial banks.
d. The provision of funds by the World Bank as the "lender of last resort."
e. The provision of funds by the Bank of Canada as the "lender of last resort."

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Suppose the Canadian banking system jointly has $20 million in reserves (cash and deposits at the Bank of Canada), all banks have a target reserve ratio of 20%, and there are no excess reserves. What is the amount of deposits in the banking system?
a. $4 million
b. $40 million
c. $80 million
d. $100 million
e. $120 million

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answer

Which of the following statements best describes the relationship between the Bank of Canada and the Government of Canada?
a. The Bank of Canada has the same status as the Department of Finance and is directly responsible to Parliament for its day-to-day operations of monetary policy.
b. The Bank of Canada is a wholly owned entity of the government but is given independence in the day-to-day operations of monetary policy.
c. The Bank of Canada is a central-banking institution that is completely independent of the government and is fully autonomous in its conduct of monetary policy.
d. The Bank of Canada is a privately owned banking institution that is overseen by a Board of Directors with a mandate to act in the best interests of the citizens of Canada.
e. The governor of the Bank of Canada and the minister of finance have joint responsibility for both fiscal and monetary policy.

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Suppose Bank ABC has a target reserve ratio of 2%. If Bank ABC receives a new deposit of $50 million it will immediately find itself with
a. No excess cash reserves.
b. Excess cash reserves of $1 million.
c. Excess cash reserves of $10 million.
d. Excess cash reserves of $49 million.
e. Excess cash reserves of $49.5 million.

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Which of the following entries would appear on the liabilities side of the Bank of Canada's balance sheet?
a. Deposit money held in accounts at Canada's commercial banks
b. Government of Canada securities
c. Foreign currency reserves
d. Paper notes in circulation
e. Canadian corporate securities

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Suppose Bank ABC has a target reserve ratio of 10%. If Bank ABC receives a new deposit of $100 000 it will immediately find itself with
a. No excess cash reserves.
b. Excess cash reserves of $10 000.
c. Excess cash reserves of $90 000.
d. Excess cash reserves of $100 000.
e. Excess cash reserves equal to 10% of its deposits.

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answer

Commercial banks in Canada are prohibited by law from
a. Accepting demand deposits.
b. Issuing paper currency.
c. Lending money to households and firms.
d. Accepting term deposits.
e. Settling inter-bank debts through a clearinghouse.

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Suppose a commercial bank has a target reserve ratio of 1%, but has an actual reserve ratio of 0.8%. This bank will likely
a. Expand its portfolio of loans.
b. Contract its portfolio of loans.
c. Maintain its new, higher reserve ratio because it is more profitable.
d. Buy government securities from the Bank of Canada.
e. Allow fewer cash withdrawals by the bank's customers.

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The financial crisis that occurred in 2007 and 2008 highlighted one of the crucial functions of commercial banks and other financial institutions in developed economies. A crucial function that ceased to work smoothly during this time, and contributed to the global recession that began in 2008, was
a. The acceptance of deposits from firms and households.
b. The joint regulation of financial markets.
c. The provision of credit to firms, households and other banks.
d. Cheque clearing and collection.
e. The clearing of electronic transfers.

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Suppose a commercial bank has a level of target reserves of $500 million and actual reserves of $575 million. This bank's ________ is/are $75 million.
a. Profits
b. Fractional reserves
c. Excess reserves
d. Reserve ratio
e. Cash drain

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An example of "interbank activities" in the Canadian banking system is
a. Banks pooling their money together to fund the operations of the Bank of Canada.
b. Banks lending money to each other in order to meet daily cash requirements.
c. The joint regulation of financial markets.
d. The joint regulation of the money supply.
e. Lender of last resort to the banking system.

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The Canadian banking system is a
a. Gold-reserve system.
b. Fractional-reserve system.
c. Target-reserve system.
d. Asset-backed reserve system.
e. Treasury-bill reserve system.

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The Canada Deposit Insurance Corporation (CDIC) was set up to protect
a. Member financial institutions in case of non-payment of loans from borrowers.
b. Member financial institutions in case of non payment of loans from the government.
c. Depositors with Canadian dollar accounts in member institutions for up to a maximum of $100 000 per eligible deposit.
d. Depositors with Canadian dollar accounts in any Canadian financial institution for up to a maximum of $100 000 per institution.
e. Depositors of any currency in any Canadian financial institution for up to a maximum of $100 000 per institution.

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Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank). This fraction is known as
a. The required reserve.
b. The excess reserve ratio.
c. The fractional reserve.
d. The reserve ratio.
e. The target reserve.

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Which of the following entries would appear on the liabilities side of the Bank of Canada's balance sheet?
a. Government of Canada securities
b. Deposits of commercial banks
c. Advances to commercial banks
d. Savings deposits
e. Shareholders' equity

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Without a central bank, commercial banks in Canada would probably hold ________ reserves than they do now, resulting in a ________ money supply than at present.
a. The same; the same
b. More; larger
c. More; smaller
d. Less; smaller
e. Less; larger

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Which of the following entries would appear on the assets side of a commercial bank's balance sheet?
a. Government of Canada securities
b. Chequable deposits
c. Government of Canada deposits
d. Savings deposits
e. Shareholders' equity

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Which of the following statements about reserve ratios at Canadian commercial banks is true? Commercial banks in Canada
a. Are required by the Bank Act to hold required reserves.
b. Have a reserve ratio of zero.
c. Have a reserve ratio of 100%.
d. Have a positive reserve ratio.
e. Never have excess reserves.

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Which of the following entries would appear on the liabilities side of a commercial bank's balance sheet?
a. Mortgage loans
b. Government of Canada securities
c. Cash reserves
d. Foreign currency reserves
e. Demand deposits

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If all the commercial banks in the banking system collectively have $300 million in cash reserves and are satisfying their target reserve ratio of 20%, what is the amount of deposits they have?
a. $0
b. $60 million
c. $600 million
d. $1500 million
e. $2000 million

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Refer to Table 26-1. What are the total assets on the balance sheet of this commercial bank?
a. 2410
b. 2520
c. 2810
d. 2960
e. 3160

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answer

A commercial bank's target reserve ratio is the
a. Fraction of its deposit liabilities that it wishes to holds as reserves, either as cash or as deposits with the Bank of Canada.
b. Fraction of its deposit liabilities that it actually holds as cash in its own vaults.
c. Fraction of its deposit liabilities that are backed by gold.
d. Ratio of Canadian dollars to foreign currencies that the bank holds on its books.
e. Ratio of chequable deposits to term deposits that the bank holds on its books.

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Refer to Table 26-1. What are the total liabilities on the balance sheet of this commercial bank?
a. 2410
b. 2520
c. 2810
d. 2960
e. 3160

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Consider a new deposit of $10 000 to the Canadian banking system. The bank that initially receives this deposit will find itself with
a. No excess reserves if there is no reserve requirement.
b. $1000 of excess cash reserves if its target reserve ratio is 10%.
c. $2000 of excess cash reserves if its target reserve ratio is 10%.
d. $8000 of excess cash reserves if its target reserve ratio is 20%.
e. $10 000 of excess cash reserves if its target reserve ratio is 100%.

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A bank run is unlikely to occur in Canada today because
a. If necessary, the central bank can provide all the reserves that are necessary to avoid this situation.
b. The commercial banks are required by law to maintain 100% of their deposits in cash.
c. There is relatively little demand for cash at present.
d. Banking is done mostly electronically.
e. The commercial banks hold enough government securities that are convertible into cash.

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"Excess reserves" for a commercial bank refer to
a. Any surplus in the bank's supply of gold.
b. Any surplus of chequable deposits.
c. Any reserves (cash or deposits with the Bank of Canada) that the bank holds over and above its desired reserves.
d. Reserves (cash or deposits with the Bank of Canada) that the Bank of Canada requires the bank to hold.
e. Excess demand for money from that bank.

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What is a bank run?
a. A situation where a commercial bank is holding zero reserves.
b. A panic situation where many depositors rush simultaneously to withdraw their deposit money in the form of cash.
c. A situation where all commercial banks in the system are simultaneously short of reserves.
d. The collapse of a non-commercial bank as a result of non-payment of loans.
e. The collapse of a commercial banks as a result of the devaluation of their assets.

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A commercial bank's actual reserve ratio is the
a. Fraction of its deposit liabilities that it actually holds as gold, other precious metal or cash in its own vaults.
b. Fraction of its deposit liabilities that are backed by gold.
c. Ratio of Canadian dollars to foreign currencies that it holds on its books.
d. Ratio of chequable deposits to term deposits that it holds on its books.
e. Fraction of its deposit liabilities that it actually holds as reserves, either as cash or as deposits with the Bank of Canada.

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Why is the possibility of a bank run extremely small in Canada today?
a. The Bank of Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals.
b. The Department of Finance guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals.
c. The Canadian Deposit Insurance Corporation provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic.
d. The Office of the Superintendent of Financial Institutions provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic.
e. Industry Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals.

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Canadian commercial banks maintain their reserves in the form of
a. Cash in their bank vaults and deposits at the Bank of Canada.
b. Cash in their bank vaults.
c. Gold in their bank vaults.
d. Deposits at other commercial banks that are immediately accessible.
e. Cash and foreign currency at the Bank of Canada.

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A central bank can "create" money by
a. Selling some of its foreign-currency reserves for domestic currency.
b. Selling government Treasury bills to the commercial banks.
c. Increasing the rate of inflation.
d. Issuing its own Central Bank bonds.
e. Purchasing government securities on the open market.

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Which of the following examples constitutes a new deposit to the Canadian commercial banking system?
a. An individual transfers money from ShipShape Credit Union to Scotiabank
b. An individual immigrates to Canada and deposits money from abroad
c. An individual puts cash in a safety-deposit box
d. The Bank of Canada sells government securities to an individual or a firm
e. The Bank of Canada buys foreign currency from abroad

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Which of the following examples constitutes a new deposit to the Canadian commercial banking system?
a. An individual transfers money from Ship Shape Credit Union to Scotiabank
b. An individual immigrates to Canada and maintains his existing deposits in a foreign bank
c. An individual puts cash in a safety-deposit box
d. The Bank of Canada buys government securities from a Canadian commercial bank
e. The Bank of Canada buys foreign currency from abroad

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Refer to Table 26-2. Assume that Bank North is operating with no excess reserves. What is their actual reserve ratio?
a. 12%
b. 13.67%
c. 15%
d. 20%
e. 25%

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answer

Refer to Table 26-2. What are the income-earning assets for Bank North?
a. Reserves
b. Loans
c. Deposits
d. Capital
e. Liabilities

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Refer to Table 26-2. If Bank North receives a new deposit of $400, its actual reserve ratio immediately becomes
a. 7%.
b. 15%.
c. 25%.
d. 29%.
e. 35%.

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Refer to Table 26-2. Assume that Bank North is operating at its target reserve ratio and has no excess reserves. If Bank North receives a new deposit of $400, it can immediately expand its loans by ________ while maintaining its target reserve ratio.
a. $260
b. $272
c. $340
d. $400
e. $700

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Refer to Table 26-2. Assume that Bank North is operating at its target reserve ratio and has no excess reserves, and that all commercial banks have the same target reserve ratio. If a new deposit to the Canadian banking system of $400 is deposited at Bank North, the total new deposits created in the banking system can be calculated as follows:
a. 300/0.136 = $2205.88.
b. 400/0.15 = $2666.67.
c. 400/0.12 = $3333.33.
d. 700/0.12 = $5833.33.
e. Not enough information to determine.

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Refer to Table 26-3. What are the reserves held by Bank West?
a. $500
b. $700
c. $1200
d. $19 800
e. $21 000

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Refer to Table 26-3. Assume that Bank West is operating with no excess reserves. What is its actual reserve ratio?
a. 2.5%
b. 2.4%
c. 5.7%
d. 6%
e. 10%

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Refer to Table 26-3. If Bank West receives a new deposit of $1500, its actual reserve ratio immediately becomes
a. 6%.
b. 7.5%.
c. 10%.
d. 12.6%.
e. 33.3%.

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answer

Refer to Table 26-3. Assume that Bank West is operating at its target reserve ratio and has no excess reserves. If Bank West receives a new deposit of $1500, it can immediately expand its loans by ________ while maintaining its target reserve ratio.
a. $1387.50
b. $1410
c. $1462.50
d. $1464
e. $1500

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Refer to Table 26-3. Assume that Bank West is operating at its target reserve ratio and has no excess reserves, and that all commercial banks have the same target reserve ratio. If a new deposit to the Canadian banking system of $1500 is deposited at Bank West, the total new deposits created in the banking system can be calculated as follows:
a. 1500/0.06 = $25 000.
b. 1500/0.025 = $60 000.
c. 1500/0.024 = $62 500.
d. 2000/0.025 = $80 000.
e. 2000/0.06 = $33 333.

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Refer to Table 26-4. Bank XYZ is immediately in a position to expand its loans by
a. $1.25 million.
b. $3.75 million.
c. $5 million.
d. $15 million.
e. $20 million.

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Refer to Table 26-4. If Bank XYZ increases its loans to the maximum extent possible with its new excess reserves, the second-generation banks will be able to expand their loans by
a. $0.94 million.
b. $1.00 million.
c. $1.50 million.
d. $2.81 million.
e. $3.75 million.

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Refer to Table 26-4. The maximum creation of new deposits by the banking system, including the dealer's original deposit at Bank XYZ, is
a. $25 million.
b. $22.5 million.
c. $20 million.
d. $15 million.
e. $5 million.

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Refer to Table 26-4. Suppose the public decides to hold 5% of their deposits in cash — that is, there is now a cash drain of 5%. As a result of the new deposit, the money supply would eventually
a. Increase by $16.67 million.
b. Increase by $20 million.
c. Decrease by $20 million.
d. Decrease by $16.67 million.
e. Decrease by $8.33 million.

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Refer to Table 26-4. Suppose the public decides to hold 15% of their deposits in cash — that is, there is now a cash drain of 15%. As a result of the new deposit, the money supply would eventually
a. Increase by $3.75 million.
b. Increase by $12.50 million.
c. Decrease by $12.50 million.
d. Decrease by $20.00 million.
e. Not change.

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Refer to Table 26-5. Bank XYZ is immediately in a position to
a. Decrease its loans by $100 million.
b. Decrease its loans by $10 million.
c. Decrease its loans by $9 million.
d. Increase loans by $9 million.
e. Increase loans by $10 million

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answer

Refer to Table 26-5. Assume that Bank XYZ has decreased its loans and re-established its target reserve ratio. The second-generation banks in this scenario will
a. Decrease their loans by $9.0 million.
b. Decrease their loans by $8.1 million.
c. Not have to change their loan positions.
d. Increase their loans by $8.1 million.
e. Increase their loans by $9.0 million.

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Refer to Table 26-5. As a result of this withdrawal from the banking system, the Canadian banking system would eventually
a. Decrease its loans by $100 million.
b. Decrease its loans by $90 million.
c. Decrease its loans by $10 million.
d. Increase loans by $90 million.
e. Increase loans by $100 million.

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answer

Consider the creation of deposit money in the banking system. One implication of an increase in the cash drain to the public is that the
a. Banking system cannot create any additional money following a new deposit.
b. Amount of new money that can be created from a new source of reserves is increased.
c. Desired ratio is reduced.
d. Desired reserve ratio is increased.
e. Banking system's ability to create new money following a new deposit is reduced.

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Suppose you found a $100 bill that was lost for many years under your grandmother's mattress and you decided to deposit this money in a commercial bank. If the target reserve ratio were 20% and all excess reserves were lent out, your new deposit of $100 would lead to an eventual expansion of the money supply of
a. $120.
b. $200.
c. $500.
d. $1200.
e. $2000.

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Suppose you found a $100 bill that was lost for many years under your grandmother's mattress. If the banking system has a cash drain of 5%, its target reserve ratio is 20%, and all excess reserves were lent out, your new deposit of the $100 bill would lead to an eventual expansion of the money supply of
a. $20.
b. $25.
c. $200.
d. $400.
e. $500.

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If all the banks in the banking system collectively have $20 million in cash reserves and have a target reserve ratio of 5%, the maximum amount of deposits the banking system can support is
a. $4 million.
b. $40 million.
c. $80 million.
d. $100 million.
e. $400 million.

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If all the banks in the banking system collectively have $500 million in cash reserves, and have a target reserve ratio of 5%, the maximum amount of deposits the banking system can support is
a. $10 million.
b. $100 million.
c. $25 billion.
d. $100 billion.
e. $10 billion.

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Assume that Bank ABC has a target reserve ratio of 10%. If Bank ABC receives a new deposit of $100 000, the largest new loan this bank could initially make, and maintain its target reserve ratio, is
a. $1000.
b. $10 000.
c. $90 000.
d. $100 000.
e. $900 000.

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Suppose the excess reserves in Toronto Dominion Bank increase by $700. Given a target reserve ratio of 1.0% and no cash drain, the maximum change in deposits for the entire banking system would be
a. $682.50.
b. $700.00.
c. $17 500.00.
d. $28 000.00.
e. $70 000.00.

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A desire by ________ has no effect on the ability of the banking system to create bank deposits, for a given amount of reserves in the banking system.
a. Banks to delay making loans in expectation of higher future interest rates
b. Households to increase the fraction of their money held in the form of currency
c. Households to hold more money in safety-deposit boxes
d. The government to increase its level of spending
e. Firms to reduce their desired level of borrowing from banks

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Refer to Table 26-6. Assume that Northern Bank's target reserve ratio is 10%. What is it's actual reserve ratio?
a. 6.67%
b. 7.1%
c. 8.0%
d. 9.1%
e. 10.0%

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Refer to Table 26-6. Northern Bank extends credit to its customers in the form of household mortgages and lines of credit. Under which category of the balance sheet do these fall?
a. Reserves
b. Loans
c. Liabilities
d. Deposits
e. Capital

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Refer to Table 26-6. Owners of Northern Bank contributed money to start the bank. Under which category of it's balance sheet do these funds fall?
a. Reserves
b. Loans
c. Assets
d. Deposits
e. Capital

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Refer to Table 26-6. Assume that Northern Bank's target reserve ratio is 10%. What is its current level of excess reserves?
a. - $320
b. - $200
c. $0
d. $320
e. $200

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Refer to Table 26-6. Assume that Northern Bank's target reserve ratio is 10%. In order to achieve its target reserve ratio, Northern Bank must ________ and ________.
a. Increase its reserves by $200; decrease its deposits by $200
b. Increase its reserves by $400; decrease its deposits by $400
c. Not change its reserves; not change its deposits
d. Increase its reserves by $200; decrease its loans by $200
e. Increase its reserves by $400; increase its loans by $800

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In reality, the reserve ratio for Canadian commercial banks is approximately ________%, which means that the deposit creation process is ________.
a. 0.1; extremely powerful
b. 1.5; powerful
c. 20; similar to that discussed in the text
d. 50; weak
e. 100; very weak

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Refer to Table 26-6. Northern Bank holds cash in its vault and has some deposits in its account at the central bank. Under which category on its balance sheet are these funds included?
a. Reserves
b. Loans
c. Liabilities
d. Deposits
e. Capital

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When discussing the banking system, a cash drain of 5% means that
a. 5% of an initial new deposit to the banking system is paid in banking fees and is therefore not available for the creation of new deposit money.
b. Depositors wish to hold 5% of the value of their deposits in cash.
c. 5% of an initial new deposit to the banking system is payable as a financial services tax.
d. 95% of an initial new deposit is maintained as cash reserves by the commercial bank.
e. Depositors wish to hold 95% of the value of their deposits in cash.

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Consider a new deposit of $10 000 to the Canadian banking system. The commercial bank that initially receives this deposit will find itself with
a. No excess reserves if there is no reserve requirement.
b. $1000 of excess cash reserves if its target reserve ratio is 10%.
c. $2000 of excess cash reserves if its target reserve ratio is 2%.
d. $9000 of excess cash reserves if its target reserve ratio is 10%.
e. $98 000 of excess cash reserves if its target reserve ratio is 2%.

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Suppose that the cash drain in the banking system increases during holiday periods. As a result,
a. The capacity of the banking system to create deposit money is dampened during holiday periods.
b. The capacity of the banking system to create deposit money is increased during holiday periods.
c. Commercial banks decrease their target reserve ratios.
d. Changes in reserves will result in no change in deposits during holiday periods.
e. The money supply will automatically increase.

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Consider a new deposit of $10 000 to the Canadian banking system. Assuming that all Canadian banks have a target reserve ratio of 2%, and that there is no cash drain, the banking system as a whole could create ________ as a result of this single new deposit.
a. $10 000 of new deposits
b. $50 000 of new deposits
c. $500 000 of new deposits
d. $980 000 of additional loans
e. $1 000 000 of additional loans

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The expansion of deposits resulting from an injection of new cash to the banking system can be calculated as follows. The change in deposits is equal to
a. The change in loans divided by the sum of the target reserve ratio.
b. The change in reserves divided by the cash-deposit ratio.
c. The change in reserves divided by the target reserve ratio.
d. The change in reserves divided by the sum of the target reserve ratio and the cash-deposit ratio.
e. The change in reserves divided by the sum of excess reserves and cash drain.

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Consider a new deposit of $100 000 to the Canadian banking system. The commercial bank that initially receives this deposit will find itself with
a. No excess reserves if there is no reserve requirement.
b. $1000 of excess cash reserves if its target reserve ratio is 10%.
c. $2000 of excess cash reserves if its target reserve ratio is 2%.
d. $10 000 of excess cash reserves if its target reserve ratio is 10%.
e. $98 000 of excess cash reserves if its target reserve ratio is 2%.

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Suppose Bank ABC has a target reserve ratio of 10%, no excess reserves, and it receives a new deposit of $500 000. This bank will initially expand its loans by
a. $50 000.
b. $450 000.
c. $500 000.
d. $4.5 million.
e. $5 million.

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If the Bank of Canada enters the open market and purchases $1000 of government securities, what will be the eventual change in the money supply given a 10% target reserve ratio in the commercial banking system?
a. Decrease of $1000
b. Decrease of $5000
c. Decrease of $10 000
d. Increase of $5000
e. Increase of $10 000

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If the target reserve ratio in the banking system is 1%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an expansion of the money supply of
a. $0.01.
b. $1.10.
c. $1.00.
d. $10.00.
e. $100.00.

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If the Bank of Canada enters the open market and sells $1000 of government securities, what will be the eventual change in the money supply if commercial banks lend out all excess reserves and they have a 2.5% target reserve ratio?
a. Decrease of $40 000
b. Decrease of $4000
c. Increase of $40 000
d. Increase of $4000
e. Decrease of $25 000

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If the target reserve ratio in the banking system is 10%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an eventual expansion of the money supply of
a. $0.01.
b. $0.10.
c. $1.00.
d. $10.00.
e. $100.00.

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If the Bank of Canada enters the open market and sells $1000 of government securities, what will be the eventual change in the money supply given a 10% target reserve ratio in the commercial banking system and a 10% cash drain?
a. Decrease of $1000
b. Decrease of $5000
c. Decrease of $10 000
d. Increase of $5000
e. Increase of $10 000

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If the target reserve ratio in the banking system is 20%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an eventual expansion of the money supply of
a. $0.20.
b. $1.20.
c. $2.00.
d. $5.00.
e. $20.00.

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The money supply in Canada is measured using M1, M2, M2+, and M3. The reason there are so many measures of the money supply is that
a. The Bank of Canada wants to confuse the general public.
b. Different kinds of bank accounts represent different functions of money, and so the various measures are used to reflect these different functions.
c. The money supply is too large to have only one measurement.
d. Only the newer and broader measurements are correct but the older measurements are still used so that historical comparisons are possible.
e. It is a convenient way for provincial and federal governments to hide their budgetary surpluses.

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Until recently, and for many years, the common definition of the money supply used by the Bank of Canada was M1, which included currency in circulation plus
a. Chequable deposits at the chartered banks.
b. Chequable deposits and savings accounts at the chartered banks.
c. Savings accounts and demand loans.
d. Term deposits and money market funds.
e. Chequable deposits at all financial institutions.

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As a measure of the Canadian money supply, M2+ is defined as currency in circulation plus
a. All chequable deposits.
b. Demand and notice deposits at all financial institutions.
c. Savings deposits at the chartered banks and non-bank financial institutions.
d. Term deposits and money market funds at all financial institutions.
e. Term deposits, money market funds and personal savings accounts.

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The main distinction between M2 and M2+ is that M2+ also includes
a. Deposits at trust companies, caisse populaires and foreign-currency accounts.
b. Coins in circulation.
c. Money market mutual funds held by the Bank of Canada.
d. Paper currency.
e. Deposits at financial institutions other than the chartered banks.

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The concept of "near money" refers to
a. Money substitutes such as credit cards.
b. Cheques on demand deposits.
c. Financial assets whose capital values are too unstable for them to be classified as money.
d. Assets that fulfill the temporary store-of-value function but not the medium-of-exchange function.
e. Assets that fulfill the medium-of-exchange function but not the store of value function.

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Credit cards are considered to be "money substitutes" instead of money because
a. They are not acceptable to pay for purchases.
b. They cannot serve as a temporary medium of exchange.
c. The only function of money they can perform is to serve as a store of value.
d. Money must eventually be used to pay for the transaction.
e. Credit card accounts are not chequable.

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Which of the following is an example of "near money"?
a. Scotiabank credit card
b. American Express card
c. 30-day Treasury bill
d. mortgage on a house
e. car loan

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When you pay for your $74 purchase at the grocery store with a debit card, you are
a. Transferring $74 of currency from your bank account to the grocery store's bank account.
b. Withdrawing $74 from your bank account with which you pay for your groceries.
c. Transferring your claim on $74 worth of gold to the grocery store.
d. Electronically transferring $74 of deposit money from your bank account to the grocery store's bank account.
e. Essentially promising the grocery store that your bank will pay them $74 at the end of the month when debts are settled.

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The M2 and M2+ definitions of the money supply concentrate on the ________ function of money.
a. Store of value
b. Unit of account
c. Medium-of-exchange
d. Accounting
e. Deposit-creation

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The M2++ and M3 definitions of the money supply include financial assets
a. That serve the store-of-value function and are convertible into a medium of exchange.
b. Such as deposits at credit unions and caisses populaires.
c. Such as deposits at non-bank financial institutions.
d. Such as a credit card.
e. Such as a government Treasury bill.

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Developments in the financial industry in recent years have resulted in a multitude of types of deposits. For the purposes of studying the money supply, the most important distinction is between chequing and savings deposits which are ________ and term deposits and other financial assets which are ________.
a. A store of value; not a store a value
b. A unit of account; not a unit of account
c. A component of the money supply; not a component of the money supply
d. Media of exchange; not media of exchange
e. Money substitutes; near money

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Other things being equal, bond prices
a. Are unaffected by changes in the demand for money.
b. Are unaffected by interest-rate changes.
c. Vary directly with interest rates.
d. Vary inversely with interest rates.
e. Vary proportionally with interest rates.

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The present value of a financial asset is
a. The most someone would be willing to pay upon maturity of the asset.
b.The most someone would be willing to pay today for the asset.
c. Equivalent to the face value of the asset.
d. The amount someone would pay in the future to have the asset today.
e. The amount someone would pay in the future for the current stream of payments from the asset.

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The present value of a bond is determined by the
a. Face value and the date of maturity.
b. Rate of inflation.
c. Market rate of interest only.
d. Market rate of interest, the date of maturity, and the face value.
e. Marginal rate of income tax.

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If Robert expects interest rates to fall in the near future, he will probably be willing to
a. Buy bonds now, and hold less money.
b. Buy bonds now, but only if their price falls.
c. Sell bonds now, and hold less money.
d. Put his money under his mattress rather than buy bonds.
e. Maintain only the current holding of bonds.

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When Janet expects interest rates to rise in the near future, she will probably be willing to
a. Buy bonds now, and hold less money.
b. Buy bonds now, but only if their price falls.
c. Sell bonds now, and hold more money.
d. Put her money under her mattress rather than in a bank account.
e. Maintain only the current holding of bonds.

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What is the present value of a bond that pays $121.00 one year from today if the interest rate is 10% per year?
a. $100.00
b. $110.00
c. $121.00
d. $133.10
e. $221.00

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When i is the annual interest rate, the formula for calculating the present value of a bond with a face value of R dollars, receivable in one year is
a. PV = (1 + i)/R.
b. PV = i(R + i).
c. PV = R (1 + i).
d. PV = R/i.
e. PV = R/(1 + i).

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If the annual market rate of interest is 5%, an asset that promises to pay $100 after each of the next two years has a present value of
a. $90.70.
b. $95.24.
c. $181.40.
d. $185.94.
e. $200.00.

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If the annual interest rate is 8%, an asset that promises to pay $160 after each of the next two years has a present value of
a. $178.32.
b. $285.32.
c. $296.30.
d. $300.00.
e. $320.00.

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If the annual interest rate is 10%, $5.00 received today has the same present value as
a. $4.00 received one year from now.
b. $4.50 received one year from now.
c. $5.00 received one year from now.
d. $5.50 received one year from now.
e. $6.00 received one year form now.

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If the annual interest rate is 3%, $10 000 received today has the same present value as ________ received one year from now.
a. $10 000
b. $13 000
c. $300
d. $9707.74
e. $10 300

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Consider a bond with a face value of $10 000, a three-year term and a coupon payment of 6% made at the end of each year. The face value of the bond is repaid at the end of the term. Which of the following equations will correctly calculate the present value of the bond?
a. PV = ($600/1.06) + ($600/1.1236) + ($10,600/1.1910)
b. PV = ($600/1.06) + ($600/1.1236) + ($600/1.1910)
c. PV = ($600/1.06) + ($600/1.106) + ($10,000/1.106)
d. PV = ($600/1.6) + ($600/2.56) + ($10,600/4.096)
e. PV = ($600/1.06) + ($600/1.06) + ($9,400/1.1910)

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In a competitive financial market, the equilibrium price of an asset will equal the
a. Present value of the asset.
b. Future value of the asset.
c. Sum of present value of the asset multiplied by the interest rate.
d. Future value of the asset multiplied by the interest rate.
e. Issue price of the asset.

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Consider a bond that promises to make coupon payments of $100 each year for three years (beginning in one year's time) and also repays the face value of $2000 at the end of the third year. If the market interest rate is 6%, what is the present value of this bond?
a. $267.30
b. $283.02
c. $1763.22
d. $1854.67
e. $1946.53

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Consider a bond that promises to make coupon payments of $100 each year for three years (beginning in one year's time) and also repays the face value of $2000 at the end of the third year. If the market interest rate is 4%, what is the present value of this bond?
a. $288.45
b. $1866.67
c. $1941.57
d. $1966.39
e. $2055.50

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When considering the present value of any financial asset that makes a stream of payments in the future, we know that if the market interest rate falls,
a. The present value of the asset will rise.
b. The future value of the asset will rise.
c. The current value of the asset will fall.
d. The present value of the asset will fall.
e. The present value of the asset is unaffected.

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Consider two bonds, Bond A and Bond B, offered for sale in the same market for financial assets:
- Bond A has a face value of $1000, a market price of $971, and matures in one year.
- Bond B has a face value of $1000, a market price of $926, and matures in one year.
Which of the following statements about Bonds A and B are correct?
a. Bond B has a higher present value than Bond A.
b. Bond A has a lower present value than Bond B.
c. The yield on Bond B is 3%; the yield on Bond A is 3%.
d. The yield on Bond A is 3%; the yield on Bond B is 8%.
e. There is a disequilibrium in this market for financial assets.

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Consider a Government of Canada bond with a face value of $1000, and a present value of $925. If this bond is offered for sale at $960, then
a. The excess demand for the bond at $960 will drive the price up to the face value of the bond.
b. Individuals will purchase the bond at the offer price which will drive the market rate of interest up.
c. Individuals will purchase the bond at the offer price which will drive the market rate of interest down.
d. The equilibrium market price of this bond has been achieved.
e. The lack of demand for this bond will drive the price down until it reaches its equilibrium market price of $925.

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Consider a Hydro Quebec bond with a face value of $1000, and a present value of $1175. If this bond is offered for sale at $1025, then
a. Excess supply of this bond will drive the price down until it reaches its face value.
b. Individuals will purchase the bond at the offer price which will drive down the price further.
c. Excess demand for this bond will drive the price up until it reaches its equilibrium market price of $1175.
d. The equilibrium market price of this bond has been achieved.
e. Hydro Quebec will be forced to change the face value of the bond.

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Consider two bonds, Bond A and Bond B, offered for sale in the same market for financial assets:
- Bond A has a face value of $1000, a market price of $971, and matures in one year.
- Bond B has a face value of $1000, a market price of $926, and matures in one year.
Which of the following statements about Bonds A and B are correct?
a. Bond B has a higher present value than Bond A.
b. Bond A has a lower present value than Bond B.
c. Bond B has a higher yield than Bond A.
d. Bond A has a higher yield than Bond B.
e. There is a disequilibrium in this market for financial assets.

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If the current market price of a bond is less than the present value of the income stream the bond will produce, the price will ________ due to excess ________ of/for the bond.
a. Rise; supply
b. Fall; supply
c. Rise; demand
d. Fall; demand

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Suppose a Government of Canada bond is being offered in financial markets at a price that is lower than its present value. We can expect that
a. The lack of demand for this bond will cause its present value to fall.
b. The price of the bond will fall further.
c. The relatively high demand for this bond will cause its price to rise.
d. The face value of the bond will be adjusted to a lower value.
e. The face value of the bond will be adjusted to a higher value.

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Consider two bonds, Bond A and Bond B, offered for sale in the same market for financial assets:
- Bond A has a face value of $1000, a market price of $971, and matures in one year.
- Bond B has a face value of $1000, a market price of $926, and matures in one year.
Which of the following statements about Bonds A and B are correct?
a. Bond A is perceived as a riskier asset than Bond B.
b. Bond B is perceived as a riskier asset than Bond A.
c. Bond B has a higher present value than Bond A.
d. There is a disequilibrium in this market for financial assets.

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An analyst is considering the purchase of a Government of Canada bond that will pay its face value of $10 000 in one year's time, but pay no direct interest. The market interest rate is 4% and the bond is being offered for sale at a price of $9800. The analyst should recommend
a. Purchasing the bond because the buyer will earn a profit of $185.
b. Purchasing the bond because the bond price is equal to its present value.
c. Not purchasing the bond because the price is lower than its present value.
d. Not purchasing the bond because the buyer could earn an additional $192 by investing the $9800 elsewhere.
e. Not purchasing the bond because the buyer could earn an additional $392 by investing the $9800 elsewhere.

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An analyst is considering the purchase of a Government of Canada bond that will pay its face value of $10 000 in one year's time, but pay no direct interest. The market interest rate is 4% and the bond is being offered for sale at a price of $9400. The analyst should recommend
a. Purchasing the bond because the purchase price is more than its present value and is therefore profitable.
b. Purchasing the bond because the purchase price is less than its present value and is therefore profitable.
c. Not purchasing the bond because the buyer could earn an additional $224 by investing the $9400 elsewhere.
d. Not purchasing the bond because the buyer could earn an additional $376 by investing the $9400 elsewhere.
e. Not purchasing the bond because the purchase price is less than its present value.

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Suppose a Government of Canada bond is being offered in financial markets at a price that is higher than its present value. We can expect that
a. The price of the bond will rise further.
b. The face value of the bond will be adjusted to a lower value.
c. The relatively high demand for the bond will cause its present value to rise.
d. The lack of demand for this bond will cause its price to fall.
e. The face value of the bond will be adjusted to a lower value.

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In order to calculate the present value of the sum of future payments due from a bond, we use the interest rate to ________ those future payments.
a. Adjust
b. Correct
c. Discount
d. Inflate
e. Maximize

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Suppose the market interest rate is stable at 4% and we see a decline in bond prices (and thus a rise in bond yields). One explanation for this is that
a. Bond issuers are facing an excess demand for their bonds.
b. Bond purchasers perceive a reduction in riskiness and thus a higher expected present value from those bonds.
c. There is no causal relationship between market interest rates and bond prices.
d. Bond purchasers perceive an increase in riskiness and thus a lower expected present value from those bonds.
e. There is a positive relationship between interest rates and bond prices.

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When the market price of a bond falls, ceteris paribus, then
a. The term to maturity of the bond increases.
b. The term to maturity of the bond decreases.
c. The yield on that bond rises.
d. The yield on that bond also falls.
e. The market interest rate rises.

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Suppose the market interest rate rises from 3% to 4%. This will lead to ________ in bond prices and ________ in bond yields.
a. A fall; a fall
b. A fall; a rise
c. A rise; a fall
d. A rise; a rise
e. No change; no change

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Suppose the market interest rate falls from 3% to 2%. This will lead to ________ in bond prices and ________ in bond yields.
a. A fall; a fall
b. A fall; a rise
c. A rise; a fall
d. A rise; a rise
e. No change; no change

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The term "demand for money" usually refers to the
a. Aggregate demand for money balances in the economy.
b. Average person's desire to hold cash.
c. Cash and deposits actually held by firms.
d. Sum of all desired holdings of cash.
e. Sum of all desired assets, including cash, bonds, and real property.

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The opportunity cost of holding money rather than bonds is
a. The rate of interest earned on bonds.
b. The price level.
c. Forgone consumption.
d. Forgone liquidity.
e. Zero — there is no opportunity cost of holding money.

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If a person is holding money for the purchase of goods and services, this demand for money is known as
a. Speculative demand.
b. Precautionary demand.
c. Transactions demand.
d. Real balance demand.
e. Nominal balance demand.

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The "transactions demand" for money arises from the fact that
a. There is uncertainty in the receipts of income.
b. There is uncertainty about the movement of interest rates.
c. Households wish to have all their wealth in the form of money.
d. Households decide to hold money in order to make purchases of goods and services.
e. Households want to keep cash on had to buy bonds if bond prices drop.

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The "precautionary demand" for money arises from the
a. Fear that interest rates will fall.
b. Fear that interest rates will rise.
c. Need to make predictable purchases of goods and services.
d. Uncertainty about when some expenditures will be necessary.
e. Desire to avoid paying interest on credit purchases.

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Other things being equal, the transactions demand for money tends to increase when
a. Interest rates rise.
b. Interest rates stop rising.
c. National income rises.
d. National income falls.
e. The price level falls.

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Consider the demand for money. If real GDP falls, other things being equal, we can expect
a. An increase in the speculative demand for money.
b. An increase in the total demand for money.
c. A decrease in transactions demand for money.
d. An increase in transactions demand for money.
e. An increase in precautionary demand for money.

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Suppose an economic analyst suggests that investors should now hold cash instead of stocks or bonds. The analyst is probably encouraging an increase in money balances for which reason?
a. Transaction demand
b. Precautionary demand
c. Speculative demand
d. Present value demand
e. Portfolio demand

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A firm that holds cash to avoid penalties associated with the late payment of bills is demonstrating which type of demand for money?
a. Transactions demand
b. Precautionary demand
c. Speculative demand
d. Present value demand
e. Risk-return demand

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Among other things, people hold cash balances for which of the following reasons?
- To meet unforeseen emergencies
- To maximize their returns on interest-earning assets
- To guard against the uncertainty of the timing of receipts and payments
a. 1 only
b. 2 only
c. 3 only
d. 1 and 2
e. 1 and 3

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Speculative demand for money arises from the desire by individuals and firms to hold cash balances
a. For speculative equity purchases.
b. In anticipation of changes in interest rates and bond prices.
c. To meet unforeseen business expenses.
d. In anticipation of investing in capital purchases for the firm.
e. To maintain adequate cash flow in case of inflation.

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In the basic AD/AS macro model, it is assumed that, for any given interest rate, the demand for money depends on the
a. Aggregate demand for goods and services.
b. Level of government spending.
c. Rate of growth of real GDP.
d. Level of taxes.
e. Level of real GDP and the price level.

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The demand for money (MD) function defines the relationship between
a. Interest rates and bond prices.
b. Inflation and bond prices.
c. Interest rates and financial assets.
d. The quantity of money demanded and the price level.
e. The quantity of money demanded and the rate of interest.

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Refer to Figure 27-1. A rightward shift of the money demand curve can be caused by
a. An increase in the price level.
b. A decrease in the price level.
c. A decrease in real GDP.
d. An increase in the rate of interest.
e. A decrease in the rate of interest.

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Refer to Figure 27-1. A leftward shift in the money demand curve can be caused by by
a. An increase in the rate of interest.
b. A decrease in the rate of interest.
c. An increase in the price level.
d. A decrease in real GDP.
e. An increase in real GDP.

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Refer to Figure 27-1. Given the money demand curve, , an increase in the quantity of money demanded from to can be caused by
a. An increase in the price level.
b. A decrease in the price level.
c. An increase in real GDP.
d. An increase in the rate of interest.
e. A decrease in the rate of interest.

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Refer to Figure 27-1. Given the money demand curve, , a decrease in the quantity of money demanded from can be caused by
a. An increase in the price level.
b. A decrease in the price level.
c. An increase in real GDP.
d. An increase in the rate of interest.
e. A decrease in the rate of interest.

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If there are just two assets, bonds and money, then an excess demand for money implies
a. An excess supply of bonds.
b. An excess demand for bonds.
c. Equilibrium in the bond market.
d. An indeterminate equilibrium in the bond market.
e. Nothing about conditions of demand for the other financial asset.

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Assume there are just two assets, money and bonds. We can expect that an individual with a given level of wealth will
a. Hold less money when bond prices rise.
b. Hold more money when the current interest rate is very low.
c. Not hold money as long as bonds pay a positive rate of interest.
d. Hold lots of money even at very high interest rates.
e. Hold less money when the current interest rate is very low.

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According to the "liquidity preference" theory of the rate of interest, if the supply of money increases, then, ceteris paribus, bond prices will
a. Fall as the rate of interest rises.
b. Rise as the rate of interest rises.
c. Fall as the rate of interest falls.
d. Rise as the rate of interest falls.
e. Stay the same.

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If the general price level were to increase, other things being equal, the money demand function would
a. Not be affected.
b. Shift to the left.
c. Shift to the right.
d. Shift, but the direction of the shift cannot be predicted.
e. Become steeper but not shift.

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If the annual market interest rate is 20%, the annual opportunity cost of having $50 cash in your pocket is
a. $0.
b. $2.
c. $10.
d. $50.
e. $1000.

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Suppose that at a given interest rate and money supply, all firms and households simultaneously try to add to their money balances. They do this by trying to ________, which causes an excess ________, which causes a(n) ________, and finally a(n) ________ in the interest rate.
a. Sell bonds; supply of bonds; increase in the price of bonds; decrease
b. Buy bonds; supply of bonds; decrease in the price of bonds; increase
c. Sell bonds; demand for bonds; increase in the price of bonds; decrease
d. Buy bonds; demand for bonds; increase in the price of bonds; decrease
e. Sell bonds; supply of bonds; decrease in the price of bonds; increase

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Suppose that at a given interest rate and money supply, all firms and households simultaneously try to reduce their money balances. They do this by trying to ________, which causes an excess ________, which causes a(n) ________, and finally a(n) ________ in the interest rate.
a. Sell bonds; supply of bonds; increase in the price of bonds; decrease
b. Buy bonds; supply of bonds; decrease in the price of bonds; increase
c. Sell bonds; demand for bonds; increase in the price of bonds; decrease
d. Buy bonds; demand for bonds; increase in the price of bonds; decrease
e. Sell bonds; supply of bonds; decrease in the price of bonds; increase

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Consider the demand for money curve. As we move down and to the right along the curve, the opportunity cost of holding money
a. Is increasing, so households and firms increase their desired money holdings.
b. Is increasing, so households and firms decrease their desired money holdings.
c. Is declining, so households and firms decrease their desired money holdings.
d. Is declining, so households and firms increase their desired money holdings.

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Consider the demand for money curve. As we move up and to the left along the curve, the opportunity cost of holding money
a. Is increasing, so households and firms increase their desired money holdings.
b. Is increasing, so households and firms decrease their desired money holdings.
c. Is declining, so households and firms decrease their desired money holdings.
d. Is declining, so households and firms increase their desired money holdings.

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Ceteris paribus, a rightward shift of the money demand curve could indicate which of the following:
- An increase in demand for bonds;
- An increase in the price level;
- An increase in real GDP.
a. 1 only
b. 2 only
c. 3 only
d. 1 and 2 only
e. 2 and 3 only

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When there is an excess demand for money balances, monetary equilibrium is established by a process that involves
- Movement down the money demand function;
- Interest rates falling;
- The price of bonds falling.
a. 1 only
b. 2 only
c. 3 only
d. 1 and 2
e. 2 and 3

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Consider a money market in which there is an excess supply of money at the prevailing interest rate. The likely response is
a. The corresponding excess supply for bonds will cause the price of bonds to increase, and the interest rate to fall, until the quantity demanded of money equals the quantity supplied of money.
b. The corresponding excess demand for bonds will cause the price of bonds to increase, and the interest rate to fall, until the quantity demanded of money equals the quantity supplied of money.
c. The money supply curve will shift to the left until the demand for money equals the supply.
d. The money supply curve will shift to the right until the demand for money equals the supply.
e. The money demand curve will shift to the right, causing the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply.

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Consider a money market in which there is an excess demand for money at the prevailing interest rate. The likely response is ________ until the quantity demanded of money equals the quantity supplied of money.
a. The corresponding excess demand of bonds will cause the price of bonds to decrease and the interest rate to rise
b. The money supply curve will shift to the left
c. The money supply curve will shift to the right
d. The money demand curve will shift to the right, causing the price of bonds to increase, and the interest rate to fall
e. The corresponding excess supply of bonds will cause the price of bonds to decrease and the interest rate to rise

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When there is an excess supply of money, monetary equilibrium is restored through
e. Interest rates rising.
b. Individuals attempting to sell bonds.
c. The price of bonds falling.
d. The price of bonds increasing.
e. The price level falling.

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Monetary equilibrium occurs when the
a. Growth in the money supply is zero.
b. Existing supply of money is willingly held by households and firms in the economy at the current rate of interest.
c. Nominal rate of interest equals the real rate of interest.
d. The money supply is growing at a constant rate.
e. Supply and demand for all goods in the economy are equal at the current rate of interest.

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If the economy is currently in monetary equilibrium, an increase in the money supply will
a. Not change the equilibrium conditions.
b. Cause a reduction in the demand for money, leading to a higher rate of interest.
c. Cause an excess demand for money and a decrease in the rate of interest.
d. Cause an increase in the demand for money, leading to a lower rate of interest.
e. Lead to a movement down the money demand curve to a lower rate of interest.

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Refer to Figure 27-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. What is the long-run effect of this change?
a. A higher price level
b. A higher price level and higher real GDP
c. Higher real GDP
d. Lower real GDP
e. No change in price level or real GDP

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Refer to Figure 27-2. Starting at equilibrium E0, an increase in real GDP will lead to a
a. Shift of the MS curve to the left and an increase in the interest rate.
b. Shift of the MS curve to the right and a fall in the interest rate.
c. Downward movement along the MD curve and a lower interest rate.
d. Shift of the MD curve to the left and a fall in the interest rate.
e. Shift of the MD curve to the right and an increase in the interest rate.

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Refer to Figure 27-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. What is the adjustment toward the new long-run equilibrium?
a. The AD curve shifts to AD1. The inflationary gap causes prices to rise, AS shifts to AS1 and equilibrium is restored at E3.
b. The AD curve shifts to AD1. The inflationary gap causes wages to rise, AS shifts to AS1 and equilibrium is restored at E2.
c. The AS curve shifts to AS1 which causes the AD curve to shift to AD1, resulting in a new equilibrium at E2.
d. The AD curve shifts to AD1. The increased money supply causes an increase in potential output and a new long-run equilibrium at E1.
e. The AD and AS curves shift to AD1 and AS1 simultaneously. The increased price level pushes them back to AD0 and AS0 and equilibrium is restored at E0.

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Refer to Figure 27-2. If the interest rate is i2, the subsequent adjustment in the money market is as follows:
a. Excess demand for money leads to a sale of bonds, which in turn causes the interest rate to rise.
b. MS curve will shift to the left as to maintain the interest rate at i2.
c. The interest rate will remain at i2, because the money market is in equilibrium at this interest rate.
d. Excess supply of money leads to the purchase of bonds, which in turn causes the interest rate to fall to i0.
e. Excess supply of money leads to the sale of bonds, which in turn causes the interest rate to fall.

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Refer to Figure 27-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. The initial effect is
a. A shift of the AD curve to AD1 and an increase in real GDP to Y1.
b. A shift of the AS curve to AS1 and a decrease in real GDP to Y2.
c. A shift of the AD curve to AD1, and then a shift back to AD0 to restore equilibrium at E0.
d. A simultaneous shift of AD to AD1 and AS to AS1, resulting in a new equilibrium at E2.
e. No change in the short-run equilibrium or level of real GDP.

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Refer to Figure 27-2. If the interest rate is i1, the subsequent adjustment in the money market is as follows:
a. Excess demand for money leads to a sale of bonds, which in turn causes the interest rate to rise.
b. The MS curve will shift to the left so as to maintain the interest rate at i2.
c. The interest rate will remain at i1 because the money market is in equilibrium at this interest rate.
d. Excess supply of money leads to the purchase of bonds, which in turn causes the interest rate to fall.
e. Excess demand for money leads to a purchase of bonds, which in turn causes the interest rate to rise.

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Refer to Figure 27-2. Starting at equilibrium E0, an increase in the supply of money will result in the
a. Shift of the MS curve to the left and an increase in the interest rate.
b. Shift of the MS curve to the right and a fall in the interest rate.
c. Downward movement along the MD curve and a higher interest rate.
d. Shift of the MD curve to the left and a fall in the interest rate.
e. Upward movement along the curve and a lower interest rate.

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Which of the following is partly responsible for the negative slope of the aggregate demand (AD) curve?
a. Open-market operations of the Bank of Canada
b. The monetary transmission mechanism
c. The multiplier effect
d. The speculative demand for money
e. The precautionary demand for money

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If the economy is experiencing an undesired inflationary gap, the Bank of Canada could
a. Increase the supply of money, lowering interest rates, which would shift the AD curve inward.
b. Decrease the demand for money, lowering interest rates, which would shift the AD curve outward.
c. Decrease the supply of money, raising interest rates, which would shift the AD curve inward.
d. Increase the supply of money, lowering interest rates, which would shift the AD curve outward.
e. Shift the investment demand curve to the right by lowering interest rates, which would shift the AD curve outward.

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When the price level increases, ceteris paribus, it causes households and firms to try to
a. Reduce money balances, which drives interest rates down.
b. Reduce money balances, which drives interest rates up.
c. Reduce money balances, which drives national income up.
d. Increase money balances, which drives interest rates down.
e. Increase money balances, which drives interest rates up.

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Consider the monetary transmission mechanism. In an open economy, such as Canada's, a decrease in the money supply leads to a rise in the interest rate. This is followed by
a. An outflow of financial capital and an appreciation of the Canadian dollar.
b. An inflow of financial capital and a depreciation of the Canadian dollar.
c. An outflow of financial capital and a depreciation of the Canadian dollar.
d. An inflow of financial capital and an appreciation of the Canadian dollar.

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Refer to Figure 27-2. Suppose the market interest rate is i1. The situation in this market is as follows:
a. Firms and households are attempting to increase their money holdings by selling bonds.
b. Firms and households are attempting to decrease their money holdings by selling bonds.
c. Firms and households are attempting to increase their money holdings by buying bonds.
d. Firms and households are attempting to decrease their money holdings by buying bonds.
e. The market is in equilibrium and no change will occur.

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If there are just two assets, bonds and money, then an equilibrium between the quantity demanded of money and the quantity supplied of money implies
a. An excess supply of bonds.
b. An excess demand for bonds.
c. Equilibrium in the bond market.
d. An indeterminant equilibrium in the bond market.
e. Nothing about conditions of demand for the other financial asset.

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Refer to Figure 27-2. Suppose the market interest rate is . The situation in this market is as follows:
a. Firms and households are attempting to increase their money holdings by selling bonds.
b. Firms and households are attempting to decrease their money holdings by selling bonds.
c. Firms and households are attempting to increase their money holdings by buying bonds.
d. Firms and households are attempting to decrease their money holdings by buying bonds.
e. The market is in equilibrium and no change will occur.

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Other things being equal, a decrease in the money supply will lead to ________ in real interest rates and, in the short run, ________ in real GDP because ________.
a. An increase; an increase; more money is available for investing in bonds from abroad
b. An increase; a decrease; of the decrease in desired investment
c. A decrease; an increase; of the increase in desired investment
d. A decrease; a decrease; of the decrease in desired investment
e. A decrease; a decrease, of the decrease in net exports

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Consider the monetary transmission mechanism. In an open economy, such as Canada's, an increase in the money supply leads to a fall in the interest rate. This is followed by
a. An outflow of financial capital and an appreciation of the Canadian dollar.
b. An inflow of financial capital and a depreciation of the Canadian dollar.
c. An outflow of financial capital and a depreciation of the Canadian dollar.
d. An inflow of financial capital and an appreciation of the Canadian dollar.

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How does monetary equilibrium re-establish itself when there is an excess supply of money balances?
a. The interest rate rises
b. Individuals attempt to sell bonds
c. The price of bonds falls
d. The price of bonds increases
e. The price level falls

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Which of the following phenomena add a second channel to the monetary transmission mechanism?
a. Inflation
b. Diminishing marginal returns
c. Rising productivity
d. Open-market operations
e. International capital mobility

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The linkage between changes in monetary equilibrium and changes in aggregate demand is called the
a. Monetary transmission mechanism.
b. Simple multiplier.
c. Equilibrium mechanism.
d. Transactions mechanism.
e. Liquidity preference function.

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Which of the following correctly describes the way in which a change in the money supply affects aggregate demand?
a. A shift of the ID curve and a movement along the aggregate demand curve
b. A movement along the ID curve and a shift of the aggregate demand curve
c. A shift of both the ID curve and the aggregate demand curve
d. Movements along the ID curve and the aggregate demand curve
e. A movement along the aggregate demand curve

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Other things being equal, a reduction in the money supply will lead to a
a. Fall in the rate of interest and an increase in desired investment expenditure.
b. Rise in the rate of interest and in increase in desired investment expenditure.
c. Fall in the rate of interest and a decrease in desired investment expenditure.
d. Rise in the rate of interest and a decrease in desired investment expenditure.
e. Rise in the rate of interest and no change in desired investment expenditure.

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Changes in the money supply in an open economy, as compared to a closed economy,
a. Are likely to have a greater effect on AD because of the secondary effect that exchange rates have on exports.
b. Are likely to have a smaller effect on AD because the secondary effect of exchange rates will offset the changes created by monetary disturbances.
c. Are the same in either situation.
d. Affect investment to a greater degree because foreign investors can create new investment in an open economy.
e. Cannot be determined with the available information.

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The economy's investment demand function describes the
a. Positive relationship between desired investment, the rate of interest, and aggregate expenditure.
b. Positive relationship between desired investment and the rate of interest.
c. Negative relationship between the demand for money and the interest rate.
d. Negative relationship between desired investment and aggregate expenditure.
e. Negative relationship between the interest rate and desired investment.

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Refer to Figure 27-3. The increase in the money supply from MS0 to MS1 shifts the monetary equilibrium from E0 to E1. The result is
a. A decrease in the interest rate and an increase in desired investment.
b. An increase in the interest rate and a decrease in desired investment.
c. Sustained monetary disequilibrium.
d. A shift of the investment demand curve to the right.
e. A shift of the investment demand curve to the left.

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Consider the monetary transmission mechanism in an open economy. Other things being equal, a decrease in the domestic money supply leads to
a. An appreciation of the domestic currency, thereby inhibiting net exports and reducing aggregate demand.
b. A depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand.
c. A depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
d. An appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
e. An appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand.

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Refer to Figure 27-3. The increase in desired investment expenditure, as shown by the movement from point A to point B, occurs because of
a. A fiscal policy designed to encourage investment.
b. An increase in the money supply.
c. A change in sales, which increases inventory investment.
d. An improvement in business confidence.
e. A tax-rate induced change in desired investment.

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Consider the monetary transmission mechanism in an open economy. Other things being equal, an increase in the domestic money supply leads to
a. An appreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand.
b. A depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand.
c. A depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
d. An appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
e. An appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand.

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The monetary transmission mechanism in an OPEN economy is more complicated than it is in a closed economy because the effects of domestic monetary contraction or expansion are
a. Strengthened because domestic interest rates must be equal to those in the rest of the world.
b. Weakened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world.
c. Strengthened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world.
d. Strengthened because changes in the domestic money supply cause changes in the exchange rate, which then reinforce the changes in desired investment.
e. Weakened because changes in the domestic money supply cause changes in the exchange rate which then offset the changes in desired investment.

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The monetary transmission mechanism can be set in motion when a rise in the price level causes
a. An increased demand for money balances, leading people to sell bonds, which in turn raises the interest rate.
b. An increased demand for money balances, leading people to sell bonds, which in turn decreases the interest rate.
c. An increased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate.
d. A decreased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate.
e. A decreased demand for money balances, leading people to sell bonds, which in turn raises the interest rate.

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Which of the following explanations for the negative slope of the AD curve is correct? A fall in the price level, with an unchanged money supply, causes the transactions demand for money to
a. Decrease, shifting the MD curve downward, lowering the interest rate and increasing desired investment, causing the AE curve to shift upward.
b. Decrease, shifting the MD curve upward, raising the interest rate and increasing desired investment, causing the AE curve to shift upward.
c. Increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift upward.
d. Increase, shifting the MD curve downward, lowering the interest rate and decreasing desired investment, causing the AE curve to shift downward.
e. Increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift downward.

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If real GDP is greater than potential GDP, the output gap could be eliminated by
- An increase in government purchases;
- An upward shift in the AE curve;
- A reduction in the money supply.
a. 1 only
b. 2 only
c. 3 only
d. 1 or 2
e. 1 or 2 or 3

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Refer to Figure 27-3. Part (i) of the figure shows the money market and the effect of an increase in the supply of money. The corresponding sequence of events in the bond market is as follows: The ________ of money at leads firms and households to ________ bonds, which leads to a(n) ________ in the price of bonds and a decrease in the interest rate.
a. Excess demand; buy; increase
b. Excess demand; sell; decrease
c. Excess supply; buy; decrease
d. Excess supply; sell; decrease
e. Excess supply; buy; increase

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The monetary transmission mechanism describes the process by which changes in
a. Personal consumption affect real GDP.
b. Business investment influence real GDP.
c. Monetary equilibrium influence real GDP through changes in desired investment.
d. Monetary equilibrium influence the interest rate.
e. Interest rate affect the demand for money.

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Which one of the following statements best describes the monetary transmission mechanism?
a. An increase in personal consumption leads to an upward shift in the AE curve and thereby increases real GDP.
b. An increase in government spending causes the AE curve to shift upwards, leading to a higher GDP.
c. A decrease in imports causes the AE curve to shift upwards, leading to a higher interest rate.
d. An increase in the money supply leads to a lower interest rate, higher desired investment, an upward shift in the AE curve and a higher GDP.
e. A decrease in the money supply leads to a lower interest rate, higher desired investment, an upward shift in the AE curve and a higher GDP.

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If the Bank of Canada were to increase the money supply, other things being equal, we would expect the aggregate expenditure curve to shift
a. Upward and the aggregate demand curve to shift to the right.
b. Upward and the aggregate demand curve to shift to the left.
c. Downward and the aggregate demand curve to shift to the right.
d. Downward and the aggregate demand curve to shift to the left.
e. Downward but the aggregate demand curve will remain unchanged.

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Consider monetary equilibrium and the monetary transmission mechanism. An exogenous fall in the price level will lead to
a. An excess demand for money resulting in a rise in the rate of interest, which shifts the AE function downward and decreases the equilibrium level of income.
b. An excess supply of money resulting in a fall in the rate of interest, which shifts the AE function upward and increases the equilibrium level of income.
c. People being able to buy more with their increased wealth, which will shift the AE function downward and decrease the equilibrium level of income.
d. A movement to the right along the AE function.
e. A movement to the left along the AE function.

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If the Bank of Canada were to reduce the money supply, other things being equal, we would expect the aggregate expenditure curve to shift
a. Upward and the aggregate demand curve to shift to the right.
b. Upward and the aggregate demand curve to shift to the left.
c. Downward and the aggregate demand curve to shift to the right.
d. Downward and the aggregate demand curve to shift to the left.
e. Downward but the aggregate demand curve will remain unchanged.

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An increase in the money supply sets the monetary transmission mechanism in motion which results in
a. A rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
b. A fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
c. A fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
d. A rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
e. A rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.

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A decrease in the money supply is most likely to
a. Raise interest rates, investment, and aggregate expenditures.
b. Raise interest rates, lower investment, and lower aggregate expenditures.
c. Lower interest rates, raise investment, and raise aggregate expenditures.
d. Lower interest rates, investment, and aggregate expenditures.
e. Raise interest rates and investment, and lower aggregate expenditures.

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The monetary transmission mechanism provides a partial explanation for the downward slope of the AD curve. For a given vertical MS curve, the explanation for the negative relationship between the price level and aggregate demand is as follows: A rise in the price level shifts the curve
a. To the right, the interest rate rises and desired investment expenditure rises.
b. To the left, the interest rate falls, and desired investment expenditure rises.
c. To the right, the interest rate rises and desired investment expenditure falls.
d. To the left, the interest rate rises and desired investment expenditure falls.
e. To the right, the interest rate falls and desired investment expenditure falls.

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Consider monetary equilibrium and the monetary transmission mechanism. An exogenous decrease in the price level, with no change in the supply of money, will
a. Increase the demand for money and increase aggregate expenditure.
b. Increase the demand for money and decrease aggregate expenditure.
c. Decrease the demand for money and increase real GDP along the aggregate demand curve.
d. Decrease the demand for money and decrease real GDP along the aggregate demand curve.
e. Decrease the demand for money and leave aggregate demand unchanged.

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A decrease in the money supply sets the monetary transmission mechanism in motion which results in
a. A rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
b. A fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
c. A fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
d. A rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
e. A rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.

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Consider the monetary transmission mechanism. A disturbance to monetary equilibrium which changes the interest rate will affect aggregate demand through
a. A shift of the investment demand function and a movement along the aggregate expenditure curve.
b. A movement along the investment demand function and a shift of the aggregate expenditure curve.
c. A shift of both the investment demand function and the aggregate expenditure curve.
d. Movements along the investment demand function and the aggregate expenditure curve.
e. A movement along the aggregate expenditure curve.

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Consider monetary equilibrium and the monetary transmission mechanism. An exogenous rise in the price level, with no change in the supply of money, will
a. Increase the demand for money and increase desired aggregate expenditure.
b. Increase the demand for money and decrease desired aggregate expenditure.
c. Decrease the demand for money and increase aggregate demand.
d. Decrease the demand for money and decrease aggregate demand.
e. Decrease aggregate demand but not affect the demand for money.

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Refer to Figure 27-5. This economy begins in equilibrium with , and real GDP equal to potential GDP (with and ). At this initial equilibrium, the money supply is ________, the interest rate is ________, the price level is ________, and real GDP is ________.
a. $500 billion; 2%; 104; $800 billion
b. $500 billion; 2%; 102; $805 billion
c. $500 billion; 4%; 100; $800 billion
d. $540 billion; 3%; 100; $800 billion
e. $540 billion; 4%; 104; $805 billion

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Refer to Figure 27-5. This economy begins in equilibrium with , and real GDP equal to potential GDP (with and ). Now suppose there is an increase in the money supply to $540 billion. The initial response in this economy is
a. An increase in the demand for money, causing a shift of the money demand curve to , and a fall in interest rate to 3%.
b. An increase in the demand for money, causing a shift of the money demand curve to , and a fall in the interest rate to 2%.
c. The AD and AS curves shift up simultaneously.
d. A movement down along the money demand curve to a lower interest rate at 2%.
e. An increase in the demand for money, causing a shift of the money demand curve to and the interest rate remains at 4%.

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Refer to Figure 27-5. This economy begins in equilibrium with M0S, M0D and real GDP equal to potential GDP (with and ). Now suppose there is an increase in the money supply to $540 billion. After the initial effect on the interest rate, the next response in this economy is as follows:
a. The lower interest rate stimulates investment demand, which causes the AD curve to shift to . Real GDP rises to $805 billion and the price level rises to 102.
b. The lower interest rate stimulates an increase in the demand for money, which causes the MD curve to shift to . The interest rate rises to 3%.
c. The lower interest rate causes wages and other factor prices to rise, which causes the AS curve to shift to . Real GDP falls to $795 billion and the price level rises to 102.
d. The higher interest rate causes wages and other factor prices to rise, which causes the AS curve to shift to . Real GDP falls to $795 billion and the price level rises to 102.

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Refer to Figure 27-5. This economy begins in equilibrium with M0S, M0D and real GDP equal to potential GDP (with and ). Now suppose there is an increase in the money supply to $540 billion. The short-run effects of this increase lead to the opening of a(n) ________ gap of ________.
a. Recessionary; $5 billion
b. Recessionary; $10 billion
c. Inflationary; $5 billion
d. Inflationary; $10 billion
e. There is no output gap.

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Any central bank, including the Bank of Canada, can implement its monetary policy by directly influencing either ________ or ________, but not both.
a. Money supply; money demand
b. Aggregate supply; aggregate demand
c. The money supply; the interest rate
d. Aggregate demand; the interest rate
e. The price level; the interest rate

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In general, if a central bank chooses to target the money supply in its implementation of monetary policy, then
a. The interest rate is determined by monetary equilibrium, and cannot be precisely predicted because of possible shocks to money demand.
b. The interest rate can be more carefully controlled.
c. Implementation of policy is more straightforward because money supply is more easily controlled than the interest rate.
d. The interest rate is determined by the Minister of Finance.
e. The implementation of policy is more straightforward because the central bank can control the process of deposit creation.

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In general, if a central bank chooses to target the interest rate in its implementation of monetary policy, then
a. It is more difficult to communicate this policy to the public than a change in money supply.
b. The central bank can more easily control the process of deposit creation by the commercial banks.
c. The money supply is determined by the Minister of Finance.
d. The implementation of policy is more straightforward because the central bank knows precisely the slope and position of the money demand curve.
e. It conducts the necessary open-market operations to accommodate the resulting change in money demand.

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Consider the implementation of monetary policy. One difficulty in attempting to stabilize the economy by controlling the money supply is that
a. Firms may be sensitive to changes in the rate of interest.
b. The Bank of Canada can print more money.
c. The commercial banks may choose not to hold excess reserves.
d. The money demand function may be unstable.
e. The Canadian government requires long-term loans.

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If the Bank of Canada chooses to expand M2 by exactly $1 million, it could do so by
a. Buying $1 million worth of government securities on the open market.
b. Selling $1 million worth of government securities on the open market.
c. Increasing reserves at the commercial banks by $1 million.
d. Decreasing reserves at the commercial banks by $1 million.
e. None of the above - the Bank of Canada cannot precisely control the money supply.

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In practice, it is not possible for the Bank of Canada to control the money supply because
a. The resulting effects on the value of the Canadian dollar are difficult to predict.
b. It cannot control the process of deposit creation carried out by the commercial banks.
c. It cannot control the amount of cash reserves that are injected into or withdrawn from the banking system.
d. It does not have the legal power to do so.
e. None of the above—the Bank of Canada could control the money supply if it chose to do so.

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Suppose the Bank of Canada were to implement an expansionary monetary policy by buying government securities on the open market, thereby increasing cash reserves in the banking system. If the commercial banks do not expand their lending in response, then
- There would be no change in the money supply at all;
- The Bank of Canada could force the commercial banks to expand their lending, based on regulations in the Bank Act;
- The increase in the overall money supply would be smaller than the Bank of Canada may have intended.
a. 1 only
b. 2 only
c. 3 only
d. 1 or 2
e. 2 or 3

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One reason that the Bank of Canada does not try to influence the money supply directly is that
a. The Bank of Canada has many other policy tools with which it can influence aggregate demand.
b. The Bank of Canada does not have the mandate to change the money supply.
c. Because the money demand curve is almost horizontal, changes in the money supply would have little or no effect on the interest rate.
d. Because the investment demand curve is almost vertical, any change in the interest rate resulting from a change in money supply would have little or no effect on desired investment expenditure.
e. The slope of the money demand curve is not precisely known, and so the effect on the interest rate of a change in money supply is uncertain.

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Most central banks, including the Bank of Canada, implement monetary policy by
a. Controlling the money supply directly.
b. Influencing a short-term interest rate directly.
c. Influencing investment demand directly.
d. Influencing the demand for money directly.
e. Controlling the process of deposit creation in the commercial banking system.

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The Bank of Canada chooses to influence interest rates directly rather than influencing the money supply directly because
a. The former method does not require knowledge of the position of the money demand curve.
b. The deposit creation mechanism in the banking system is outside the full control of the Bank of Canada.
c. It is easier to communicate policy actions to the public by setting the interest rate.
d. The former method does not require knowledge of the slope of the money demand curve.
e. All of the above.

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Refer to Figure 28-1. If the Bank of Canada raises the target interest rate to 3%, as shown in part (i), then it must accommodate the resulting ________ in quantity of money demanded by ________ in financial markets.
a. Increase; selling government securities
b. Decrease; selling government securities
c. Increase; buying government securities
d. Decrease; buying government securities

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Refer to Figure 28-1. If the Bank of Canada pursues a(n) ________ monetary policy and raises the target interest rate from 2% to 3%, then the quantity of money demanded will ________.
a. Contractionary; rise
b. Contractionary; fall
c. Expansionary; not change
d. Expansionary; rise
e. Expansionary; fall

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Refer to Figure 28-1. If the Bank of Canada's goal is to increase the target interest rate from 2% to 3%, then the most effective approach is to
a. Reduce the money supply to , as shown in part (ii), and then let the interest rate adjust to 3%.
b. Increase the money supply to , as shown in part (ii), and then let the interest rate adjust to 3%.
c. Allow the money supply to shift to by market forces, which will cause the interest rate to rise to 3%.
d. Raise the interest rate to 3%, as shown in part (i), and then buy government securities in financial markets to accommodate the decline in the quantity of money demanded.
e. Raise the interest rate to 3%, as shown in part (i), and then sell government securities in financial markets to accommodate the decline in the quantity of money demanded.

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Refer to Figure 28-1. The Bank of Canada must be able to easily communicate its monetary policy actions to the public. Which approach is more amenable to this requirement, and why?
a. Part (ii) - targeting the money supply: because an announcement of a 1% decrease in the money supply is more easily understood than an increase in the interest rate.
b. Part (i) - targeting the interest rate: because the Bank of Canada can more easily instruct the commercial banks to raise their interest rates.
c. Part (ii) - targeting the money supply: because the public can more easily understand that a decrease in reserves in the banking system makes it more difficult to get a loan or mortgage.
d. Part (i) - targeting the interest rate: because changes in the interest rate are much more meaningful and understandable to the public than changes in the money supply.

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Refer to Figure 28-1. One advantage of implementing monetary policy by targeting the interest rate as shown in part (i), rather than targeting the money supply as shown in part (ii), is that
a. It is easier to get political support for changes in interest rates than for changes in the money supply.
b. It is almost impossible to change the money supply without passing new legislation.
c. The overall change in interest rates, and thus on aggregate demand, is more certain.
d. Changes in interest rates have a stronger impact on aggregate demand than do changes in the money supply.
e. The position and slope of the money demand curve are known with certainty.

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In practice, the Bank of Canada uses monetary policy to reduce undesirable fluctuations in real GDP by
a. Controlling business investment expenditures directly.
b. Controlling government spending.
c. Influencing market interest rates through changes in its target for the overnight interest rate.
d. Directly influencing the money supply which affects the interest rate and hence, consumption and investment.
e. Targeting the money supply directly.

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What is the "bank rate"?
a. The interest rate at which the Bank of Canada will lend funds to the Canadian government.
b. The interest rate at which the Bank of Canada will lend funds to commercial banks.
c. The interest rate that commercial banks charge their best customers.
d. The interest rate that the Bank of Canada pays on deposits from the commercial banks.
e. It is the same as a margin requirement.

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Loans from the Bank of Canada are
a. Made only to the Canadian federal government and to provincial governments.
b. Made to commercial banks at the bank rate.
c. Made to commercial banks at the prime rate and are short-term in nature.
d. Made to large non-bank corporations.
e. The Bank's major policy instrument.

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To reduce short-term market interest rates, the Bank of Canada could
a. Reduce its target for the overnight rate.
b. Decrease the commercial banks' reserves.
c. Decrease the money supply directly.
d. Adjust the rate paid on Treasury bills.
e. Reduce the commercial banks' reserve requirements.

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The Bank of Canada determines the "bank rate" by setting it equal to the upper end of a 50 basis-point-range that the
a. Government of Canada pays for short term loans to meet interest payments on the public debt.
b. Bank of Canada announces as a target range for the overnight interest rate.
c. Bank of Canada announces as a target range for the exchange rate between the Canadian Dollar and the US Dollar.
d. Bank of Canada announces as the target range for the five-year mortgage rate.
e. Bank of Canada announces as its target for the core rate of inflation.

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To raise short-term market interest rates, the Bank of Canada could
a. Purchase government securities in the open market.
b. Increase its target for the overnight rate.
c. Increase the commercial banks' required reserves.
d. Adjust the rate paid on Treasury bills.
e. Lower the reserve requirement.

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In practice, the Bank of Canada implements its monetary policy by
a. Directly influencing the overnight interest rate.
b. Directly influencing the excess reserves in the commercial banking system.
c. Setting the money supply.
d. Directly influencing the price level.
e. Influencing the slope of the money demand curve.

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The term structure of interest rates refers to
a. The general observation that the yield on 30-year government bonds is less than the yield on 90-day Treasury bills.
b. The variance of the different interest rates available in the economy.
c. The composition of the market interest rate.
d. The variation of the market interest rate over the span of one year.
e. The pattern of interest rates that corresponds to the varying terms to maturity of government securities.

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The interest rate that commercial banks charge each other for the shortest period of borrowing or lending is called the
a. Term interest rate.
b. Prime rate.
c. Overnight interest rate.
d. Bank rate.
e. Preferred lending rate.

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The interest rate that the Bank of Canada charges commercial banks for loans is called the
a. Term interest rate.
b. Prime rate.
c. Overnight interest rate.
d. Bank rate.
e. Preferred lending rate.

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Suppose the Bank of Canada announces its target for the overnight interest rate at 2.5%. In that case, the Bank of Canada is willing to lend to commercial banks at ________% and is willing to pay ________% on deposits it receives from commercial banks.
a. 2.25; 2.5
b. 2.5; 2.0
c. 2.5; 2.5
d. 2.75; 2.25
e. 3.5; 1.5

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The Bank of Canada establishes a rate at which they will lend to commercial banks and a rate at which they will borrow from commercial banks. By doing so,
a. The Bank of Canada can ensure that the actual overnight interest rate will never fall below 2%.
b. The Bank of Canada can ensure that the commercial banks will not be earning excess profits.
c. The Bank of Canada can ensure that money demand remains at the level necessary for monetary equilibrium.
d. The Bank of Canada establishes a spread, into which all interest rates in the economy fall.
e. The Bank of Canada can ensure that the actual overnight interest rate will fall between these two interest rates.

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Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term rates in the market fall as a result. Households' and firms' demand for new loans from the commercial banks would ________. In order to make the new loans, the commercial banks require more ________.
a. Rise; government securities
b. Fall; currency
c. Rise; cash reserves
d. Remain stable; excess reserves
e. Fall; excess reserves

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Suppose the Bank of Canada raises its target for the overnight interest rate and longer-term rates in the market rise as a result. Households' and firms' demand for loans from the commercial banks would ________. In order to accommodate this change, the commercial banks require ________.
a. Rise; more government securities
b. Fall; more cash reserves
c. Rise; more currency
d. Remain stable; no change to their reserves
e. Fall; fewer cash reserves

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Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term interest rates in the market fall as a result. When this occurs, the commercial banks respond to
a. An increase in the demand for loans by buying government securities from the Bank of Canada, against which they can extend new loans.
b. An increase in the demand for loans by selling government securities to the Bank of Canada in exchange for cash, with which they can extend new loans.
c. A decrease in the demand for loans by selling government securities to the Bank of Canada and calling in existing loans.
d. A decrease in the demand for loans by buying government securities from the Bank of Canada in exchange for cash, and calling in existing loans.
e. An increase in the demand for loans by borrowing cash from the Bank of Canada with which they can extend new loans.

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Suppose the actual overnight interest rate is 3.5%. If the Bank of Canada raises its target for the overnight interest rate to 4%, and longer-term interest rates in the market rise as a result,
a. The demand for loans from commercial banks falls, the commercial banks sell government securities to the Bank of Canada, and the money supply falls.
b. The demand for loans from commercial banks rises, the commercial banks buy government securities from the Bank of Canada, and the money supply falls.
c. The demand for loans from commercial banks rises, the commercial banks sell government securities to the Bank of Canada, and the money supply rises.
d. The demand for loans from commercial banks falls, the commercial banks buy government securities from the Bank of Canada, and the money supply falls.
e. The demand for loans from commercial banks rises the commercial banks buy government securities from the Bank of Canada, and the money supply rises.

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Suppose the actual overnight interest rate is 4%. If the Bank of Canada lowers its target for the overnight rate to 3.75%, the money supply will eventually
a. Increase as a result of open-market operations.
b. Increase as a result of an increase in excess reserves in the banking system.
c. Decrease as a result of an increase in excess reserves in the banking system.
d. Decrease as a result of open-market operations.
e. Decrease as a result of a decrease in the demand for new loans.

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If the Bank of Canada wants to influence real economic variables in the short run, it uses
a. Policy instruments such as the exchange rate and investment to influence the economy.
b. Its only policy instrument—the overnight interest rate target—to influence aggregate demand.
c. Policy variables such as the exchange rate and investment to influence aggregate demand.
d. Policy variables such as open-market operations to influence aggregate demand.
e. Policy variables such as the money supply to influence investment and aggregate supply.

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The overnight interest rate is crucial to the Bank of Canada when it implements its monetary policy because
a. The Bank of Canada's first priority is to ensure the solvency of commercial banks.
b. Its changes in the overnight interest rate generally lead to changes in longer-term interest rates.
c. Overnight loans constitute a major source for open-market operations.
d. The Bank of Canada has no ability to influence other interest rates.
e. It is the result of the Bank of Canada's regular changes in the money supply.

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Suppose the Bank of Canada announces its target for the overnight interest rate at 2.75%. What is the Bank's target range for the overnight interest rate?
a. 1.75 - 3.75%
b. 2.25 - 3.25%
c. 2.5 - 3.00%
d. 2.7 - 2.8%
e. 2.74 - 2.76%

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Suppose the Bank of Canada's announced target for the overnight interest rate is 2.75%. Why should we expect commercial banks to borrow and lend overnight funds at a rate very close to this target?
a. Because the Bank of Canada Act requires that commercial banks borrow from each other at a rate no higher than 0.25% above the target rate.
b. Because commercial banks know that they can borrow from the Bank of Canada at 3.00%, and lend to the Bank at 2.50% so the rate they charge each other will stay within that range.
c. Because the Bank of Canada chooses its target rate based on the anticipated borrowing needs of the commercial banks.
d. Because it is not legal for commercial banks to transact between each other at any rate outside of the Bank of Canada's target range.
e. Because commercial banks face regulatory obstacles if they borrow from each other at any rate outside of the Bank of Canada's target range.

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How does the Bank of Canada communicate its target for the overnight interest rate to the public?
a. Monthly announcements at fixed announcement dates (FADs)
b. In its quarterly publication, "Monetary Policy Report"
c. Announcements made 8 times per year at pre-specified fixed announcement dates (FADs)
d. The target is communicated to the minister of finance for approval and then released to the public on a quarterly basis
e. The target is communicated to the Prime Minister for approval and then released to the public at 8 pre-specified fixed announcement dates (FADs)

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In Canada, open-market operations are
a. Government actions aimed at creating competition within the banking industry.
b. Loans made by the Bank of Canada to the commercial banks.
c. Conducted to enforce the reserve requirements of commercial banks.
d. No longer carried out.
e. The buying and selling of government securities by the Bank of Canada.

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The Bank of Canada's purchases and sales of government securities, when they occur, are referred to as
a. Increases and decreases in government expenditure.
b. Margin requirements.
c. Open-market operations.
d. Reserve requirements.
e. The setting of the bank rate.

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If the Bank of Canada chooses to expand the money supply directly, it could
a. Sell government securities on the open market.
b. Sell some of its foreign currency assets.
c. Reduce its deposits at commercial banks.
d. Buy government securities on the open market.
e. Change the price level.

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When the Bank of Canada enters the open market and buys or sells government securities, we refer to this as
a. Monetary policy.
b. Commercial lending.
c. Changing the target reserve ratio.
d. Setting the target ratio.
e. Open-market operations.

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The Bank of Canada conducts its open-market operations directly in response to
a. Changes in aggregate demand.
b. Orders from Parliament.
c. Its announced changes in the money supply.
d. Changes in the price level.
e. The changing demand for cash reserves from the commercial banks.

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The amount of currency in circulation in the Canadian economy is described as being endogenous to the system. This is because
a. The process of deposit creation by the commercial banks is determined by the Bank of Canada.
b. The commercial banks determine the currency in circulation in response to the Bank of Canada's changes to the money supply.
c. The Bank of Canada conducts its open-market operations in response to the changing demand for cash from the commercial banks.
d. The Bank of Canada targets the money supply directly.
e. The Bank of Canada targets the currency in circulation directly.

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Suppose the Bank of Canada reduces its target for the overnight interest rate by 0.50 percentage points. In this situation, the Bank will likely need to accommodate the eventual resulting change in the demand for money by
a. Increasing the supply of money by buying government securities on the open market.
b. Increasing the supply of money by selling government securities on the open market.
c. Decreasing the supply of money by buying government securities on the open market.
d. Decreasing the supply of money by selling government securities on the open market.
e. Maintaining the current supply of money which will increase the effectiveness of the change in the overnight interest rate.

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Suppose the Bank of Canada increases its target for the overnight interest rate by 0.25 percentage points. In this situation, the Bank will likely need to accommodate the resulting change in the demand for money by
a. Increasing the supply of money by buying government securities on the open market.
b. Increasing the supply of money by selling government securities on the open market.
c. Decreasing the supply of money by buying government securities on the open market.
d. Decreasing the supply of money by selling government securities on the open market.
e. Maintaining the current supply of money which will increase the effectiveness of the change in the overnight interest rate.

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An expansionary monetary policy by the Bank of Canada could include
a. Moral suasion to increase the commercial banks' target reserve ratio.
b. Moral suasion to reduce lending by commercial banks.
c. An open-market sale of government securities.
d. A reduction of the Bank's target for the overnight interest rate.
e. None of the above would be expansionary.

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An expansionary monetary policy would ________ and would event