Question 1

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

Accepted Answer

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

Question 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

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

Question 5

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

Accepted Answer

The nominal interest rate on currency is

Question 6

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

Accepted Answer

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

Question 7

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

Accepted Answer

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

Question 8

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

Accepted Answer

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

Question 9

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

Accepted Answer

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

Question 10

Which of the following is the most liquid asset?

Accepted Answer

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

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

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

Question 13

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

Accepted Answer

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

Question 14

Figure 15-1  
-Refer to Figure 15-1. At which interest rate is there an excess money demand?

Accepted Answer

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

Question 15

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

Accepted Answer

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

Question 16

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

Accepted Answer

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

Question 17

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

Accepted Answer

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

Question 18

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

Accepted Answer

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

Question 19

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

Accepted Answer

a. Both models use a money-demand and a

Question 20

Which of the following shifts money demand to the left?

Accepted Answer

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

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

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

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

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

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

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

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

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

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

Which of the following is the most liquid asset?

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

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

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

Figure 15-1 -Refer to Figure 15-1. At which interest rate is there an excess money demand?

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

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

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

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

Which of the following shifts money demand to the left?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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Exam 15: The Influence of Monetary Policy on Aggregate Demand

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

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

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

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

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

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

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

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

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

Which of the following is the most liquid asset?

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

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

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

Figure 15-1 -Refer to Figure 15-1. At which interest rate is there an excess money demand?

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

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

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

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

Which of the following shifts money demand to the left?

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment, and the Financial System

Unemployment and Its Natural Rate

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Small Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Fiscal Policy on Aggregate Demand

The Short-Run Tradeoff Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

Filters