Question 1

An increase in the money supply shifts the aggregate-supply curve right.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is an effect of a decrease in the interest rate?

Accepted Answer

A)  it shifts money demand to the right 
B)  foreign citizens decide to buy more Canadian bonds 
C)  firms decide to purchase new machinery 
D)  people decide to decrease residential investment 
A)  it shifts money demand to the right 
B)  foreign citizens decide to buy more Canadian bonds 
C)  firms decide to purchase new machinery 
D)  people decide to decrease residential investment

Question 3

The liquidity-preference theory assumes that the interest rate adjusts to balance the money demand and supply, where the money supply is arbitrarily determined by the central bank. However, we have previously learned that the central bank controls the money supply precisely by changing the interest rate. How do you reconcile the liquidity-preference theory with using the interest rate as a monetary policy tool?

Accepted Answer

When the Bank of Canada chooses the bank

Question 4

According to liquidity-preference theory, if the price level decreases, how do the equilibrium interest rate and the aggregate quantity of goods change?

Accepted Answer

A)  The interest rate and the quantity demanded rise. 
B)  The interest rate rises and the quantity demanded falls. 
C)  The interest rate falls and the quantity demanded rises. 
D)  The interest rate and the quantity demanded fall. 
A)  The interest rate and the quantity demanded rise. 
B)  The interest rate rises and the quantity demanded falls. 
C)  The interest rate falls and the quantity demanded rises. 
D)  The interest rate and the quantity demanded fall.

Question 5

Which statement do opponents of active stabilization policy believe?

Accepted Answer

A)  Fiscal policy cannot stabilize the economy even in theory. 
B)  Fiscal policy has no impact in the long run. 
C)  The effects of monetary policy may last for several years. 
D)  The Bank of Canada should try to fine-tune the economy with steady growth in the money supply. 
A)  Fiscal policy cannot stabilize the economy even in theory. 
B)  Fiscal policy has no impact in the long run. 
C)  The effects of monetary policy may last for several years. 
D)  The Bank of Canada should try to fine-tune the economy with steady growth in the money supply.

Question 6

Which statement is consistent with the short-run economic theories studied?

Accepted Answer

A)  In the short run, output is determined by the amount of capital, labour, and technology; the interest rate adjusts to balance the supply and demand for money; and the price level adjusts to balance the supply and demand for loanable funds. 
B)  In the short run, output is determined by the amount of capital, labour, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level adjusts to balance the supply and demand for money. 
C)  In the short run, output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for money; and the price level is stuck. 
D)  In the short run, output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level adjusts to balance the supply and demand for money. 
A)  In the short run, output is determined by the amount of capital, labour, and technology; the interest rate adjusts to balance the supply and demand for money; and the price level adjusts to balance the supply and demand for loanable funds. 
B)  In the short run, output is determined by the amount of capital, labour, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level adjusts to balance the supply and demand for money. 
C)  In the short run, output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for money; and the price level is stuck. 
D)  In the short run, output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; and the price level adjusts to balance the supply and demand for money.

Question 7

Which of the following shifts aggregate demand to the right?

Accepted Answer

A)  an increase in the price level 
B)  an increase in the money supply 
C)  a decrease in the price level 
D)  a decrease in the money supply 
A)  an increase in the price level 
B)  an increase in the money supply 
C)  a decrease in the price level 
D)  a decrease in the money supply

Question 8

If expected inflation is constant and the nominal interest rate increased 2 percentage points, what would happen to the real interest rate?

Accepted Answer

A)  It would increase 2 percentage points. 
B)  It would increase, but by fewer than 2 percentage points. 
C)  It would decrease, but by fewer than 2 percentage points. 
D)  It would decrease by 2 percentage points. 
A)  It would increase 2 percentage points. 
B)  It would increase, but by fewer than 2 percentage points. 
C)  It would decrease, but by fewer than 2 percentage points. 
D)  It would decrease by 2 percentage points.

Question 9

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

Accepted Answer

A)  interest rate 
B)  exchange rate 
C)  gross domestic product 
D)  the consumer price index 
A)  interest rate 
B)  exchange rate 
C)  gross domestic product 
D)  the consumer price index

Question 10

Which of the following is an effect of an increase in the interest rate?

Accepted Answer

A)  People put more money in their savings accounts. 
B)  Foreign citizens decide to buy fewer Canadian bonds. 
C)  Firms decide to purchase new machinery. 
D)  People decide to increase residential investment. 
A)  People put more money in their savings accounts. 
B)  Foreign citizens decide to buy fewer Canadian bonds. 
C)  Firms decide to purchase new machinery. 
D)  People decide to increase residential investment.

Question 11

When the Bank of Canada decreases the money supply, what do we expect to happen to interest rates and stock prices?

Accepted Answer

A)  Interest rates and stock prices both rise. 
B)  Interest rates and stock prices both fall. 
C)  Interest rates rise and stock prices fall. 
D)  Interest rates fall and stock prices rise. 
A)  Interest rates and stock prices both rise. 
B)  Interest rates and stock prices both fall. 
C)  Interest rates rise and stock prices fall. 
D)  Interest rates fall and stock prices rise.

Question 12

If the interest rate is above a central bank's target, what should the central bank do?

Accepted Answer

A)  buy bonds to increase the money supply 
B)  buy bonds to decrease the money supply 
C)  sell bonds to increase the money supply 
D)  sell bonds to decrease the money supply 
A)  buy bonds to increase the money supply 
B)  buy bonds to decrease the money supply 
C)  sell bonds to increase the money supply 
D)  sell bonds to decrease the money supply

Question 13

The most important lag for monetary policy is the time it takes to formulate policy, while the most important lag for fiscal policy is the time it takes for the economy to respond to changes in government spending.

Accepted Answer

A) True 
 B)False

Question 14

Over what period of time is the liquidity-preference theory most relevant, and what does it suppose?

Accepted Answer

A)  short run; it supposes that the price level adjusts to bring money supply and money demand into balance 
B)  short run; it supposes that the interest rate adjusts to bring money supply and money demand into balance 
C)  long run; it supposes that the price level adjusts to bring money supply and money demand into balance 
D)  long run; it supposes that the interest rate adjusts to bring money supply and money demand into balance 
A)  short run; it supposes that the price level adjusts to bring money supply and money demand into balance 
B)  short run; it supposes that the interest rate adjusts to bring money supply and money demand into balance 
C)  long run; it supposes that the price level adjusts to bring money supply and money demand into balance 
D)  long run; it supposes that the interest rate adjusts to bring money supply and money demand into balance

Question 15

What is the main reason the aggregate-demand curve slopes downward?

Accepted Answer

A)  As the price level increases, money demand increases, interest rates increase, and investment decreases. 
B)  As the price level increases, money demand increases, interest rates decrease, and investment increases. 
C)  As the price level decreases, money demand increases, interest rates increase, and investment increases. 
D)  As the price level decreases, money demand increases, interest rates decrease, and investment decreases. 
A)  As the price level increases, money demand increases, interest rates increase, and investment decreases. 
B)  As the price level increases, money demand increases, interest rates decrease, and investment increases. 
C)  As the price level decreases, money demand increases, interest rates increase, and investment increases. 
D)  As the price level decreases, money demand increases, interest rates decrease, and investment decreases.

Question 16

At what interest rate do some economists believe a liquidity trap will occur?

Accepted Answer

A)  0 percent 
B)  2 percent 
C)  4 percent 
D)  6 percent 
A)  0 percent 
B)  2 percent 
C)  4 percent 
D)  6 percent

Question 17

According to liquidity-preference theory, other things being equal, what does a higher price level lead households to do in the short run?

Accepted Answer

A)  increase residential investment 
B)  decrease the amount of cash they want to hold 
C)  buy bonds 
D)  decrease consumption 
A)  increase residential investment 
B)  decrease the amount of cash they want to hold 
C)  buy bonds 
D)  decrease consumption

Question 18

According to liquidity-preference theory, if the price level decreases, in which direction does the demand curve shift and how does the interest rate change?

Accepted Answer

A)  The demand curve shifts right, so the interest rate increases. 
B)  The demand curve shifts right, so the interest rate decreases. 
C)  The demand curve shifts left, so the interest rate decreases. 
D)  The demand curve shifts left, so the interest rate increases. 
A)  The demand curve shifts right, so the interest rate increases. 
B)  The demand curve shifts right, so the interest rate decreases. 
C)  The demand curve shifts left, so the interest rate decreases. 
D)  The demand curve shifts left, so the interest rate increases.

Question 19

According to the liquidity-preference theory, equilibrium in the money market is achieved by adjustments in which of the following?

Accepted Answer

A)  government spending 
B)  the interest rate 
C)  the exchange rate 
D)  the inflation rate 
A)  government spending 
B)  the interest rate 
C)  the exchange rate 
D)  the inflation rate

Question 20

According to the liquidity-preference theory, how does an increase in the price level affect the interest rate?

Accepted Answer

A)  It increases the money demand and the interest rate. 
B)  It lowers the money demand and the interest rate. 
C)  It increases the money demand and lowers the interest rate. 
D)  It lowers the money demand and increases the interest rate. 
A)  It increases the money demand and the interest rate. 
B)  It lowers the money demand and the interest rate. 
C)  It increases the money demand and lowers the interest rate. 
D)  It lowers the money demand and increases the interest rate.

An increase in the money supply shifts the aggregate-supply curve right.

Which of the following is an effect of a decrease in the interest rate?

According to liquidity-preference theory, if the price level decreases, how do the equilibrium interest rate and the aggregate quantity of goods change?

Which statement do opponents of active stabilization policy believe?

Which statement is consistent with the short-run economic theories studied?

Which of the following shifts aggregate demand to the right?

If expected inflation is constant and the nominal interest rate increased 2 percentage points, what would happen to the real interest rate?

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

Which of the following is an effect of an increase in the interest rate?

When the Bank of Canada decreases the money supply, what do we expect to happen to interest rates and stock prices?

If the interest rate is above a central bank's target, what should the central bank do?

The most important lag for monetary policy is the time it takes to formulate policy, while the most important lag for fiscal policy is the time it takes for the economy to respond to changes in government spending.

Over what period of time is the liquidity-preference theory most relevant, and what does it suppose?

What is the main reason the aggregate-demand curve slopes downward?

At what interest rate do some economists believe a liquidity trap will occur?

According to liquidity-preference theory, other things being equal, what does a higher price level lead households to do in the short run?

According to liquidity-preference theory, if the price level decreases, in which direction does the demand curve shift and how does the interest rate change?

According to the liquidity-preference theory, equilibrium in the money market is achieved by adjustments in which of the following?

According to the liquidity-preference theory, how does an increase in the price level affect the interest rate?

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

An increase in the money supply shifts the aggregate-supply curve right.

Which of the following is an effect of a decrease in the interest rate?

According to liquidity-preference theory, if the price level decreases, how do the equilibrium interest rate and the aggregate quantity of goods change?

Which statement do opponents of active stabilization policy believe?

Which statement is consistent with the short-run economic theories studied?

Which of the following shifts aggregate demand to the right?

If expected inflation is constant and the nominal interest rate increased 2 percentage points, what would happen to the real interest rate?

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

Which of the following is an effect of an increase in the interest rate?

When the Bank of Canada decreases the money supply, what do we expect to happen to interest rates and stock prices?

If the interest rate is above a central bank's target, what should the central bank do?

The most important lag for monetary policy is the time it takes to formulate policy, while the most important lag for fiscal policy is the time it takes for the economy to respond to changes in government spending.

Over what period of time is the liquidity-preference theory most relevant, and what does it suppose?

What is the main reason the aggregate-demand curve slopes downward?

At what interest rate do some economists believe a liquidity trap will occur?

According to liquidity-preference theory, other things being equal, what does a higher price level lead households to do in the short run?

According to liquidity-preference theory, if the price level decreases, in which direction does the demand curve shift and how does the interest rate change?

According to the liquidity-preference theory, equilibrium in the money market is achieved by adjustments in which of the following?

According to the liquidity-preference theory, how does an increase in the price level affect the interest rate?

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