Exam 11: Monetary Policy

Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be relatively ________ and real GDP to be relatively ________.

The relationship between GDP and the money supply has gotten stronger since the 1980s.

The Bank of Canada

Which of the following situations is one in which the Bank of Canada will potentially pursue expansionary monetary policy?

Figure 11.14 Alt text for Figure 11.14: In figure 11.14, a dynamic AD-AS model. Long description for Figure 11.14: The x-axis is labelled, real GDP (trillions of 2007 dollars).The y-axis is labelled, price level (CPI).6 lines are shown; SRAS1, SRAS2, AD1, AD2, LRAS1, and LRAS2.Line SRAS1 begins near the bottom left corner and slopes up to the top right corner.Line SRAS2 follows the same slope as line SRAS1, but is plotted to the right.Line AD1 begins at the top left corner and slopes down to the end of the x-axis.Line AD2 follows the same slope as line AD1, but is plotted to the right.Line LRAS1 is perpendicular to the x-axis and begins from x-axis value 1.7.Line LRAS2 is perpendicular to the x-axis and begins from x-axis value 1.9.Line LRAS1 intersects lines AD1 and SRAS1 at point A (1.7, 100).Lines AD2 and SRAS2 intersect at point B (1.94, 104).Points A and B are connected to their respective coordinates on the x-axis and y-axis with dotted lines.Line LRAS1 intersects line SRAS2 below point A.Line LRAS2 intersects lines SRAS1 and AD2 just above point B. -Refer to Figure 11.14.In the dynamic AD-AS model, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Bank of Canada pursues the appropriate policy.This will result in

Rising nominal GDP will increase the demand for money and short-term interest rates.

Using the money demand and money supply model, an increase in money demand would cause the equilibrium interest rate to

Does the money demand curve have a positive slope or a negative slope? Why does it have this slope? Explain why an increase in the variable on the vertical axis of the money demand curve causes either an increase or a decrease in the variable on the horizontal axis of the money demand curve.

What is a symmetric inflation targeting, and what does it mean for the Bank of Canada?

A monetary policy target is a variable that the Bank of Canada can affect directly, which then affects one or more of the Bank of Canada's policy goals.

Figure 11.9 Alt text for Figure 11.9: In figure 11.9, a static AD-AS model. Long description for Figure 11.9: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI).5 lines are shown; AD1, AD2, AD3, LRAS, SRAS.Line AD1 begins in the top left corner and slopes down to the end of the x-axis.Line AD2 follows the same slope but is plotted to the left.Similarly, line AD3 is plotted to the left of line AD2.Line SRAS begins close to the vertex and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and passes through points D, B, and E.Lines AD3 and SRAS intersect at point A.Lines AD2, LRAS, and SRAS intersect at point B.Lines AD1 and SRAS intersect at point C.Lines AD1 and LRAS intersect at point D.Lines AD3 and LRAS intersect at point E. -Refer to Figure 11.9.Suppose the economy is in a recession and no policy is pursued.Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

Inflation targeting, typically, has been accompanied by lower inflation.

Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in long-run macroeconomic equilibrium.For Year 2, graph aggregate demand, long-run aggregate supply, and short-run aggregate supply such that the condition of the economy will induce the Bank of Canada to conduct a contractionary monetary policy.Briefly explain the condition of the economy and what the Bank of Canada is attempting to do.

In the following table, fill in the columns for your return on investment if the price of your house increased or decreased by 20 percent, based on the down payments specified in the first column. Return on Your Investment From

According to the Taylor rule, the Bank of Canada should set the target for the overnight interest rate equal to the sum of the equilibrium real overnight interest rate, the current inflation rate, one-half times the ________, and one-half times the ________.

Figure 11.11 Alt text for Figure 11.11: In figure 11.11, a graph comparing real GDP and price level. Long description for Figure 11.11: The x-axis is labelled, real GDP (trillions of 2007 dollars)and the y-axis is labelled, price level (CPI, 2002 = 100).4 lines are shown; AD1, AD2, LRAS, SRAS.Line AD1 begins in the top left corner and slopes down to the end of the x-axis.Line AD2 follows the same slope but is plotted to the right.Line SRAS begins in the bottom left corner and slopes up to the top right corner.Line LRAS is perpendicular to the x-axis, and intersects lines AD2 and SRAS at point B.Lines AD1 and SRAS intersect at point A. -Refer to Figure 11.11.In the figure above, suppose the economy is initially at point A.The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Bank of Canada?

Figure 11.13 Alt text for Figure 11.13: In figure 11.13, a dynamic model of AD-AS. Long description for Figure 11.13: The x-axis is labelled, real GDP (trillions of 2007 dollars), with values $1.4, 1.5, 1.6 marked.The y-axis is labelled, price level (CPI), with values 100 and 102 marked.6 lines are shown; SRAS1, SRAS2, AD1, AD2, LRAS1, LRAS2.Line SRAS1 begins in the bottom left and slopes up to the top right corner.Line SRAS2 follows the same slope as line SRAS1, but is plotted to the right.Line AD1 begins at the top left corner and slopes down to the end of the x-axis.Line AD2 follows the same slope as AD1, but is plotted to the right.Line LRAS1 is perpendicular to the x-axis, and begins from the x-axis value $1.4.Line LRAS2 is perpendicular to the x-axis, and begins from the value 1.6.Line LRAS1 intersects line AD1 and SRAS1 at point A ($1.4, 100).Lines AD2 and SRAS2 intersect at point B (1.5, 102).Points A and B are connected to their respective coordinates on the x-axis and y-axis with dotted lines.Line LRAS2 intersects lines SRAS1 and SRAS2 on the right end of these lines.Similarly, line LRAS2 intersects lines AD1 and AD2 toward the right end of these lines. -Refer to Figure 11.13.In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Bank of Canada would most likely

If the amount you owe on your house is greater than the price of the house, you have

If the Bank of Canada raises its target for the overnight interest rate, this indicates that

Suppose you buy a house for $250,000.One year later, the market price for the house has fallen to $200,000.What is the return on your investment in the house if you made a down payment of 10 percent and took out a mortgage loan for the other 90 percent?