Question 1

The purpose of an expansionary monetary policy is to:

Accepted Answer

A)  increase aggregate demand.
B)  decrease aggregate demand.
C)  increase investment demand.
D)  decrease investment demand. A

Question 2

Columns (1) and (2) indicate the transactions demand (Dt) for money and columns (1) and (3) show the asset demand (Da) for money: Refer to the above information.These data suggest that the amount of money that society wishes to hold as an asset:

Accepted Answer

A)  varies directly with the interest rate.
B)  varies inversely with the interest rate.
C)  varies inversely with the GDP.
D)  is independent of the interest rate. B

Question 3

If the chartered banking system borrows from the Bank of Canada.

Accepted Answer

A)  The demand deposits of chartered banks are unchanged, but their reserves increase.
B)  The demand deposits and reserves of chartered banks both decrease.
C)  The demand deposits of chartered banks are unchanged, but their reserves decrease.
D)  The demand deposits and reserves of chartered banks are both unchanged. A

Question 4

Because of the liquidity trap, the Bank of Canada's creation of billions of dollars in excess reserves during the great recession had little or no effect on lending by the chartered banks.

Accepted Answer

A) True 
 B)False

Question 5

Refer to the graphs below.The first graph shows the money market of an economy, and the second graph shows the market for goods and services in the economy.   In the above diagrams, the numbers in the parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each AD curve.All figures are in billions.Qf is the full-employment level of real output.The interest rate in the economy is 4 percent.Which of the following should the monetary authorities do to achieve a non-inflationary full-employment level of real GDP?

Accepted Answer

A)  They should increase the money supply from $75 billion to $225 billion.
B)  They should decrease the money supply by $150 billion.
C)  They should decrease the money supply from $225 billion to $150 billion.
D)  They should increase the money supply by $200 billion.

Question 6

Suppose the demand for money and the supply of money increase simultaneously.We can:

Accepted Answer

A)  expect the interest rate to rise and bond prices to fall.
B)  expect the interest rate to fall and bond prices to rise.
C)  the nominal GDP to expand.
D)  not predict what will happen to interest rates or bond prices.

Question 7

Assume that the Bank of Canada's policy is to keep the price level from either rising or falling.If aggregate supply increases in the economy, the Bank of Canada:

Accepted Answer

A)  will have to increase interest rates to keep the price level from falling.
B)  will have to reduce the money supply to keep the price level from rising.
C)  will have to increase the money supply to keep the price level from falling.
D)  can keep the price level stable without altering the money supply or interest rate.

Question 8

If in the market for money the quantity of money demanded exceeds the money supply, we would expect the interest rate to:

Accepted Answer

A)  fall, causing households and businesses to hold less money.
B)  rise, causing households and businesses to hold less money.
C)  rise, causing households and businesses to hold more money.
D)  fall, causing households and businesses to hold more money.

Question 9

The interest rate will fall when the:

Accepted Answer

A)  quantity of money demanded exceeds the quantity of money supplied.
B)  quantity of money supplied exceeds the quantity of money demanded.
C)  demand for money increases.
D)  supply of money decreases.

Question 10

A consumer holds money to meet spending needs.This would be an example of the:

Accepted Answer

A)  use of money as a measure of value.
B)  use of money as legal tender.
C)  transactions demand for money.
D)  asset demand for money.

Question 11

All else equal, when the Bank of Canada engages in an expansionary monetary policy, the interest rate received on government securities tends to:

Accepted Answer

A)  fall.
B)  rise.
C)  remain constant.
D)  move in the same direction as the bonds' price.

Question 12

An expansionary monetary policy may be more effective than a restrictive monetary policy because chartered banks may decide to hold a large quantity of excess reserves.

Accepted Answer

A) True 
 B)False

Question 13

Net exports would most likely decrease when there is a(n):

Accepted Answer

A)  expansionary monetary policy or a contractionary fiscal policy.
B)  restrictive monetary policy or a contractionary fiscal policy.
C)  expansionary monetary policy or an expansionary fiscal policy.
D)  restrictive monetary policy or an expansionary fiscal policy.

Question 14

Under some conditions, proper domestic monetary policy may be at odds with the goal of correcting a trade imbalance because:

Accepted Answer

A)  changes in the domestic interest rate cause changes in domestic investment spending.
B)  changes in the domestic interest rate tend to cause changes in the international value of the dollar.
C)  the domestic interest rate varies inversely with the value of the dollar.
D)  changes in the interest rate cause changes in domestic saving.

Question 15

If the quantity of money demanded exceeds the quantity supplied:

Accepted Answer

A)  the supply-of-money curve will shift to the left.
B)  the demand-for-money curve will shift to the right.
C)  the interest rate will fall.
D)  the interest rate will rise.

Question 16

The price of a bond having no expiration date is originally $8000 and has a fixed annual interest payment of $800.A fall in the price of the bond by $3,000 will provide a new buyer of the bond an interest rate of:

Accepted Answer

A)  10 percent.
B)  12 percent.
C)  14 percent.
D)  16 percent.

Question 17

Assume that the desired reserve ratio is 10 percent and there are no excess reserves in the banking system.Also, suppose that the full-employment, non-inflationary level of GDP in this closed, private economy is $1,200.  Refer to the above information.The equilibrium interest rate in this economy is:

Accepted Answer

A)  3 percent.
B)  4 percent.
C)  5 percent.
D)  6 percent.

Question 18

It is assumed that households and businesses want to hold for transactions purposes an amount of money equal to one-half of the GDP.The table shows the amounts of money that households and businesses want to hold as an asset at various interest rates.  Refer to the information above.If the GDP is $200 and the interest rate is 6, what total amount of money will households and businesses want to hold?

Accepted Answer

A)  $120
B)  $140
C)  $160
D)  $180

Question 19

The two main tools of the monetary policy are:

Accepted Answer

A)  tax rate changes, and the bank rate.
B)  open-market operations, and the bank rate & overnight lending rate.
C)  tax rate changes, and the changes in government expenditures.
D)  changes in government expenditures, and the bank rate.

Question 20

According to the Taylor Rule:

Accepted Answer

A)  for each 1 percent increase in the inflation rate above its target of 2 percent, the central bank should raise the real overnight lending rate by one percent point.
B)  for each 1 percent increase in the inflation rate above its target of 2 percent, the central bank should raise the real overnight lending rate by one-half a percent point.
C)  for each 1 percent increase in the inflation rate above its target of 2 percent, the central bank should lower the real overnight lending rate by one percent point.
D)  for each 1 percent increase in the inflation rate above its target of 2 percent, the central bank should lower the real overnight lending rate by one-half a percent point.

Exam 15: B: Interest Rates and Monetary Policy