Question 1

For interest rates to remain stable during economic expansions, what should happen to the growth rate of the money supply in relation to the demand for money?

Accepted Answer

A)   The growth rate of the money supply should exceed the growth in the demand for money. 
B)   The growth rate of the money supply should just match the growth in the demand for money. 
C)   The growth rate of the money supply should be less than the growth in the demand for money. 
D)   The growth rate of the money supply should be zero.

Question 2

Suppose the Bank of Canada wants to stimulate the economy.Which of the following strategies might the Bank use?

Accepted Answer

A)   buy bonds to lower the money supply 
B)   sell bonds to lower the money supply 
C)   raise the bank rate to increase the money supply 
D)   lower the bank rate to increase the money supply

Question 3

What would be the ultimate effect of a reduction in the money supply?

Accepted Answer

A)   a leftward shift of the aggregate demand curve 
B)   a rightward shift of the short-run aggregate supply curve 
C)   a movement upward along the aggregate demand curve 
D)   a movement downward along the aggregate demand curve

Question 4

How is the velocity of money defined?

Accepted Answer

A)   by the time it takes the average worker to get to the bank with his paycheque 
B)   by the time it takes banks to clear a cheque 
C)   by the average number of times per year each dollar is used to purchase final goods and services 
D)   by the average number of times per year each dollar is spent for goods, payrolls, etc.

Question 5

How will a monetary injection by the Bank of Canada affect interest rates and aggregate demand?

Accepted Answer

A)   Interest rates will increase, and aggregate demand will decrease. 
B)   Interest rates will increase, and aggregate demand will increase. 
C)   Interest rates will decrease, and aggregate demand will decrease. 
D)   Interest rates will decrease, and aggregate demand will increase.

Question 6

What does a vertical supply curve of money indicate?

Accepted Answer

A)   It indicates that the lower the interest rate, the higher the opportunity cost of holding assets in the form of money. 
B)   It indicates that the quantity of money supplied is independent of the interest rate. 
C)   It indicates that the larger the supply of money, the higher the interest rate, all things equal. 
D)   It indicates that the quantity of money supplied depends on the interest rate.

Question 7

What is the effect of an expansionary monetary policy on the demand for investment curve?

Accepted Answer

A)   The curve will shift to the left. 
B)   The curve will shift to the right. 
C)   There will be a downward movement along the curve. 
D)   There will be an upward movement along the curve.

Question 8

When would an increase in aggregate demand have a small long-run effect on real GDP?

Accepted Answer

A)   when the aggregate demand curve is flat 
B)   when the short-run aggregate supply curve is horizontal 
C)   when the economy is well below potential output 
D)   when the economy is already at potential output

Question 9

What type of relationship exists between the interest rate and the quantity of money demanded?

Accepted Answer

A)   a direct relationship 
B)   an inverse relationship 
C)   a direct relationship when the interest rate is low, and an inverse relationship when the interest rate is high 
D)   an inverse relationship when the interest rate is low, and a direct relationship when the interest rate is high

Question 10

What is the equation of exchange?

Accepted Answer

A)   QS = QD 
B)   P × V = M × Y 
C)   M × V = P × Y 
D)   C × I = Y × G

Question 11

Suppose the economy's real output grows at an average rate of 3 percent per year.And suppose there is a 7 percent average rate of growth in the money supply, and velocity is constant.How would the inflation rate be affected?

Accepted Answer

A)   The inflation rate would be -4 percent. 
B)   The inflation rate would be 4 percent. 
C)   The inflation rate would be 7 percent. 
D)   The inflation rate would be 10 percent.

Question 12

Suppose the economy's velocity is constant and real output grows at an average rate of 4 percent per year.What would be the result of a 4 percent average rate of growth in the money supply?

Accepted Answer

A)   a constant price level 
B)   a constant real GDP 
C)   a rapidly increasing price level 
D)   a slowly increasing price level

Question 13

Suppose there is an increase in the money supply, with velocity and real GDP constant.According to the equation of exchange, which of the following variables will likely increase?

Accepted Answer

A)   net exports 
B)   the price level 
C)   interest rates 
D)   the value of Canadian dollar

Question 14

What is the equation of exchange?

Accepted Answer

A)   money in circulation × prices = velocity × income 
B)   money in circulation × income = velocity × prices 
C)   real GDP = money in circulation × velocity 
D)   nominal GDP = money in circulation × velocity

Question 15

Exhibit 14-1
 
-Refer to the graph in the exhibit.Suppose there is an increase in level of GDP.What will this increase cause?

Accepted Answer

A)   a move from B to A 
B)   a move from A to B 
C)   a move from DM to DM' 
D)   a move from DM to DM*

Question 16

How does the demand for money vary with price level and real GDP?

Accepted Answer

A)   directly with the price level, and directly with the level of real GDP 
B)   inversely with the price level, and directly with the level of real GDP 
C)   directly with the price level, and inversely with the level of real GDP 
D)   inversely with the price level, and directly with the level of real GDP

Question 17

If the demand for money increases, how will the money demand curve be affected?

Accepted Answer

A)   There will be a movement downward along the money demand curve. 
B)   There will be a movement upward along the money demand curve. 
C)   There will be a rightward shift of the money demand curve. 
D)   There will be a leftward shift of the money demand curve.

Question 18

Which of the following actions might the Bank of Canada take in order to close a recessionary gap?

Accepted Answer

A)   increase government spending 
B)   decrease taxes 
C)   sell Canadian government bonds to banks 
D)   lower the bank rate

Question 19

According to the equation of exchange, what does the quantity of money multiplied by the velocity of money equal?

Accepted Answer

A)   real GDP 
B)   the price level 
C)   nominal GDP 
D)   the demand for money

Question 20

According to the equation of exchange, what are increases in the money supply translated into?

Accepted Answer

A)   into increases in the velocity of money 
B)   into decreases in real GDP 
C)   into increases in real GDP 
D)   into increases in the price level

Exam 15: Monetary Theory and Policy in an Open Economy

According to the equation of exchange, what does the quantity of money multiplied by the velocity of money equal?

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Suppose the Bank of Canada wants to stimulate the economy.Which of the following strategies might the Bank use?

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When would an increase in aggregate demand have a small long-run effect on real GDP?

Correct AnswerverifiedShow Answer

For interest rates to remain stable during economic expansions, what should happen to the growth rate of the money supply in relation to the demand for money?

Correct AnswerverifiedShow Answer

What is the effect of an expansionary monetary policy on the demand for investment curve?

Correct AnswerverifiedShow Answer

How will a monetary injection by the Bank of Canada affect interest rates and aggregate demand?

Correct AnswerverifiedShow Answer

What would be the ultimate effect of a reduction in the money supply?

Correct AnswerverifiedShow Answer

Suppose there is an increase in the money supply, with velocity and real GDP constant.According to the equation of exchange, which of the following variables will likely increase?

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What does a vertical supply curve of money indicate?

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Suppose the economy's real output grows at an average rate of 3 percent per year.And suppose there is a 7 percent average rate of growth in the money supply, and velocity is constant.How would the inflation rate be affected?

Correct AnswerverifiedShow Answer

Suppose the economy's velocity is constant and real output grows at an average rate of 4 percent per year.What would be the result of a 4 percent average rate of growth in the money supply?

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What is the equation of exchange?

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How does the demand for money vary with price level and real GDP?

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How is the velocity of money defined?

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According to the equation of exchange, what are increases in the money supply translated into?

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What is the equation of exchange?

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Which of the following actions might the Bank of Canada take in order to close a recessionary gap?

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If the demand for money increases, how will the money demand curve be affected?

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What type of relationship exists between the interest rate and the quantity of money demanded?

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Exhibit 14-1 -Refer to the graph in the exhibit.Suppose there is an increase in level of GDP.What will this increase cause?

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