Question 1

Figure 15-1
 
-Refer to the Figure 15-1. What is most likely to happen if the interest rate is equal to 4?
A) There is excess demand for money, and the interest rate will fall.
B) There is excess supply of money, and the interest rate will rise.
C) There is excess demand for money, and the interest rate will rise.
D) There is an excess supply of money, and the interest rate will fall.

Accepted Answer

At an interest rate of 4, the quantity of money supplied (MS) is higher than the quantity of money demanded (MD). This creates an excess supply of money, leading to a fall in the interest rate towards the equilibrium level. Therefore, the most likely outcome is an excess supply of money, and the interest rate will fall, as indicated by option D.

Question 2

Figure 15-1
 
-Refer to the Figure 15-1. What will happen if the current interest rate is 2 percent?
A) There will be excess money supply.
B) People will sell more bonds, which drives interest rates up.
C) People will buy more bonds, which drives interest rates up...
D) People will sell more bonds, which drives the interest rates down.

Accepted Answer

The answer of Figure 15-1
 
-Refer to the Figure 15-1....

Question 3

Figure 15-1
 
-Refer to the Figure 15-1. At which interest rate is there an excess money demand?
A) 2 percent
B) 3 percent
C) 4 percent
D) 5 percent

Accepted Answer

The answer of Figure 15-1
 
-Refer to the Figure 15-1....

Question 4

According to liquidity-preference theory, what is the opportunity cost of holding money?
A) the interest rate on bonds
B) the inflation rate
C) the cost of currency exchange
D) the difference between the inflation rate and the interest rate on bonds

Accepted Answer

According to liquidity-preference theory, the opportunity cost of holding money is the interest rate on bonds. This means that by holding onto money, individuals are forgoing the potential interest they could earn from investing in bonds.

Question 5

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

Accepted Answer

When there is excess money supply, people tend to deposit more into interest-bearing accounts as they have more cash than needed for their immediate consumption. This increase in deposits leads banks to have more funds to lend, which typically results in a decrease in interest rates as banks compete to lend out their excess reserves.

Question 6

When does the opportunity cost of holding money decrease or increase, and how does people's desire to hold money change?
A) The opportunity cost of holding money decreases when the interest rate increases, so people desire to hold more money.
B) The opportunity cost of holding money decreases when the interest rate increases, so people desire to hold less money.
C) The opportunity cost of holding money increases when the interest rate increases, so people desire to hold more money.
D) The opportunity cost of holding money increases when the interest rate increases, so people desire to hold less money.

Accepted Answer

The opportunity cost of holding money is the interest rate that could have been earned if that money had been invested instead. When the interest rate increases, the opportunity cost of holding money also increases, since more interest can be earned by investing the money instead. Therefore, people will desire to hold less money and invest more to earn greater returns.

Question 7

When the interest rate increases, how do the opportunity cost of holding money and the quantity of money demanded change?
A) The opportunity cost of holding money increases, so the quantity of money demanded increases.
B) The opportunity cost of holding money increases, so the quantity of money demanded decreases.
C) The opportunity cost of holding money decreases, so the quantity of money demanded increases.
D) The opportunity cost of holding money decreases, so the quantity of money demanded decreases.

Accepted Answer

As the interest rate increases, the opportunity cost of holding money increases because holding money becomes less attractive compared to holding an interest-bearing asset. Therefore, people demand less money as they prefer to hold interest-bearing assets. This leads to a decrease in the quantity of money demanded.

Question 8

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?
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.

Accepted Answer

According to liquidity-preference theory, if the quantity of money supplied exceeds the quantity demanded, the interest rate will decrease to encourage borrowing and spending, which in turn increases the quantity of money demanded.

Question 9

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

Accepted Answer

If there is excess money demand, people will try to withdraw money from interest-bearing accounts to hold as cash. This actually increases the demand for money in the overall economy, which puts upward pressure on interest rates. Therefore, the interest rate will rise.

Question 10

In recent years, what has been the predominant method used by the Bank of Canada to alter the money supply?
A) bank reserves
B) the monetary growth rate
C) the exchange rate
D) the bank rate

Accepted Answer

The Bank of Canada's predominant method used to alter the money supply in recent years has been through changes in the bank rate. The bank rate is the interest rate at which the Bank of Canada lends money to commercial banks, and changes in this rate can impact the cost of borrowing for consumers and businesses, thereby affecting the overall level of demand and economic activity in the country.

Question 11

Figure 15-1
 
-Refer to the Figure 15-1. At an interest rate of 4 percent, how much is the excess money demand or supply?
A) There is an excess money demand equal to the distance between a and b.
B) There is an excess money demand equal to the distance between b and c.
C) There is an excess money supply equal to the distance between b and a.
D) There is an excess money supply equal to the distance between c and b.

Accepted Answer

At an interest rate of 4 percent, the equilibrium interest rate would be at point b. But the money supply is greater than money demand at this interest rate, resulting in an excess money supply. The distance between point b and point a represents the excess money supply.

Question 12

According to liquidity-preference theory, why is the money-demand curve downward sloping?
A) because interest rates rise as the Bank of Canada reduces the quantity of money demanded
B) because interest rates fall as the Bank of Canada reduces the supply of money
C) because people will want to hold less money as the cost of doing so falls
D) because people will want to hold more money as the cost of doing so falls

Accepted Answer

According to liquidity-preference theory, the money-demand curve is downward sloping because people will want to hold more money as the cost of doing so falls. As interest rates decrease due to an increase in the money supply, the opportunity cost of holding money decreases, prompting people to want to hold more of it. Conversely, as interest rates increase due to a decrease in the money supply, the opportunity cost of holding money increases, prompting people to want to hold less of it.

Question 13

If at some interest rate the quantity of money demanded is greater than the quantity of money supplied, what will people desire to do and what will happen to the interest rate?
A) People will sell interest-bearing assets, causing the interest rate to decrease.
B) People will sell interest-bearing assets, causing the interest rate to increase.
C) People will buy interest-bearing assets, causing the interest rate to decrease.
D) People will buy interest-bearing assets, causing the interest rate to increase.

Accepted Answer

When the quantity of money demanded exceeds the quantity of money supplied, people will sell interest-bearing assets to obtain more money. This increases the supply of these assets in the market, leading to a decrease in their price and an increase in their yield, which is the interest rate.

Question 14

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?
A) interest rate
B) exchange rate
C) quantity of output
D) price level

Accepted Answer

According to the theory of liquidity preference, the interest rate adjusts to balance the supply and demand for money. When the demand for money is high, people are willing to pay a higher interest rate to hold onto their money. When the supply of money is high, people are willing to accept a lower interest rate to lend out their money. Therefore, the interest rate is the variable that adjusts to balance the supply and demand for money.

Question 15

If at some interest rate the quantity of money supplied is greater than the quantity of money demanded, what will people desire to do and what happens to the interest rate?
A) People will sell interest-bearing assets, causing the interest rate to decrease.
B) People will sell interest-bearing assets, causing the interest rate to increase.
C) People will buy interest-bearing assets, causing the interest rate to decrease.
D) People will buy interest-bearing assets, causing the interest rate to increase.

Accepted Answer

The answer of If at some interest rate the quantity...

Question 16

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

Accepted Answer

According to liquidity-preference theory, if the quantity of money demanded is greater than the quantity supplied, there is excess demand for money. This leads to an increase in the interest rate to decrease the quantity demanded, and a decrease in the quantity demanded as individuals find it less attractive to hold money at higher interest rates. Therefore, the correct answer is A.

Question 17

When the interest rate decreases, what happens to the opportunity cost of holding money and the quantity of money demanded?
A) The opportunity cost of holding money increases, so the quantity of money demanded increases.
B) The opportunity cost of holding money increases, so the quantity of money demanded decreases.
C) The opportunity cost of holding money decreases, so the quantity of money demanded increases.
D) The opportunity cost of holding money decreases, so the quantity of money demanded decreases.

Accepted Answer

When the interest rate decreases, the opportunity cost of holding money decreases because investors can earn less interest on their money. As a result, people demand more money because it is less costly to hold. Therefore, the quantity of money demanded increases.

Question 18

Why do people primarily own or hold money?
A) because it has a guaranteed nominal return
B) because it can be invested for a guaranteed real return
C) because it can be used directly to buy goods and services
D) because it functions as a unit of account

Accepted Answer

The primary reason people own or hold money is to use it directly to buy goods and services. While money can function as a unit of account, it is not the primary reason people hold it, and it does not offer a guaranteed nominal or real return.

Question 19

In which situation do people want to hold less money?
A) when the price level and the interest rate increases
B) when the price level and the interest rate decreases
C) when the price level increases and the interest rate decreases
D) when the price level decreases and the interest rate increases

Accepted Answer

The answer of In which situation do people want to...

Question 20

In which situation do people want to hold more money?
A) when the price level and the interest rate increases
B) when the price level and the interest rate decreases
C) when the price level increases and the interest rate decreases
D) when the price level decreases and the interest rate increases

Accepted Answer

When the price level increases, people want to hold more money because their purchasing power decreases, so they need more money to buy the same amount of goods and services. When the interest rate decreases, holding money becomes relatively more attractive because its opportunity cost (i.e. the foregone interest income from holding other assets) decreases. Therefore, when the price level increases and the interest rate decreases, people want to hold more money.

Quiz 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Figure 15-1 -Refer to the Figure 15-1. What is most likely to happen if the interest rate is equal to 4?

Figure 15-1 -Refer to the Figure 15-1. What will happen if the current interest rate is 2 percent?

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

According to liquidity-preference theory, what is the opportunity cost of holding money?

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

When does the opportunity cost of holding money decrease or increase, and how does people's desire to hold money change?

When the interest rate increases, how do the opportunity cost of holding money and the quantity of money demanded change?

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?

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

In recent years, what has been the predominant method used by the Bank of Canada to alter the money supply?

Figure 15-1 -Refer to the Figure 15-1. At an interest rate of 4 percent, how much is the excess money demand or supply?

According to liquidity-preference theory, why is the money-demand curve downward sloping?

If at some interest rate the quantity of money demanded is greater than the quantity of money supplied, what will people desire to do and what will happen to the interest rate?

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

If at some interest rate the quantity of money supplied is greater than the quantity of money demanded, what will people desire to do and what happens to the interest rate?

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

When the interest rate decreases, what happens to the opportunity cost of holding money and the quantity of money demanded?

Why do people primarily own or hold money?

In which situation do people want to hold less money?

In which situation do people want to hold more money?