Question 1

Suppose the short-run aggregate supply curve is positively sloped and the money supply increases.What is the effect on aggregate demand?  
A) Aggregate demand increases, which increases real GDP and increases the price level. 
B) Aggregate demand increases, which decreases real GDP and decreases the price level. 
C) Aggregate demand falls, which increases real GDP and increases the price level. 
D) Aggregate demand falls, which decreases real GDP and increases the price level.

Accepted Answer

An increase in the money supply shifts the aggregate demand curve to the right. In the short-run, the positive sloping aggregate supply curve implies that as firms' costs increase, they will need to raise prices to maintain profits. This results in an increase in both real GDP and the price level. Therefore, the correct choice is A as it reflects the effect of an increase in the money supply on aggregate demand.

Question 2

Which of the following is an example of a contractionary monetary policy?  
A) Transfer payments to poor families are reduced. 
B) The Bank of Canada buys government securities in the open market. 
C) The bank rate is raised. 
D) Government spending is reduced.

Accepted Answer

Contractionary monetary policy refers to measures taken by the central bank to decrease the money supply and increase interest rates, leading to a decrease in aggregate demand and inflation. A raise in the bank rate (the interest rate at which the central bank lends to commercial banks) is an example of a contractionary monetary policy. Options A and D are examples of contractionary fiscal policies, while option B describes an expansionary monetary policy.

Question 3

Exhibit 14-3
 
-Refer to the graph in the exhibit.In this situation, how could the Bank of Canada return the economy to potential output?  
A) by increasing taxes 
B) by decreasing taxes 
C) by decreasing the money supply 
D) by increasing the money supply

Accepted Answer

The answer of Exhibit 14-3
 
-Refer to the graph in...

Question 4

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

Accepted Answer

A monetary injection by the Bank of Canada typically involves the purchase of government bonds, which increases the money supply and lowers interest rates. Lower interest rates make borrowing more attractive and this increases spending and investment, thereby increasing aggregate demand. Therefore, interest rates will decrease and aggregate demand will increase as a result of a monetary injection by the Bank of Canada.

Question 5

Exhibit 14-3
 
-Refer to the graph in the exhibit.How could the Bank of Canada return the economy to potential output?  
A) by decreasing government spending 
B) by decreasing taxes 
C) by selling Canadian government bonds to banks 
D) by lowering the bank rate

Accepted Answer

The answer of Exhibit 14-3
 
-Refer to the graph in...

Question 6

Which of the following is an example of an expansionary monetary policy?  
A) Government purchases of goods and services decline. 
B) Government purchases of goods and services increase. 
C) The bank rate is lowered. 
D) The bank rate is increased.

Accepted Answer

Lowering the bank rate is an expansionary monetary policy, as it encourages borrowing and spending by lowering the cost of borrowing. A decrease in government purchases of goods and services is a contractionary fiscal policy, not a monetary policy. An increase in government purchases of goods and services, as well as an increase in the bank rate, are also contractionary monetary policies.

Question 7

How does a reduction in money supply affect the aggregate demand curve?  
A) The curve shifts leftward, lowering real GDP and the price level. 
B) The curve shifts leftward, raising real GDP and the price level. 
C) The curve shifts rightward, lowering real GDP but raising the price level. 
D) The curve shifts rightward, raising real GDP and the price level.

Accepted Answer

A reduction in the money supply will increase the cost of borrowing and, consequently, reduce consumption and investment spending. This leads to a decrease in aggregate demand and a leftward shift of the AD curve, causing lower real GDP and a lower price level.

Question 8

Which monetary policy would be appropriate for closing a recessionary gap?  
A) a tax cut 
B) a decrease in government purchases 
C) the sale of Canadian government securities by the Bank of Canada 
D) the purchase of government securities by the Bank of Canada

Accepted Answer

The purchase of government securities by the Bank of Canada is an expansionary monetary policy which increases the money supply, lowers interest rates, and encourages borrowing and spending. This, in turn, leads to increased aggregate demand and helps close a recessionary gap. A tax cut may also stimulate spending, but it may take longer to have an effect and may not be as targeted towards the sectors that need it most. A decrease in government purchases may actually exacerbate a recessionary gap by reducing aggregate demand further. The sale of Canadian government securities by the Bank of Canada is a contractionary policy which would further reduce aggregate demand and worsen a recessionary gap.

Question 9

In order for monetary policy to be effective in changing planned investment spending, what must investment be sensitive to?  
A) interest rates 
B) gross domestic product 
C) consumption 
D) the spending multiplier

Accepted Answer

Monetary policy involves the control of interest rates in order to influence aggregate demand in the economy. Investment spending is sensitive to interest rates, as higher interest rates decrease the profitability of investment and discourage borrowing for investment purposes. Therefore, for monetary policy to be effective in changing planned investment spending, it must influence interest rates.

Question 10

Which of the following actions might the Bank of Canada take in order to close a recessionary gap?  
A) increase government spending 
B) decrease taxes 
C) sell Canadian government bonds to banks 
D) lower the bank rate

Accepted Answer

Lowering the bank rate would encourage borrowing and spending, which would increase aggregate demand and help close the recessionary gap. Increasing government spending or decreasing taxes could also increase aggregate demand, but these policies may not be feasible due to budget constraints. Selling government bonds to banks may affect interest rates and the money supply, but it may not be enough to close a recessionary gap.

Question 11

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

Accepted Answer

A reduction in the money supply would lead to a decrease in consumer spending, investment, and government spending, ultimately causing a leftward shift of the aggregate demand curve. This is because there would be less money available for consumers and businesses to spend, leading to a decrease in demand for goods and services. As a result, firms would produce less, leading to lower economic output and higher unemployment.

Question 12

Exhibit 14-4
 
-Refer to the graph in the exhibit.What can the Bank of Canada do to return the economy to its potential output?
 
A) sell Government of Canada Treasury securities in the open market 
B) lower the bank rate 
C) buy Government of Canada Treasury securities in the open market 
D) print money

Accepted Answer

The Bank of Canada can buy Government of Canada Treasury securities in the open market to increase the money supply and lower interest rates, which will stimulate economic activity and help the economy return to its potential output.

Question 13

Which of the following will allow monetary policy to be most effective in changing aggregate demand?  
A) Interest rates need to be responsive to changes in the money supply, and investment needs to be sensitive to changes in interest rates. 
B) Interest rates need to be responsive to changes in the money supply, but investment does NOT need to be sensitive to changes in interest rates. 
C) Interest rates do NOT need to be responsive to changes in the money supply, but investment does need to be sensitive to changes in interest rates. 
D) Interest rates do NOT need to be responsive to changes in the money supply, and investment does NOT need to be sensitive to changes in interest rates.

Accepted Answer

If interest rates are responsive to changes in the money supply, then the central bank can use changes in interest rates to influence aggregate demand. Additionally, if investment is sensitive to changes in interest rates, then changes in interest rates will have a significant impact on aggregate demand. Both of these factors working together will allow monetary policy to be more effective in changing aggregate demand.

Question 14

Suppose the short-run aggregate supply curve is steep.For a given increase in aggregate demand, how much will real GDP and price level increase?  
A) The increase in real GDP will be relatively small, and the increase in the price level will be relatively large. 
B) The increase in real GDP will be relatively large, and the increase in the price level will be relatively small. 
C) The increase in real GDP will be large, and the increase in price level will be large. 
D) The increase in real GDP will be small, and the increase in price level will be small.

Accepted Answer

A steep short-run aggregate supply curve means that a small increase in aggregate demand will lead to a significant increase in the price level but only a small increase in real GDP. Therefore, the best choice is A - the increase in real GDP will be relatively small, and the increase in the price level will be relatively large.

Question 15

Exhibit 14-3
 
-Refer to the graph in the exhibit.How could the Bank of Canada return the economy to potential output?  
A) by decreasing government spending 
B) by decreasing excess reserves in the banking system 
C) by selling Canadian government bonds to banks 
D) by increasing the bank rate

Accepted Answer

The answer of Exhibit 14-3
 
-Refer to the graph in...

Question 16

Suppose the Bank of Canada decreases the money supply.What would be expected to happen to the aggregate demand curve and the aggregate supply curve?  
A) Aggregate demand would increase, which would lead to movement along the short-run aggregate supply curve. 
B) Aggregate demand would decrease, which would lead to movement along the short-run aggregate supply curve. 
C) Aggregate supply would increase, which would lead to movement along the aggregate demand curve. 
D) Aggregate supply would decrease, which would lead to movement along the aggregate demand curve.

Accepted Answer

When the central bank decreases the money supply, it becomes more expensive for firms and individuals to borrow money. As a result, consumption and investment spending decrease, leading to a decrease in aggregate demand. This would cause the aggregate demand curve to shift leftward (or downward). At the same time, there would be no change in the short-run aggregate supply curve, which relies on the nominal wage rate and other input prices that are assumed to be sticky in the short run. Thus, the decrease in aggregate demand would lead to a movement along the short-run aggregate supply curve to a lower level of output and prices.

Question 17

Suppose a shift in the aggregate demand curve causes prices to increase a lot and real output to increase by a little.What does this suggest about the shape of short-run aggregate supply curve?  
A) It is horizontal. 
B) It is very steep. 
C) It is vertical. 
D) It is downward sloping.

Accepted Answer

A very steep short-run aggregate supply curve suggests that increases in aggregate demand lead to large increases in price and only small increases in real output, which aligns with the scenario described.

Question 18

How will a decrease in the money supply affect interest rates and aggregate demand in the short term?  
A) Interest rates will increase, and aggregate demand will shift to the right. 
B) Interest rates will increase, and aggregate demand will shift to the left. 
C) Interest rates will decrease, and aggregate demand will shift to the right. 
D) Interest rates will decrease, and aggregate demand will shift to the left.

Accepted Answer

A decrease in the money supply typically leads to higher interest rates as there is less money available for borrowing. Higher interest rates make borrowing more expensive, which can reduce spending and investment, leading to a shift in aggregate demand to the left.

Question 19

Exhibit 14-4
 
-Refer to the graph in the exhibit.At what point does short-run equilibrium occur?  
A) at point a 
B) at point b 
C) at point c, where the actual price level exceeds the expected price level 
D) at the origin point c, where the actual price level is less than the expected price level

Accepted Answer

Short-run equilibrium in economic models, particularly in the context of the Aggregate Demand-Aggregate Supply (AD-AS) model, occurs at the point where the aggregate demand curve intersects the short-run aggregate supply curve. This point reflects the current price level and output level where the expectations of sellers about the price level are met. Point C, where the actual price level exceeds the expected price level, indicates a situation where the economy might be experiencing higher demand than anticipated, leading to an increase in prices and output in the short run. This is consistent with the dynamics of short-run equilibrium in the AD-AS model.

Question 20

Suppose the government wants to eliminate a recessionary gap.Which of the following strategies should the Bank of Canada implement?  
A) The Bank of Canada should increase the money supply and increase the interest rate. 
B) The Bank of Canada should increase the money supply and decrease the interest rate. 
C) The Bank of Canada should decrease the money supply and increase the interest rate. 
D) The Bank of Canada should decrease the money supply and decrease the interest rate.

Accepted Answer

To eliminate a recessionary gap, the Bank of Canada should implement expansionary monetary policy. This involves increasing the money supply and decreasing the interest rate to encourage borrowing and investment, which can stimulate aggregate demand and output. Therefore, choice B is the best option. Choice A, decreasing the money supply while increasing the interest rate, would be contractionary and could worsen the recessionary gap. Choice C, decreasing the money supply while increasing the interest rate, would also be contractionary and could worsen the recessionary gap. Choice D, decreasing the money supply and decreasing the interest rate, would be contradictory and not effective in stimulating aggregate demand and output.

Quiz 15: Monetary Theory and Policy in an Open Economy

Suppose the short-run aggregate supply curve is positively sloped and the money supply increases.What is the effect on aggregate demand?

Which of the following is an example of a contractionary monetary policy?

Exhibit 14-3 -Refer to the graph in the exhibit.In this situation, how could the Bank of Canada return the economy to potential output?

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

Exhibit 14-3 -Refer to the graph in the exhibit.How could the Bank of Canada return the economy to potential output?

Which of the following is an example of an expansionary monetary policy?

How does a reduction in money supply affect the aggregate demand curve?

Which monetary policy would be appropriate for closing a recessionary gap?

In order for monetary policy to be effective in changing planned investment spending, what must investment be sensitive to?

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

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

Exhibit 14-4 -Refer to the graph in the exhibit.What can the Bank of Canada do to return the economy to its potential output?

Which of the following will allow monetary policy to be most effective in changing aggregate demand?

Suppose the short-run aggregate supply curve is steep.For a given increase in aggregate demand, how much will real GDP and price level increase?

Exhibit 14-3 -Refer to the graph in the exhibit.How could the Bank of Canada return the economy to potential output?

Suppose the Bank of Canada decreases the money supply.What would be expected to happen to the aggregate demand curve and the aggregate supply curve?

Suppose a shift in the aggregate demand curve causes prices to increase a lot and real output to increase by a little.What does this suggest about the shape of short-run aggregate supply curve?

How will a decrease in the money supply affect interest rates and aggregate demand in the short term?

Exhibit 14-4 -Refer to the graph in the exhibit.At what point does short-run equilibrium occur?

Suppose the government wants to eliminate a recessionary gap.Which of the following strategies should the Bank of Canada implement?