Question 1

If expected inflation is constant and the nominal interest rate increased 3 percentage points,what would happen to the real interest rate?
A) It would increase 3 percentage points.
B) It would increase,but by fewer than 3 percentage points.
C) It would decrease,but by fewer than 3 percentage points.
D) It would decrease by 3 percentage points.

Accepted Answer

The real interest rate is the nominal interest rate minus the expected inflation rate. If expected inflation is constant and the nominal interest rate increases by 3 percentage points, the real interest rate will also increase by 3 percentage points.

Question 2

For the Canadian economy,what is the least important of the three reasons for the downward slope of the aggregate-demand curve?
A) wealth effect
B) interest-rate effect
C) exchange-rate effect
D) real-wage effect

Accepted Answer

A

Question 3

Which of the following is the most liquid asset?
A) capital goods
B) stocks and bonds with a low risk
C) real estate
D) funds in a chequing account

Accepted Answer

Funds in a chequing account are the most liquid asset as they can be easily accessed and used for transactions. Capital goods, stocks and bonds, and real estate are all less liquid as they typically take longer to sell or convert into cash.

Question 4

The theory of liquidity preference assumes that the nominal supply of money is determined by which of the following?
A) the level of real GDP
B) the rate of inflation
C) government spending
D) the central bank

Accepted Answer

The theory of liquidity preference, developed by John Maynard Keynes, assumes that the nominal supply of money is determined by the central bank, which can control the money supply through various monetary policy tools. The theory states that people hold money for three reasons: transactions, precautionary, and speculative. When the interest rate is high, people prefer to hold less money and save more, which reduces aggregate demand and lowers output. On the other hand, when the interest rate is low, people prefer to hold more money, which increases aggregate demand and raises output. Therefore, the central bank can use its monetary policy tools, such as open market operations, discount rate, and reserve requirements, to influence the interest rate and stabilize the economy. Real GDP, inflation, and government spending may affect the demand for money, but they are not the primary determinants of the nominal supply of money.

Question 5

What does liquidity refer to?
A) the relation between the price and interest rate of an asset
B) the risk of an asset relative to its selling price
C) the ease with which an asset is converted into a medium of exchange
D) the sensitivity of investment spending to changes in the interest rate

Accepted Answer

Liquidity refers to how easily an asset can be converted into cash or a medium of exchange. It is a measure of how easily an asset can be bought or sold without affecting its price. Assets that are highly liquid are easier to sell and typically have a lower risk of price fluctuations.

Question 6

If expected inflation is constant and the nominal interest rate increases,how does the real interest rate change?
A) It increases by more than the change in the nominal interest rate.
B) It increases by the change in the nominal interest rate.
C) It decreases by the change in the nominal interest rate.
D) It decreases by more than the change in the nominal interest rate.

Accepted Answer

If expected inflation is constant, the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, if the nominal interest rate increases, but expected inflation remains constant, the real interest rate will also increase by the same amount as the change in the nominal interest rate.

Question 7

Over what period of time is the liquidity-preference theory most relevant,and what does it suppose?
A) short run; it supposes that the price level adjusts to bring money supply and money demand into balance
B) short run; it supposes that the interest rate adjusts to bring money supply and money demand into balance
C) long run; it supposes that the price level adjusts to bring money supply and money demand into balance
D) long run; it supposes that the interest rate adjusts to bring money supply and money demand into balance

Accepted Answer

The liquidity-preference theory is most relevant in the short run, as it focuses on the interest rate as the main mechanism for bringing money supply and money demand into balance. It suggests that individuals and businesses have a preference for holding money in liquid form, and that they will only be willing to part with it if they are compensated with a higher interest rate. Therefore, changes in the money supply and demand will affect the interest rate in the short run.

Question 8

According to liquidity-preference theory,when would the money-supply curve shift right?
A) if government spending increased
B) only if the Bank of Canada chose to increase the money supply
C) if the interest rate increased
D) if the price level fell or the interest rate decreased

Accepted Answer

The money-supply curve shifts right when the central bank, such as the Bank of Canada, decides to increase the money supply.

Question 9

When the Bank of Canada buys government bonds,how do the reserves of the banking system change and what happens to the money supply?
A) The reserves increase,so the money supply increases.
B) The reserves increase,so the money supply decreases.
C) The reserves decrease,so the money supply increases.
D) The reserves decrease,so the money supply decreases.

Accepted Answer

When the Bank of Canada buys government bonds, it pays for them using newly-created reserves. As a result, the reserves of the banking system increase, leading to an increase in the amount of money that banks can lend out. This, in turn, increases the overall money supply in the economy.

Question 10

Which statement is NOT a reason the aggregate-demand curve slopes downward?
A) As the price level increases,real wages decline.
B) As the price level increases,real wealth declines.
C) As the price level increases,the interest rate increases.
D) As the price level increases,the exchange rate increases.

Accepted Answer

Real wages actually increase as the price level decreases, which is why people can buy more when prices are lower, contributing to the downward slope of the aggregate-demand curve. The other options (B, C, D) correctly explain why the aggregate-demand curve slopes downward.

Question 11

Which statement does NOT accurately explain the slope of the aggregate-demand curve?
A) When interest rates fall,Sleepwell Hotels decides to build some new hotels.
B) The exchange rate falls,so French restaurants in Paris buy more Canadian beef.
C) Janet feels wealthier because of the price drop,so she decides to landscape her backyard.
D) With prices down and wages fixed by contract,Safe Well Servicing decides to lay off workers.

Accepted Answer

The slope of the aggregate-demand curve reflects the negative relationship between the price level and the quantity of real GDP demanded. Option D incorrectly suggests a positive relationship between price and quantity demanded, as Safe Well Servicing decides to lay off workers due to falling prices.

Question 12

According to the liquidity-preference theory,equilibrium in the money market is achieved by adjustments in which of the following?
A) price level
B) interest rate
C) exchange rate
D) expenditure

Accepted Answer

According to the liquidity-preference theory, equilibrium in the money market is achieved by adjustments in the interest rate. As the demand for money increases, the interest rate must increase to encourage people to supply more money, and vice versa. Adjustments in price level, exchange rate, and expenditure may affect the demand for money, but they are not the primary factors in achieving equilibrium in the money market according to this theory.

Question 13

According to the theory of liquidity preference,how is the money supply affected by the interest rate?
A) inversely
B) negatively
C) not affected
D) directly

Accepted Answer

The answer of According to the theory of liquidity preference,how...

Question 14

According to liquidity-preference theory,what is the shape of the money-supply curve?
A) upward sloping
B) downward sloping
C) vertical
D) horizontal

Accepted Answer

The liquidity-preference theory suggests that the money supply is determined by the central bank and is independent of the interest rate, hence the money-supply curve is vertical.

Question 15

Which reason for the downward slope of the aggregate demand curve would likely be more important for a small closed economy?
A) wealth effect
B) interest-rate effect
C) exchange-rate effect
D) real-wage effect

Accepted Answer

The interest-rate effect would likely be more important for a small closed economy because changes in interest rates will have a greater impact on investment and consumer spending since there are fewer alternative investment opportunities and trade options compared to a larger, open economy. The other effects (wealth effect, exchange-rate effect, and real-wage effect) may also play a role but to a lesser extent.

Question 16

According to liquidity-preference theory,what action taken by the Bank of Canada would shift the money-supply curve?
A) if the Bank of Canada engaged in arbitrage
B) if the Bank of Canada changed the inflation rate
C) if the Bank of Canada changed the exchange rate
D) if the Bank of Canada engaged in open-market transactions

Accepted Answer

According to liquidity-preference theory, the money-supply curve is determined by the actions of the central bank, particularly through open-market transactions. Therefore, if the Bank of Canada were to engage in open-market transactions (buying or selling government securities in the open market), it would directly affect the money supply and shift the money-supply curve.

Question 17

What is characteristic of aggregate demand in Canada?
A) The real exchange-rate effect is nonexistent.
B) The interest-rate effect is relatively small.
C) The wealth effect is the most important.
D) The interest-rate effect is relatively large.

Accepted Answer

The interest-rate effect is relatively large in Canada, meaning that changes in interest rates have a significant impact on aggregate demand in the country. This is due to the high proportion of Canadian household debt held in variable-rate mortgages, making them very sensitive to changes in interest rates.

Question 18

Which of Keynes's theories does liquidity preference refer to?
A) the effects of changes in money demand and supply on interest rates
B) the effects of changes in money demand and supply on exchange rates
C) the effects of changes in money demand and supply on expenditure
D) the effects of changes in money demand and supply on real wealth

Accepted Answer

Liquidity preference is a theory in Keynesian economics that refers to the demand for money as a store of value and the preference for liquidity or cash over other assets. It explains the effects of changes in money demand and supply on interest rates.

Question 19

What is the difference between the effects of fiscal policy and the effects of monetary policy?
A) Monetary policy can affect long-term growth while fiscal policy cannot.
B) Fiscal policy can affect the short-term price level while monetary policy cannot.
C) Fiscal policy can affect long-term growth while monetary policy cannot.
D) Monetary policy can affect the short-term level of output while fiscal policy cannot.

Accepted Answer

Fiscal policy, through government spending and taxation, can influence long-term economic growth by affecting aggregate demand and supply-side factors like infrastructure and education. Monetary policy primarily influences short-term economic variables like interest rates and inflation.

Question 20

The wealth effect helps explain the downward slope of the aggregate-demand curve.How important is this effect and why?
A) It is relatively important in Canada because expenditures on consumer durables is very responsive to changes in wealth.
B) It is relatively important in Canada because consumption spending is a large part of GDP.
C) It is relatively unimportant in Canada because money holdings are a small part of consumer wealth.
D) It is relatively unimportant in Canada because it takes a large change in wealth to make a significant change in interest rates.

Accepted Answer

The answer of The wealth effect helps explain the downward...

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

If expected inflation is constant and the nominal interest rate increased 3 percentage points,what would happen to the real interest rate?

For the Canadian economy,what is the least important of the three reasons for the downward slope of the aggregate-demand curve?

Which of the following is the most liquid asset?

The theory of liquidity preference assumes that the nominal supply of money is determined by which of the following?

What does liquidity refer to?

If expected inflation is constant and the nominal interest rate increases,how does the real interest rate change?

Over what period of time is the liquidity-preference theory most relevant,and what does it suppose?

According to liquidity-preference theory,when would the money-supply curve shift right?

When the Bank of Canada buys government bonds,how do the reserves of the banking system change and what happens to the money supply?

Which statement is NOT a reason the aggregate-demand curve slopes downward?

Which statement does NOT accurately explain the slope of the aggregate-demand curve?

According to the liquidity-preference theory,equilibrium in the money market is achieved by adjustments in which of the following?

According to the theory of liquidity preference,how is the money supply affected by the interest rate?

According to liquidity-preference theory,what is the shape of the money-supply curve?

Which reason for the downward slope of the aggregate demand curve would likely be more important for a small closed economy?

According to liquidity-preference theory,what action taken by the Bank of Canada would shift the money-supply curve?

What is characteristic of aggregate demand in Canada?

Which of Keynes's theories does liquidity preference refer to?

What is the difference between the effects of fiscal policy and the effects of monetary policy?

The wealth effect helps explain the downward slope of the aggregate-demand curve.How important is this effect and why?