Question 1

If the Bank of Canada reduces the money supply by 5 percent and the quantity theory of money is true,then output will fall 5 percent in the short run and:
A) prices will remain unchanged in the long run.
B) output will fall 5 percent in the long run.
C) prices will fall 5 percent in the long run.
D) output will remain unchanged in the long run.

Accepted Answer

The answer of If the Bank of Canada reduces the...

Question 2

Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0.The aggregate demand curve is Y = 3(M/P)and M = 1,000.a.If the economy is initially in long-run equilibrium,what are the values of P and Y?
b.Now suppose a supply shock moves the short-run aggregate supply curve to P = 1.5.What are the new short-run P and Y?
c.If the aggregate demand curve and long-run aggregate supply curve are unchanged,what are the long-run equilibrium P and Y after the supply shock?
d.Suppose that after the supply shock the central bank wanted to hold output at its long-run level.What level of M would be required? If this level of M were maintained,what would be long-run equilibrium P and Y?

Accepted Answer

The answer of Assume that the long-run aggregate supply curve...

Question 3

If the Bank of Canada reduces the money supply by 5 percent,then the real interest rate will:
A) rise in both the short run and the long run.
B) rise in the short run but return to its original equilibrium level in the long run.
C) rise in the short run but will fall below its original equilibrium level in the long run.
D) be unaffected in both the short run and the long run.

Accepted Answer

In the short run, reducing the money supply by 5 percent will increase the real interest rate. This is because there is less money available for lending, making it more expensive to borrow. However, in the long run, the real interest rate will return to its original equilibrium level because households and firms will adjust their spending and investment plans to the new lower level of the money supply.

Question 4

If the demand for money increases,but the Bank of Canada keeps the money supply the same,then in the short run output will:
A) fall and in the long run prices will remain unchanged.
B) remain unchanged and in the long run prices will fall.
C) remain unchanged and in the long run prices will remain unchanged.
D) fall and in the long run prices will fall.

Accepted Answer

The answer of If the demand for money increases,but the...

Question 5

Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0.The aggregate demand curve is Y = 2(M/P)and M = 1,500.a.If the economy is initially in long-run equilibrium,what are the values of P and Y?
b.What is the velocity of money in this case?
c.Suppose because banks start paying interest on chequing accounts,the aggregate demand function shifts to Y = (1.5) (M/P).What are the short-run values of P and Y?
d.What is the velocity of money in this case?
e.With the new aggregate demand function,once the economy adjusts to long-run equilibrium,what are P and Y?
f.What is the velocity now?

Accepted Answer

The answer of Assume that the long-run aggregate supply curve...

Question 6

If the demand for money increases,this will:
A) increase velocity.
B) decrease velocity.
C) have no effect on velocity.
D) cause the Bank of Canada to increase the money supply.

Accepted Answer

If the demand for money increases, people will want to hold onto more cash and as a result, spend less. This will decrease the velocity of money since fewer transactions will occur.

Question 7

Suppose you are an economist working for the Bank of Canada when droughts in the Prairies and floods in Ontario substantially reduce food production in Canada.Use the aggregate demand-aggregate supply model to illustrate graphically your policy recommendation to accommodate this adverse supply shock,assuming that your top priority is maintaining full employment in the economy.Be sure to label:
i.the axes
ii.the curves
iii.the initial equilibrium values
iv.the direction the curves shift
v.the terminal equilibrium values.State in words what happens to prices and output as a combined result of the supply shock and the recommended Bank of Canada accommodation.

Accepted Answer

The answer of Suppose you are an economist working for...

Question 8

If a change in government regulations allows banks to start paying interest on chequing accounts this will:
A) increase the demand for money.
B) decrease the demand for money.
C) have no effect on the demand for money.
D) increase the demand for currency but decrease the demand for chequing accounts.

Accepted Answer

Allowing banks to pay interest on chequing accounts would make holding money more attractive, thus increasing the demand for money.

Question 9

In the mid-1980s,oil prices ______,inflation was ______,and the unemployment rate ______.
A) rose rapidly; high; rose
B) rose slowly; moderate; high
C) fell; low; declined
D) fell; low; rose

Accepted Answer

The answer of In the mid-1980s,oil prices ______,inflation was ______,and...

Question 10

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level,then in response to an exogenous increase in the price of oil:
A) both Central Bank A and Central Bank B should increase the quantity of money.
B) Central Bank A should increase the quantity of money whereas Central Bank B should keep it stable.
C) Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it.
D) both Central Bank A and Central Bank B should keep the quantity of money stable.

Accepted Answer

Central Bank A, which cares only about keeping the price level stable, would want to keep the quantity of money stable in response to an exogenous increase in the price of oil. Increasing the quantity of money would lead to an increase in the price level, which is not consistent with its objective. On the other hand, Central Bank B, which cares only about keeping output at its natural level, would want to increase the quantity of money to counter the negative effects of the exogenous shock on output. Therefore, the best choice is C, where Central Bank A keeps the quantity of money stable whereas Central Bank B increases it.

Question 11

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level,then in response to an exogenous decrease in the velocity of money:
A) both Central Bank A and Central Bank B should increase the quantity of money.
B) Central Bank A should increase the quantity of money whereas Central Bank B should keep it stable.
C) Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it.
D) both Central Bank A and Central Bank B should keep the quantity of money stable.

Accepted Answer

An exogenous decrease in the velocity of money would lead to a decrease in the price level and output. To counteract this and maintain their respective goals (price level stability for Central Bank A and natural level of output for Central Bank B), both would need to increase the quantity of money to offset the decrease in velocity.

Question 12

Making use of Okun's law,it may be computed that if the Bank of Canada reduces the money supply 5 percent and the quantity theory of money is true,then the unemployment rate will rise about:
A) 5 percent in both the short run and the long run.
B) 2.5 percent in both the short run and the long run.
C) 5 percent in the short run but will return to its natural rate in the long run.
D) 2.5 percent in the short run but will return to its natural rate in the long run.

Accepted Answer

According to Okun's law, a decrease in output leads to an increase in unemployment. A 5% reduction in money supply would decrease output, causing a temporary rise in unemployment by about 2.5% in the short run, but it will return to its natural rate in the long run.

Question 13

The principal method used by the Bank of Canada to change the money supply is through open-market operations.Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of a Bank decision to increase open-market purchases.Be sure to label:
i.the axes
ii.the curves
iii.the initial equilibrium values
iv.the direction the curves shift
v.the short-run equilibrium values
vi.the long-run equilibrium values.State in words what happens to prices and output in the short run and the long run.

Accepted Answer

The answer of The principal method used by the Bank...

Question 14

Throughout much of the 1990s,North America experienced declining energy prices.Assume that the Canadian economy was in long-run equilibrium before these declines began.a.Use the aggregate demand-aggregate supply model to illustrate graphically the short-run and long-run impact of this decline on output and prices.b.If the Bank of Canada attempted to offset this deviation from the natural rate in the short run,should the money supply be increased or decreased?

Accepted Answer

The answer of Throughout much of the 1990s,North America experienced...

Question 15

Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0.The aggregate demand curve is Y = 2(M/P)and M = 1,500.a.If the economy is initially in long-run equilibrium,what are the values of P and Y?
b.If M increases to 2,000,what are the new short-run values of P and Y?
c.Once the economy adjusts to long-run equilibrium at M = 2,000,what are P and Y?

Accepted Answer

The answer of Assume that the long-run aggregate supply curve...

Question 16

Suppose that droughts in the Prairies and floods in Ontario substantially reduce food production in Canada.Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this adverse supply shock.Be sure to label:
i.the axes
ii.the curves
iii.the initial equilibrium values
iv.the direction the curves shift
v.the short-run equilibrium values
vi.the long-run equilibrium values.State in words what happens to prices and output in the short run and the long run.

Accepted Answer

The answer of Suppose that droughts in the Prairies and...

Question 17

Suppose that laws are passed banning labour unions and that resulting lower labour costs are passed along to consumers in the form of lower prices.Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this favourable supply shock.Be sure to label:
i.the axes
ii.the curves
iii.the initial equilibrium values
iv.the direction the curves shift
v.the short-run equilibrium values
vi.the long-run equilibrium values.State in words what happens to prices and output in the short run and the long run.

Accepted Answer

The answer of Suppose that laws are passed banning labour...

Question 18

The long-run and short-run aggregate supply curves reflect fundamental differences between long-run and short-run macroeconomic analysis.a.Graphically illustrate the long-run and short-run aggregate supply curves.Be sure to label the axes.b.What determines the level of output in the long run versus the short run?
c.How do prices behave differently in the long run and the short run?

Accepted Answer

The answer of The long-run and short-run aggregate supply curves...

Question 19

The advent of interest-earning chequing accounts in the early 1980s led many households to keep a larger proportion of their income in chequing accounts.Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this change in money demand.Be sure to label:
i.the axes
ii.the curves
iii.the initial equilibrium values
iv.the direction the curves shift
v.the short-run equilibrium values
vi.the long-run equilibrium values.State in words what happens to prices and output in the short run and the long run.

Accepted Answer

The answer of The advent of interest-earning chequing accounts in...

Question 20

If the Bank of Canada reduces the money supply by 5 percent and the quantity theory of money is true,then:
A) every point on the aggregate demand curve moves 5 percent to the left.
B) every point on the aggregate demand curve moves up 5 percent.
C) the aggregate demand curve moves down and to the left,but it is impossible to determine exactly by how much.
D) the aggregate demand curve moves up and to the right,but it is impossible to determine exactly by how much.

Accepted Answer

According to the quantity theory of money, changes in the money supply directly affect the price level. A decrease in the money supply by 5 percent would lead to a 5 percent decrease in the price level. This, in turn, would lead to a decrease in consumption and investment, resulting in a leftward shift of the aggregate demand curve. Therefore, every point on the aggregate demand curve would move 5 percent to the left.

Quiz 9: Introduction to Economic Fluctuations

If the Bank of Canada reduces the money supply by 5 percent and the quantity theory of money is true,then output will fall 5 percent in the short run and:

If the Bank of Canada reduces the money supply by 5 percent,then the real interest rate will:

If the demand for money increases,but the Bank of Canada keeps the money supply the same,then in the short run output will:

If the demand for money increases,this will:

If a change in government regulations allows banks to start paying interest on chequing accounts this will:

In the mid-1980s,oil prices ,inflation was ,and the unemployment rate __.

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level,then in response to an exogenous increase in the price of oil:

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level,then in response to an exogenous decrease in the velocity of money:

Making use of Okun's law,it may be computed that if the Bank of Canada reduces the money supply 5 percent and the quantity theory of money is true,then the unemployment rate will rise about:

If the Bank of Canada reduces the money supply by 5 percent and the quantity theory of money is true,then: