Question 1

If policy makers wanted to use both monetary and fiscal policy to help reduce a high rate of inflation,which of the following would be most appropriate?

Accepted Answer

To reduce high inflation, the appropriate policy mix would be to have contractionary monetary and fiscal policies. A government budget surplus would reduce aggregate demand and decrease inflationary pressures. The sale of securities in the open market by the Bank of Canada would also reduce the money supply, which would lower inflation. Lastly, a higher bank rate would discourage borrowing and limit spending, which would further decrease inflationary pressures. Therefore, a government budget surplus, the sale of securities in the open market by the Bank of Canada, and a higher bank rate would be the most appropriate combination of policies to reduce high inflation.

Question 2

What impact will an increase in the money supply have on the economy?

Accepted Answer

An increase in the money supply will likely lead to an increase in demand for goods and services, which can lead to inflation if the economy is already operating at its full potential. When there is high demand for goods but limited supply, prices tend to rise.

Answer: D
 An increase in the money supply can lead to an increase in the supply of loanable funds, which can lead to a decrease in interest rates. This can encourage borrowing and investment, but also contribute to inflationary pressures. However, this is not a definite outcome and can depend on various factors such as the state of the economy and monetary policy.

Question 3

Which of the following would tend to reduce the price level?

Accepted Answer

When the Bank of Canada sells bonds on the open market, there is a decrease in the money supply because the individuals or institutions buying the bonds pay for them with cash. As a result, there is less money in circulation, which tends to reduce the price level. Choices A and C would both increase the money supply, which would tend to increase the price level. Choice B can have an ambiguous effect, as a decrease in the bank rate can encourage increased borrowing and spending, leading to inflationary pressures.

Question 4

Suppose the Bank of Canada purchases $100 million of government bonds from the public.If the desired reserve ratio is 20 percent and all banks keep zero excess reserves,what will the total impact of this action on the money supply be?

Accepted Answer

The money multiplier is 1/0.2 = 5. Therefore, the total increase in the money supply is $100 million * 5 = $500 million.

Question 5

Assume a starting position of macroeconomic equilibrium at the full-employment level of real GDP.In the short run,what effect will a decrease in the money supply have?

Accepted Answer

A decrease in the money supply will lead to a decrease in aggregate demand, which causes a decrease in both prices and real GDP in the short run. The decrease in demand for loanable funds will also lead to an increase in interest rates. Overall, this will lead to a decrease in real GDP and an increase in interest rates, while the price level will decrease.

Question 6

What the relationship among money,interest rates,and inflation?

Accepted Answer

Money supply affects interest rates, and interest rates, in turn, influence inflation. Higher interest rates typically lower inflation by reducing consumer and business spending, whereas lower interest rates increase inflation by boosting spending. When the money supply increases, it typically results in a decrease in interest rates, encouraging spending, and leading to inflation. So, there is a direct relationship among money, interest rates, and inflation.

Question 7

Assume the Bank of Canada sells $1000 worth of government bonds to Paul,who deposits the money in the First National Bank.If the desired reserve ratio is 25 percent,what effect will this transaction have?

Accepted Answer

The sale of bonds by the Bank of Canada reduces the money supply by $1000. The deposit of the proceeds in the First National Bank increases the bank's reserves by $1000. The desired reserve ratio is 25%, so the bank must hold $250 in reserves against the new deposit. This leaves $750 in excess reserves, which can be used to make new loans. However, the new loans will eventually lead to an increase in the money supply by $4000, as the money is deposited in other banks and the process repeats itself.

Question 8

Which of the following would tend to decrease unemployment in the short run?

Accepted Answer

When the Bank of Canada buys government securities from investment dealers, it injects money into the economy, increasing the level of bank reserves and lowering interest rates. This makes it easier and cheaper for banks to borrow money and lend it out, leading to an increase in investment, consumption, and aggregate demand. As a result, businesses are more likely to hire additional workers, leading to a decrease in unemployment in the short run.

Question 9

When the economy is experiencing an inflationary gap,how can monetary policy affect real output and the price level?

Accepted Answer

A contractionary monetary policy reduces the money supply, leading to higher interest rates, which can decrease investment and consumption, thus reducing real output and lowering the price level.

Question 10

Under what circumstances is profitable investment most effectively promoted?

Accepted Answer

Profitable investment is most effectively promoted when the money supply and price level are stable, as this reduces uncertainty and allows businesses to plan and invest with confidence.

Question 11

Which one of the following would be the most appropriate stabilization policy if the economy is operating beyond its long-run potential capacity?

Accepted Answer

If the economy is operating beyond its long-run potential capacity, it is likely experiencing inflationary pressures. In this case, the most appropriate stabilization policy would be to reduce aggregate demand, which can be achieved through monetary policy tools such as an increase in the bank rate. This would make borrowing more expensive, reducing consumption and investment spending, and ultimately reducing inflationary pressures. Options A and D would both increase aggregate demand, potentially exacerbating inflationary pressures. Option B, a purchase of bonds by the Bank of Canada, would increase the money supply, potentially leading to inflationary pressures as well.

Question 12

If policy makers wanted to use both monetary and fiscal policy to stimulate demand and reduce a high rate of unemployment,which of the following would be most appropriate?

Accepted Answer

Both a larger budget deficit and the purchase of securities in the open market by the Bank of Canada would stimulate demand and reduce unemployment. A larger deficit would increase government spending, which would stimulate demand, and the purchase of securities by the Bank of Canada would lower interest rates, which would make borrowing cheaper for businesses and individuals, leading to increased spending and investment.

Question 13

If the Bank of Canada sells bonds,what will be included in the short run impact of this policy?

Accepted Answer

When the Bank of Canada sells bonds, it decreases the money supply in the economy, which leads to an increase in real interest rates. As a result, borrowing becomes more expensive, consumption and investment decrease, and aggregate demand falls. This can cause a short-run contraction in real output and potentially increase unemployment. However, this policy may also help to curb inflationary pressures in the economy.

Question 14

When the economy is in a recession,how can monetary policy affect real output?

Accepted Answer

An expansionary monetary policy, which involves lowering interest rates and increasing the money supply, can potentially stimulate spending and investment in the short run, leading to increases in real output. In the long run, however, the effectiveness of monetary policy is uncertain and depends on various factors, such as the degree of price stickiness and the response of expectations and inflation. A contractionary monetary policy, which involves raising interest rates and decreasing the money supply, can potentially reduce inflationary pressures and improve confidence in the economy, but may also dampen demand and output in the short run.

Question 15

If the Bank of Canada sells bonds,what will the short-run impact of this policy tend to include?

Accepted Answer

When the Bank of Canada sells bonds, it reduces the money supply in the economy, which tends to increase real interest rates in the short run. This is because with a lower amount of money available, lenders can charge higher interest rates to borrowers. It is also likely to lead to a reduction in inflationary pressure and potentially a decrease in real output and an increase in unemployment, neither of which are listed as choices.

Question 16

In the long run,what is the most likely effect of a sustained increase in money supply growth relative to the growth rate of potential real output?

Accepted Answer

When the growth rate of money supply exceeds the growth rate of potential real output, it leads to an excess of money in circulation, causing a rise in demand for goods and services. This increase in demand results in an increase in the general price level over time, known as inflation. Therefore, the most likely effect of a sustained increase in money supply growth relative to the growth rate of potential real output is an increase in the price level.

Question 17

When the economy is initially above full employment,how can monetary policy affect real output?

Accepted Answer

The answer of When the economy is initially above full...

Question 18

Which of the following interest rates will an expansionary monetary policy have its greatest direct effect on?

Accepted Answer

An expansionary monetary policy primarily affects the bank rate, which is the interest rate at which central banks lend to commercial banks. Lowering the bank rate encourages banks to lend more, thereby stimulating economic activity.

Question 19

What is the problem associated with the Bank of Canada targeting money supply as a method of monetary policy?

Accepted Answer

When the Bank of Canada targets the money supply, interest rates can fluctuate as they are determined by the demand for money, which can lead to instability in the economy.

Question 20

Starting from an initial equilibrium with a recessionary gap,what effect would a shift to more expansionary monetary policy tend to have?

Accepted Answer

Expansionary monetary policy increases real output in the short run by boosting demand, but in the long run, output returns to its natural level, and only prices increase.

Quiz 13: Monetary Policy