Question 1

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

At an interest rate of 2 percent, the quantity of money demanded exceeds the quantity of money supplied, resulting in an excess money demand.

Question 2

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

People primarily own or hold money because it can be used directly to buy goods and services.

Question 3

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, people will want to hold more money as the cost of doing so falls. The cost of holding money includes the forgone interest that could have been earned on alternative assets. As interest rates decrease, the opportunity cost of holding money decreases, leading to an increase in the quantity of money demanded and a downward sloping money-demand curve.

Question 4

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 is the variable that adjusts to balance the supply and demand for money. As the demand for money increases, the interest rate rises to encourage people to save more and borrow less, reducing demand. Conversely, as the supply of money increases, the interest rate falls to encourage people to borrow more and save less, increasing demand.

Question 5

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 primarily uses the bank rate to alter the money supply. The bank rate is the interest rate at which banks can borrow funds from the central bank, and changes to this rate can influence the interest rates that commercial banks charge borrowers. By lowering the bank rate, the Bank of Canada can encourage borrowing and increase the money supply, while raising the bank rate can decrease borrowing and decrease the money supply.

Question 6

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 7

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 that could have been earned by investing it instead. When the interest rate increases, the opportunity cost of holding money also increases as the potential earnings from investing it become higher. Therefore, people will desire to hold less money in order to invest it and earn a higher return.

Question 8

What is the variable that balances the money demand and supply in the liquidity-preference and the classical theories?
A) the interest rate in both theories
B) the price level in both theories
C) the interest rate in the liquidity-preference theory and the price level in the classical theory
D) the price level in the liquidity-preference theory and the interest rate in the classical theory

Accepted Answer

In the liquidity-preference theory, the interest rate balances money demand and supply by adjusting to equate the quantity of money people want to hold with the quantity available. In the classical theory, the price level adjusts to balance money demand and supply, as changes in the price level affect the real money supply and demand.

Question 9

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

When the interest rate increases, the opportunity cost of holding money increases because individuals could earn a higher return by investing their money instead. Therefore, the quantity of money demanded decreases as people hold less money and invest more.

Question 10

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, money is held because it is a store of value and a medium of exchange. However, holding money also means sacrificing the opportunity to earn interest on other assets such as bonds. Therefore, the opportunity cost of holding money is the interest rate on bonds.

Question 11

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

If the quantity of money demanded is greater than the quantity of money supplied, people will desire to sell their interest-bearing assets to obtain more cash. This increased selling of assets and demand for cash will cause the interest rate to increase as the supply of loanable funds decreases.

Question 12

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

According to the diagram, when the interest rate is equal to 4, the supply of money (MS) is greater than the demand for money (MD), creating an excess supply of money. In this situation, people will start to invest in other assets, causing the interest rate to fall until the equilibrium is restored. Therefore, the best choice is D because there is an excess supply of money, and the interest rate will fall.

Question 13

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 14

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.What...

Question 15

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, this creates excess demand for money. As a result, individuals and firms bidding for the limited money supply will drive up the interest rate. The higher interest rate will reduce the quantity of money demanded and bring it back in line with the quantity supplied. Therefore, the correct choice is A: The interest rate will increase, and the quantity of money demanded will decrease.

Question 16

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 17

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 withdraw money from interest-bearing accounts, leading to a decrease in the supply of money. This decrease in the supply of money will cause the interest rate to rise, as lenders will be willing to offer higher interest rates to entice borrowers to borrow the limited funds available.

Question 18

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 19

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

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

Question 20

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 the alternative cost of putting money in an interest-bearing account decreases. As a result, people are willing to hold more money, which increases the quantity of money demanded.

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

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

Why do people primarily own or hold money?

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

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

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

In which situation do people want to hold less money?

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

What is the variable that balances the money demand and supply in the liquidity-preference and the classical theories?

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,what is the opportunity cost of holding money?

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?

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

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?

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

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?

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

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

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?

In which situation do people want to hold more money?

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