Multiple Choice. 1 point each. PLEASE CIRCLE the correct/best variants.

1.   An increase in the real interest rate would cause an increase in the real demand for money

a.   no matter what the change in expected inflation.

b.   if expected inflation fell by less than the rise in the real interest rate.

c.   if expected inflation fell by the same amount as the rise in the real interest rate.

d.   if expected inflation fell by more than the rise in the real interest rate.

2.   Over time, the wealth of society increases and payments technologies get more efficient. What is the effect on money demand of these two changes?

a.   Money demand rises proportionately to the rise in wealth.

b.   Money demand rises, but less than proportionately to the rise in wealth.

c.   The overall effect is ambiguous.

d.   Money demand declines.

3.   If the income elasticity of money demand is 3/4 and the interest elasticity of money     demands is - 1/4, by what percent does money demand rise if income rises 10% and the nominal interest rate rises from 4% to 5%?

a.   7.50%

b.   6.25%

c.   5.00%

d.   1.25%

4.   An introduction of ATM (automatic teller machines), other things being constant

a.   reduces interest rates since it shifts money demand leftward.

b.   reduces interest rates since it shifts money demand rightward.

c.   increases interest rates since it shifts money demand leftward.

d.   increases interest rates since it shifts money demand rightward.

5.   If the quantity of money demanded exceeds the quantity of money supplied, then

a.   the quantity of nonmonetary assets demanded exceeds the quantity supplied.

b.   the quantity of nonmonetary assets supplied exceeds the quantity demanded.

c.   the quantity of nonmonetary assets demanded will still equal the quantity supplied, all else being equal.

d.   you can make no conclusions about the relative supply and demand of nonmonetary assets.

6.   When price rises,

a.   money loses its function as a medium of exchange.

b.   money loses its function as a store of value.

c.   money loses its function as a unit of account.

d.   money keeps all its functions.

7.   Which of the following macroeconomic variables is procyclical and coincident with the business cycle?

a.   residential investment

b.   nominal interest rates

c.   industrial production

d.   unemployment

8.   A temporary supply shock, such as a bumper crop, would

a.   shift the FE line to the right and leave the IS curve unchanged.

b.   shift the FE line to the left and shift the IS curve up.

c.   shift the FE line to the left and leave the IS curve unchanged.

d.   have no effect on the FE line.

9.   A tax cut on capital will

a.   shift the IS curve down and to the left.

b.   shift the LM curve up and to the right.

c.   shift the IS curve up and to the right.

d.   shift the LM curve down and to the left.

10. You have just read that the Bank of Canada has increased the money supply to avoid a recession. For a given price level, you would expect the LM curve to

a.   shift up as the real money supply falls.

b.   shift up as the real money supply rises.

c.   shift down as the real money supply falls.

d.   shift down as the real money supply rises.

11. The IS-LM-FE model predicts that a temporary adverse supply shock

a.   reduces output, national saving, and investment, but not the real interest rate.

b.   reduces output, national saving, and the real interest rate, but not investment.

c.   reduces the real interest rate, investment, and output, but not national saving.

d.   reduces output, national saving, investment, and the real interest rate.

12. Suppose the intersection of the IS and LM curves is to the left of the FE line. What would most likely eliminate a disequilibrium among the asset, labour, and goods markets?

a.   a rise in the price level, shifting the LM curve up

b.   a fall in the price level, shifting the LM curve down

c.   a rise in the price level, shifting the IS curve up

d.   a fall in the price level, shifting the IS curve down

13. A decrease in government purchases will lead to

a.   a lower output and price level in the short run but a higher output and price level in the long run.

b.   a lower output and price level in the short run but the same output and price level in the long run.

c.   a lower output and price level in the short run but a higher output and lower price level in the long run.

d.   a lower output and price level in the short run but the same output and lower price level in the long run.

14. The crowding-out effect occurs when

a.   an expansion of the government's budget raises the interest rate.

b.   a contraction of the government's budget raises the interest rate.

c.   an expansionary monetary policy decreases the interest rate.

d.   a contractionary monetary policy increases the interest rate.

15. Three-wheel cars made in North Edsel are sold for 5000 pounds. Four-wheel cars made    in South Edsel are sold for 10,000 marks. The real exchange rate between North and South Edsel is four three-wheel cars for three four-wheel cars. The nominal exchange rate between the two countries is

a.   0.50 marks/pound.

b.   0.66 marks/pound.

c.   1.50 marks/pound

d.   2.00 marks/pound.

16. When the nominal exchange rate rises

a.   the domestic currency buys more units of foreign currency, and the domestic currency has depreciated.

b.   the domestic currency buys fewer units of foreign currency, and the domestic currency has depreciated.

c.   the domestic currency buys more units of foreign currency, and the domestic currency has appreciated.

d.   the domestic currency buys fewer units of foreign currency, and the domestic currency has appreciated.

17. Suppose the Big Macs are more expensive in Canada than in China, when measured by US dollar. According to the purchasing power parity theorem

a.   the Canadian dollar will appreciate against the Chinese yuan.

b.   the Chinese yuan will appreciate against the Canadian dollar.

c.   the Chinese yuan will depreciate against the Canadian dollar.

d.  both Canadian dollar and the Chinese yuan will depreciate against the US dollar.

18. If the real exchange rate rises 2%, domestic inflation is 3%, and foreign inflation is 4%, what is the percent change in the nominal exchange rate?

a.   5%

b.   3%

c.   1%

d.   - 1%

19. Which of the following statements describes the interest parity condition?

a.   In the equilibrium, all the prices must be the same in the international market.

b.   In the equilibrium, the inflation rates must be the same in the international market.

c.   In the long run, the exchange rates must be the same in the international market.

d.   In the equilibrium, the rates of return on assets of comparable risk and liquidity must be the same in the international market.

20. In an open economy, an increase in net exports because of increased demand for             domestic products by foreigners should cause the domestic real interest rate to ________ and should cause desired saving minus desired investment to ________.

a.   rise; rise

b.   rise; fall

c.   fall; rise

d.   fall; fall

21. You have just noticed that the dollar depreciated and you suspect that the Canadian          government was behind this change. Which would you choose as the most likely cause of this depreciation in the real exchange rate?

a.   an increase in the money supply

b.   a decrease in the money supply

c.   a temporary increase in government purchases

d.   a temporary decrease in taxes

22. The reason that fiscal policy is ineffective during a recession is that

a.   an expansionary fiscal policy will lead to higher interest rates, appreciation of exchange rate, and a reduction in net exports.

b.   an expansionary fiscal policy will lead to lower interest rates, depreciation of exchange rate, and an increase in net exports.

c.   an expansionary fiscal policy will lead to lower interest rates, appreciation of exchange rate, and a reduction in net exports.

d.   an expansionary fiscal policy will lead to higher interest rates, appreciation of exchange rate, and an increase in net exports.

23. Which of the following best explains economic theory behind the Phillips curve?

a.   If inflation rate is lower than expected inflation rate, real money balance will increase leading to a lower interest rate and a higher aggregate demand and  output.

b.   If inflation rate is lower than expected inflation rate, real money balance will decrease leading to a higher interest rate and a lower aggregate demand and  output.

c.   If there is an unanticipated inflation rate, real wage will increase leading to a lower output and employment.

d.   If there is an unanticipated inflation rate, real wage will decrease leading to a lower output and employment.

24. The long-run Phillips curve is

a.   vertical.

b.   horizontal.

c.   upward sloping.

d.   downward sloping.

25. Some economists argue that Okun's Law overstates the cost of cyclical unemployment because

a.   the cost of retraining workers must be offset against the loss in output that occurs when workers are unemployed.

b.   if efficiency wages prevail, and workers are paid their real wage, already employed workers will reduce their effort, reducing output.

c.   it ignores the fact that leisure increases during a recession.

d.   it ignores the loss of government revenue and additional government expenditures that occur when unemployment rises.

26. According to the expectations-augmented Phillips curve, if macroeconomic policy succeeds in reducing inflation below its expected rate, unemployment will

a.   fall below the natural rate.

b.   rise above the natural rate.

c.   remain unchanged.

d.  be equal to the natural rate.

27. The most important factor determining how quickly expected inflation adjusts when the government attempts to reduce inflation is

a.   the slope of the Phillips curve.

b.   the credibility of the government's disinflationary policy.

c.   the degree of gradualism in the government's disinflationary policy.

d.   the slope of the IS curve.

28. Reducing inflation without incurring serious unemployment costs is possible if

a.   policy makers are able to reduce the expected inflation rate.

b.  people form their expectations based on rational expectations theory.

c.   monetary authorities rapidly decrease the money supply.

d.   the government makes a significant budget cut.

29. The amount of output lost when the inflation rate is reduced by one percentage point is called

a.   Okun's law.

b.   the sacrifice ratio.

c.   the Solow residual.

d.   Planck's constant.

30. Hyperinflation occurs when the inflation rate

a.   rises.

b.   declines.

c.   is extremely high.

d.   is extremely low.

31. Assume that the reserve-deposit ratio is 0.2. The Bank of Canada carries out open-market operations, purchasing $1,000,000 worth of bonds from banks. This action increased the  money supply by $2,600,000. What is the currency-deposit ratio?

a.   0.2

b.   0.3

c.   0.4

d.   0.5

32. If people hold more currency, other things remaining constant

a.   the money multiplier will decrease.

b.   the money multiplier will increase.

c.   the money multiplier will remain unchanged.

d.   the monetary base will decrease.

33. The money supply is $6 million, currency held by the public is $2 million, and the reserve-deposit ratio is 0.1. The monetary base is equal to

a.   $2 million.

b.   $2.4 million.

c.   $2.6 million.

d.   $4 million.

34. Suppose the Bank of Canada decides to reduce the interest rate. Which of the following actions will produce the desired outcome?

a.   The Bank sells treasury bills in the open-market operations.

b.   The Bank reduces the Bank rate.

c.   The Bank buys treasury bills in the open-market operations.

d.   The Bank increases the desired reserve ratio.

35. Milton Friedman would eliminate the destabilizing effect of the Central Bank's monetary policy by

a.   eliminating the Central Bank.

b.   removing the Central Bank's political independence.

c.   requiring that the Central Bank choose a monetary aggregate and increase it at a fixed percentage rate each year.

d.   eliminating the Central Bank's right to carry out open-market operations.

Problems.

36. Suppose the Bank of Canada strictly followed a rule of keeping money supply at $800   billion. This level of money is consistent with the economy's initial general equilibrium.

a.   Assume that GDP has increased. How will the interest rate change, ceteris paribus? Explain. (3)

b.   Assume that a financial innovation increases liquidity of alternative assets (i.e., the assets that are alternative to money). How will the interest rate change, ceteris paribus? Explain. (3)

c.   What are the effects of the Bank's money targeting policy on the economy (does the policy help to reduce business cycle fluctuations due to changes in money demand)? Explain. (3)

d.   If the Bank decides to target the interest rate instead of money (i.e., keep the interest rates at the level that was there when the economy was in the initial general equilibrium), what will be the effects of the shocks in (a) and (b) on the economy (does the policy help to reduce business cycle fluctuations due to changes in money demand)? Explain. (3)

37. Recall that the BoC’s core functions are listed on their website as

•   Monetary Policy

•   Financial System

•   Currency

•   Funds Management

•   Retail Payments Supervision

The article on the next page informs us that the BoC wants to address income inequality. Discuss how the Bank could do something about income inequality through one or more of its core functions. (4)

Bank of Canada inflation mandate stays at 2

cent, turns its eye to employment

Yahoo Finance Canada, Mon., December 13, 2021, 7:11 a.m. ·3 min read

 

The federal government is leaving the Bank of Canada’s inflation mandate at 2 per cent amid a rising cost of living and uncertainty of the new Omicron COVID-19 variant.

The mandate is reviewed every five years and the inflation target has been between one and three per cent since 1991. The Bank of Canada says it will use the flexibility of a range of between one and three per cent as conditions warrant.