MCQ

1. According to the quantity theory of money demand,

A. An increase in interest rates will cause the demand for money to fall.

B. A decrease in interest rates will cause the demand for money to increase.

C. Interest rates have a proportional effect on the demand for money.

D. An increase in money will cause the demand for money to fall.

E. None of the above.

2. Keynes's liquidity preference theory indicates that the demand for money

A. Is purely a function of income, and interest rates have no effect on the demand for money.

B. Is purely a function of interest rates, and income has no effect on the demand for money.

C. Is a function of both income and real interest rates.

D. Is a function of both government spending and income.

E. None of the above.

3. The more sensitive is the demand for money to interest rates, the . . . . . . . unpredictable velocity will be, and the link between the money supply and aggregate spending will be . . . . . . . clear.

A. More; more.

B. More; less.

C. Less; more.

D. Less; less.

E. None of the above.

4. Keynes mentioned two factors that influenced planned investment spending:

A. Interest rates and disposable income.

B. Interest rates and business expectations about the future.

C. Disposable income and business expectations about the future.

D. Interest rates and business expectations about inflation.

E. All of the above.

5. What are the factors that can shift the aggregate demand curve to the right?

A. An increase in the money supply.

B. An increase in government spending.

C. A decrease in taxes.

D. An increase in business optimism. E. All of the above.

6. By analyzing aggregate demand through its component parts, we can conclude that, everything else held constant, a decline in the inflation rate causes . . . . . . ..

A. An increase in real interest rates, an increase in investement spending, and a decline in aggregate output demanded.

B. A decline in real interest rates, a decrease in investment spending, and an increase in aggregate output demanded.

C. A decline in real interest rates, an increase in investment spending, and an increase in aggregate output demanded.

D. An increase in real interest rates, a decline in investemnt spending, and a decline in aggregate output demanded.

E. All of the above.

7. In deriving the aggregate demand curve a . . . . . . . inflation rate leads the central bank to . . . . . . . real interest rates, thereby . . . . . . . the level of equilibrium aggregate output.

A. Higher; raise; lowering.

B. Lower; raise; lowering.

C. Higher; lower; lowering.

D. Higher; lower; raising. E. None of the above.

8. If the Bank of Canada conducts open market sales, the money supply . . . . . . ., shifting the MP curve to the . . . . . . ., everything else held constant.

A. Decreases; right.

B. Decreases; left.

C. Inreases; right.

D. Increases; left.

E. None of the above.

9. The positively sloped short-run aggregate supply curve reflects the assumption that

A. Factor prices are more flexible than output prices.

B. Factor prices are less flexible than output prices.

C. Factor prices are fixed in the long run.

D. Factor prices are perfectly flexible in both the short-run and the long-run.

E. None of the above.

10. Which of the following increases aggregate supply in the short-run, everything else held constant?

A. An increase in the price of crude oil.

B. A successful wage push by workers.

C. Expectations of a higher aggregate price level.

D. A technological improvement that increase worker productivity.

E. None of the above.

11. Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause . . . . . . . in the unemployment rate in the short run and . . . . . . . in the inflation rate in the short run.

A. An increase; an increase.

B. A decrease; a decrease.

C. A decrease; an increase.

D. No change; no change.

E. None of the above.

12. Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause . . . . . . . in real GDP in the long 4 run and . . . . . . . in the inflation rate in the long run, everything else held constant.

A. An increase; an increase.

B. A decrease; a decrease.

C. No change; an increase.

D. No change; a decrease.

E. None of the above.

13. Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Bank of Canada will cause . . . . . . . in real GDP in the short run and . . . . . . . in the inflation rate in the short run, everything else held constant. A. An increase; an increase.

B. A decrease; a decrease.

C. No change; an increase.

D. No change; a decrease. E. None of the above.

14. Suppose the Canadian economy is operating at potential output. A negative supply shock that is accommodated by an open market purchase by the Bank of Canada will cause . . . . . . . in real GDP in the long run and . . . . . . . in the inflation rate in the long run, everything else held constant.

A. No change; an increase.

B. No change; a decrease.

C. An increase; an increase.

D. A decrease; a decrease.

E. None of the above.

15. Suppose the government passes legislation that encourages investment in research and the development of new technologies. Assuming this policy leads to a positive productivity change for the Canadian economy, what will the impact of such a policy be on the economy's aggregate supply?

A. A shift to the right of short-run aggregate supply curve.

B. A shift to the right of the long-run aggregate supply curve. 5

C. A shift to the right of the short- and long-run aggregate supply curves D. No shift to the short- and long-run aggregate supply curves.

E. None of the above.

16. which of the following statements are correct?

A. Cost-push inflation results from a push by workers for wages that are lower than productivity gains.

B. Demand-pull inflation results from policies that increase aggregate supply.

C. In the long-run inflation results from imported foreign prices.

D. All of the above.

E. None of the above.

17. Which of the following statement(s) is correct regarding policy rules?

A. Advocates of rules argue that policy rules solve the time-inconsistency problem so that policymakers will achieve good long-run economic outcomes.

B. Opponents argue that rules are too rigid and deny policymakers the flexibility they need to deal with unforeseeable problems.

C. Advocates argue that policy rules allow more discretion to policymakers to boost output in the face of various shocks.

D. None of the above.

E. (A) and (B) of the above.

18. Monetary policy has greater impact on the economy through A. Relative prices such as the real interest rate and the real exchange rate.

B. Wealth effects.

C. Liquidity effects

D. Balance sheet effects.

E. All of the above.

19. Due to asymmetric information in credit markets, monetary policy may affect economic activity through the balance sheet channel, where an increase in the money supply 6

A. Raises stock prices, lowering the cost of new capital relative to firms' market value, thus increasing investment spending. B. Raises firms' net worth, decreasing adverse selection and moral hazard problems, thus increasing banks willingness to lend to finance investment spending.

C. Raises the level of bank reserves, deposits, and bank loans, thereby raising spending by those individuals who do not have access to credit markets.

D. Lowers the value of the dollar, increasing net exports and aggregate demand.

E. None of the above.

20. Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. These lessons include:

A. It is dangerous always to associate the easing or tightening of monetary policy with a fall or a rise in short-term interest rates.

B. Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.

C. Avoiding fluctuations in the level of unemployment is an important objective of monetary policy, thus providing a rationale for interest-rate stability as the primary long-run goal for monetary policy.

D. Only (A) and (B) of the above.

E. None of the above.