Economics of Money, Banking, and Financial Markets, The, Canadian Edition, 8th edition Test Bank.pdf

3) Which of the following is not considered one of the strategies used by the Bank of Canada for increasing its lending facilities to provide liquidity to the financial markets during the recent financial crises caused by the coronavirus pandemic?

A) The expansion of the Standing Lending Facility.

B) The enhancing of its Standing Term Liquidity Facility.

C) The increase in the Target Level of Settlement Balances.

D) The introduction of New Lending Programs.

Answer: C Diff: 2 Type: MC Skill: Recall Objective: 16.5 Explain the key monetary policy tools that are used when conventional monetary policy is no longer effective 4) During the Covid-19 pandemic, the Bank of Canada came up with several new and novel programs to help restore liquidity in the financial system. In one of these programs, the Bank of Canada purchased provincial ________ market securities on the ________ market.

A) money; secondary B) capital; secondary C) money; primary D) capital; primary Answer: C Diff: 2 Type: MC Skill: Recall Objective: 16.5 Explain the key monetary policy tools that are used when conventional monetary policy is no longer effective 5) During the 2008-2009 global financial crisis in the United States, huge increases in the monetary base led to large ________ in excess reserves and bank lending ________.

A) increases; increased B) decreases; decreased C) increases; decreased D) increases; did not change Answer: D Diff: 2 Type: MC Skill: Recall Objective: 16.5 Explain the key monetary policy tools that are used when conventional monetary policy is no longer effective

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6) Quantitative easing is regarded as ________.

A) the price of liquidity B) a risky monetary policy tool C) a very low-risk monetary policy tool D) an adequate policy tool Answer: B Diff: 3 Type: MC Skill: Recall Objective: 16.5 Explain the key monetary policy tools that are used when conventional monetary policy is no longer effective 7) Quantitative easing is a high-risk monetary policy tool as it runs the risk of ________.

A) possibly creating deflation B) possibly creating inflation and even hyperinflation C) not having the expected effect D) having very short-term and non-permanent effects Answer: B Diff: 3 Type: MC Skill: Recall Objective: 16.5 Explain the key monetary policy tools that are used when conventional monetary policy is no longer effective 8) Altering the composition of the Bank of Canada's balance sheet in order to improve the functioning of certain segments of the credit markets.is known as ________.

A) quantitative easing B) forward guidance C) managing risk expectations D) credit easing Answer: D Diff: 3 Type: MC Skill: Recall Objective: 16.5 Explain the key monetary policy tools that are used when conventional monetary policy is no longer effective 9) Say that the Bank of Canada announces that it will keep the policy rate at 0.25% for an extensive period of time without indicating that this decision may change depending on the circumstances. This is an example of ________.

A) a conditional commitment B) an unconditional commitment C) an open market commitment D) quotative commitment Answer: B Diff: 2 Type: MC Skill: Recall Objective: 16.5 Explain the key monetary policy tools that are used when conventional monetary policy is no longer effective 31 .

10) Helicopter money is a ________ policy tool that can potentially be used by a central bank to ________ output and at the same time fight ________ pressures.

A) conventional; increase; inflationary B) nonconventional; increase; inflationary C) nonconventional; increase; deflationary D) nonconventional; decrease; deflationary Answer: C Diff: 2 Type: MC Skill: Recall Objective: 16.5 Explain the key monetary policy tools that are used when conventional monetary policy is no longer effective 16.6 Monetary Policy Tools of the Federal Reserve and the European Central Bank 1) Describe some of the actions the Bank of Canada took to mitigate the effects of widening spreads and increased volatility in the term interbank market in the second half of 2008.

Answer: The Bank of Canada announced that it would enter into a series 28-day PRA transactions, thereby injecting huge amounts of liquidity in the markets. Moreover, the Bank expanded its list of acceptable collateral to include bank-sponsored asset-backed commercial paper and U.S. Treasuries. It also expanded its list of eligible counterparties. In engaging in these trades, the Bank takes securities onto its books in exchange for borrowings from the Bank's standing lending facility.

Diff: 3 Type: ES Skill: Recall Objective: 16.6 Identify the distinctions and similarities between the monetary policy tools of the Bank of Canada and those of the Federal Reserve and the European Central Bank 2) The Federal Reserve's lending of reserves to banks is called ________ lending. A) discount window B) term C) prime D) target Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 16.6 Identify the distinctions and similarities between the monetary policy tools of the Bank of Canada and those of the Federal Reserve and the European Central Bank

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3) The lending facility at the Federal Reserve sets a ________ on the short-term overnight interest rates.

A) ceiling B) floor C) target D) ceiling and floor Answer: A Diff: 1 Type: MC Skill: Recall Objective: 16.6 Identify the distinctions and similarities between the monetary policy tools of the Bank of Canada and those of the Federal Reserve and the European Central Bank 4) The primary indicator of the stance of monetary policy in the U.S. is the ________.

A) federal funds rate B) discount rate C) overnight rate D) prime rate Answer: A Diff: 1 Type: MC Skill: Recall Objective: 16.6 Identify the distinctions and similarities between the monetary policy tools of the Bank of Canada and those of the Federal Reserve and the European Central Bank 5) The European Central bank uses the ________ to signal its stance on monetary policy.

A) target financing rate B) overnight cash rate C) overnight bank rate D) discount window Answer: A Diff: 1 Type: MC Skill: Recall Objective: 16.6 Identify the distinctions and similarities between the monetary policy tools of the Bank of Canada and those of the Federal Reserve and the European Central Bank 6) The equivalent to the Federal Reserve's discount rate in the European System of Central Banks is the ________.

A) federal funds rate B) marginal lending rate C) deposit facility rate D) LICO rate Answer: B Diff: 1 Type: MC Skill: Recall Objective: 16.6 Identify the distinctions and similarities between the monetary policy tools of the Bank of Canada and those of the Federal Reserve and the European Central Bank

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Economics of Money, Banking, and Fin. Markets, 8Ce (Mishkin) Chapter 17 The Conduct of Monetary Policy: Strategy and Tactics 17.1 The Price Stability Goal and the Nominal Anchor 1) Price stability is defined as ________.

A) low inflation B) low and stable inflation C) stable inflation D) core inflation Answer: B Diff: 1 Type: MC Skill: Recall Objective: 17.1 Define and recognize the importance of a nominal anchor 2) The importance of a nominal anchor is to ________.

A) limit the time-inconsistency problem B) reduce inflation C) promote low inflation D) allow discretionary day-to-day monetary policy Answer: A Diff: 1 Type: MC Skill: Recall Objective: 17.1 Define and recognize the importance of a nominal anchor 3) Inflation leads to ________.

A) price instability B) lower economic growth C) public hostility D) all of the above Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.1 Define and recognize the importance of a nominal anchor 4) The nominal anchor ________.

A) acts like behavioural rule B) leads to inflation C) creates the time-inconsistency problem D) avoids the natural rate of unemployment Answer: A Diff: 1 Type: MC Skill: Recall Objective: 17.1 Define and recognize the importance of a nominal anchor

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5) Describe the time-inconsistency problem as it pertains to monetary policy outcomes.

Answer: The time-inconsistency problem occurs when monetary policymakers are tempted to pursue a discretionary monetary policy that is more expansionary than firms or people expect because such a policy would boost economic output (or lower employment) in the short run.

Diff: 1 Type: ES Skill: Recall Objective: 17.1 Define and recognize the importance of a nominal anchor 17.2 Other Goals of Monetary Policy 1) The natural rate of unemployment ________.

A) is consistent with full employment B) is equal to zero C) equals the structural employment rate D) is the same as frictional employment Answer: A Diff: 1 Type: MC Skill: Recall Objective: 17.2 Identify the six potential goals that monetary policymakers may pursue 2) High unemployment ________.

A) results in lower GDP B) leads to increased human misery C) cannot be a target of monetary policy D) A and B only Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.2 Identify the six potential goals that monetary policymakers may pursue 3) The natural rate of output is also known as ________.

A) potential output B) NAIRU C) structural output D) GDP Answer: A Diff: 1 Type: MC Skill: Recall Objective: 17.2 Identify the six potential goals that monetary policymakers may pursue

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4) Interest rate stability is desirable because ________.

A) fluctuations in interest rates create uncertainty B) it leads to financial market stability C) it leads to stability in the foreign exchange markets D) all of the above Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.2 Identify the six potential goals that monetary policymakers may pursue 5) Increases in interest rates ________.

A) cause large capital losses B) could lead to bank failures C) affect consumers' willingness to buy houses D) all of the above Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.2 Identify the six potential goals that monetary policymakers may pursue 6) A rise in the value of the Canadian dollar makes Canadian industries ________ competitive with those abroad, while a drop in the value of the dollar ________ inflation.

A) more; slows B) more; stimulates C) less; stimulates D) less; slows Answer: C Diff: 2 Type: MC Skill: Recall Objective: 17.2 Identify the six potential goals that monetary policymakers may pursue

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17.3 Should Price Stability Be the Primary Goal of Monetary Policy?

1) Hierarchical mandates ________.

A) puts the goal of price stability first and then allows for other goals B) requires all goals to be met simultaneously C) is only used by the Bank of Canada D) is only used by the Federal Reserve Answer: A Diff: 1 Type: MC Skill: Recall Objective: 17.3 Summarize the distinctions between hierarchical and dual mandates 2) In the long-run, there is no trade-off between ________ and ________.

A) inflation; unemployment B) inflation; price stability C) unemployment; price stability D) unemployment; economic growth Answer: A Diff: 1 Type: MC Skill: Recall Objective: 17.3 Summarize the distinctions between hierarchical and dual mandates 3) Which of the following countries central banks have hierarchical mandates?

A) Reserve Bank of New Zealand B) Bank of Canada C) Bank of England D) all of the above Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.3 Summarize the distinctions between hierarchical and dual mandates 4) Price stability is often the primary goal of central banks. Describe the five other goals of monetary policy Answer: The other objectives of monetary policy are: (1) high employment and output stability, (2) economic growth, (3) stability of financial markets, (4) interest-rate stability, and (5) stability in foreign exchange markets.

Diff: 1 Type: ES Skill: Recall Objective: 17.3 Summarize the distinctions between hierarchical and dual mandates

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17.4 Inflation Targeting 1) Inflation targeting includes ________.

A) a public announcement of medium-term targets for inflation B) an institutional commitment to price stability as the primary long run goal C) an information-inclusive approach in which many variables are used in making decisions about monetary policy D) all of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 2) The type of monetary policy that is used in Canada, New Zealand, and the United Kingdom is ________.

A) monetary targeting B) inflation targeting C) targeting with an implicit nominal anchor D) interest-rate targeting Answer: B Diff: 1 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 3) Concerns about a dual mandate include ________.

A) over expansionary policy B) policies that lead to large output fluctuations C) time-inconsistency problems D) decreases in output and unemployment Answer: A Diff: 1 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 4) Which of the following is not an element of inflation targeting?

A) A public announcement of medium-term numerical targets for inflation B) An institutional commitment to price stability as the primary long-run goal C) An information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy D) Increased accountability of the central bank for attaining its inflation objectives Answer: C Diff: 3 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting

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5) The first country to adopt inflation targeting was ________. A) the United Kingdom B) Canada C) New Zealand D) Australia Answer: C

Diff: 1 Type: MC Skill: Applied Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 6) New Zealand adopted inflation targeting in ________. A) 1990 B) 1991 C) 1992 D) 1994 Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 7) The Reserve Bank of New Zealand ________.

A) is one of the most independent central banks B) as the sole objective of price stability C) negotiates with the minister of finance when setting a Policy Targets Agreement D) all of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 8) Tight monetary policy in New Zealand ________.

A) brought inflation down to below 2 percent B) reduced unemployment C) led to a higher economic growth rate D) all of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting

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9) During the early period when Canada first adopted inflation targeting, the unemployment rate increased ________.

A) above 10 percent B) nearly 8 percent C) over 5 percent but less than 10 percent D) 5 percent Answer: A Diff: 1 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 10) In both New Zealand and Canada, what has happened to the unemployment rate since the countries adopted inflation targeting?

A) The unemployment rate increased sharply.

B) The unemployment rate remained constant.

C) The unemployment rate has declined substantially after a sharp increase.

D) The unemployment rate declined sharply immediately after the inflation targets were adopted.

Answer: C Diff: 1 Type: MC Skill: Applied Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 11) The United Kingdom uses ________ as its nominal anchor.

A) an inflation target B) monetary aggregates C) an interest rate target D) none of the above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 12) Peak inflation in the United Kingdom was ________ in ________.

A) 9 percent; 1991 B) 4 percent; 1997 C) 12 percent; 1991 D) 8 percent; 1995 Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting

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13) The target inflation range set by the Bank of England is ________. A) 1-4 percent B) 1-3 percent C) 2-4 percent D) 2-3 percent Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 14) Which of the following is an advantage of inflation targeting?

A) There is simplicity and clarity with regards to the target.

B) Inflation targeting does not rely on a stable money-inflation relationship.

C) It is understood by the public and is transparent.

D) All of the above.

Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 15) Which of the following is an advantage to inflation targeting?

A) There is a delayed signal about the success of having achieved the target.

B) Inflation targets could impose a rigid rule on policymakers.

C) There is potential for large output fluctuations.

D) There is transparency.

Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 16) Which of the following is an advantage to inflation targeting?

A) There is a delayed signal about the success of having achieved t the target.

B) Inflation targets could impose a rigid rule on policymakers.

C) There is potential for larger output fluctuations.

D) The central bank becomes more accountable.

Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting

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17) Which of the following is an advantage to inflation targeting?

A) There is a delayed signal about the success of having achieved the target.

B) Inflation targets could impose a rigid rule on policymakers.

C) There is potential for larger output fluctuations.

D) The performance has been quite good.

Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 18) Which of the following is an advantage to inflation targeting?

A) There is a delayed signal about the success of having achieved the target.

B) Inflation targets could impose a rigid rule on policymakers.

C) There is potential for larger output fluctuations.

D) It is easily understood by the public.

Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 19) Which of the following is a disadvantage of inflation targeting?

A) There is transparency.

B) Inflation targeting does not rely on a stable money-inflation relationship.

C) It imposes a rigid rule.

D) Inflation targeting reduces the effects of inflation shocks.

Answer: C Diff: 1 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 20) Which of the following is a disadvantage of inflation targeting?

A) There is simplicity and clarity with regards to the target.

B) Inflation targeting does not rely on a stable money-inflation relationship.

C) There is a delayed signal on the achievement of the target.

D) Inflation targeting reduces the effects of inflation shocks.

Answer: C Diff: 1 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting

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21) Which of the following is a disadvantage of inflation targeting?

A) There is simplicity and clarity with regards to the target.

B) Inflation targeting does not rely on a stable money-inflation relationship.

C) It imposes a rigid rule.

D) Inflation targeting reduces the effects of inflation shocks.

Answer: C Diff: 1 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 22) Which of the following is disadvantage of inflation targeting?

A) There is simplicity and clarity with regards to the target.

B) Inflation targeting does not rely on a stable money-inflation relationship.

C) It may lead to larger output fluctuations.

D) Inflation targeting reduces the effects of inflation shocks.

Answer: C Diff: 1 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 23) Inflation targeting has the potential to reduce the likelihood that the central bank will fall into the time-inconsistency trap of trying to ________ output and employment in the short run by pursuing an overly ________ monetary policy.

A) lower; tight B) expand; expansionary C) lower; expansionary D) expand; tight Answer: B Diff: 2 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 24) The decision by inflation targeters to choose inflation targets ________ zero reflects the concern of monetary policymakers that particularly ________ inflation can have substantial negative effects on economic growth.

A) below; high B) below; low C) above; high D) above; low Answer: D Diff: 2 Type: MC Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting

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25) What are the advantages inflation targeting?

Answer: The advantages of inflation targeting include: 1. the simplicity and clarity of a numerical target for the inflation rate; 2. does not rely on a stable money-inflation relationship; 3. there is increased accountability of the central bank; 4. reduces the effects of inflationary shocks.

Diff: 2 Type: ES Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 26) What are the disadvantages inflation targeting?

Answer: The disadvantages of inflation targeting include: 1. there is a delayed signal about the achievement of the target; 2. it could lead to a rigid rule where the only focus is the inflation rate (has not happened in practice); 3. if sole focus is the inflation rate, larger output fluctuations can occur (has not happened in practice).

Diff: 2 Type: ES Skill: Recall Objective: 17.4 Compare and contrast the advantages and disadvantages of inflation targeting 17.5 Lessons for Monetary Policy Strategy from the Global Financial Crisis 1) Which of the following is not one of the four basic lessons for economists and policymakers on how the economy works?

A) Developments in the financial sector have a far greater impact on economic activity than was earlier realized.

B) The effective lower bound on interest rates can be a serious problem.

C) The cost of cleaning up after a financial crisis is very high.

D) Price and output stability lead to financial stability.

Answer: D Diff: 2 Type: MC Skill: Recall Objective: 17.5 List the four lessons learned from the global financial crisis, and discuss what they mean for inflation targeting 2) During the coronavirus pandemic, the effective lower bound on interest rates forced the Bank of Canada to use ________ policy tools, which are ________ to use effectively.

A) nonconventional monetary; easier B) nonconventional monetary; harder C) conventional monetary; easier D) conventional monetary; harder Answer: B Diff: 2 Type: MC Skill: Recall Objective: 17.5 List the four lessons learned from the global financial crisis, and discuss what they mean for inflation targeting

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3) Did the financial crisis reveal that developments in the financial sector were less important than previously thought?

Answer: No. Financial developments had very significant impacts on the economy and those financial frictions could have a major disruptive impact on the economies of many countries.

Diff: 2 Type: ES Skill: Recall Objective: 17.5 List the four lessons learned from the global financial crisis, and discuss what they mean for inflation targeting 4) The effective lower bound on interest rates can be a serious problem?

Answer: The other nonconventional monetary policy tools are complicated and unpredictable.

Diff: 2 Type: ES Skill: Recall Objective: 17.5 List the four lessons learned from the global financial crisis, and discuss what they mean for inflation targeting 5) What are some of the costs of cleaning up after a financial crisis?

Answer: High and persistent unemployment, increased government debt and increased likelihood of defaults on government debt.

Diff: 2 Type: ES Skill: Recall Objective: 17.5 List the four lessons learned from the global financial crisis, and discuss what they mean for inflation targeting 6) Did the Great Moderation protect economies from financial instability.

Answer: No, the apparent stability of the economy obscured the fact that financial developments could create new problems for the economy.

Diff: 2 Type: ES Skill: Applied Objective: 17.5 List the four lessons learned from the global financial crisis, and discuss what they mean for inflation targeting

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17.6 Should Central Banks Try to Stop Asset-Price Bubbles 1) The two types of asset-price bubbles are ________ and ________ bubbles.

A) credit-driven; debt driven B) rational; optimistic C) irrational exuberance; optimistic D) credit-driven; irrational exuberance Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.6 Summarize the arguments for and against central bank policy responses to asset-price bubbles 2) Define the two types of asset-price bubbles and explain why one of these is more is more problematic for the economy.

Answer: The two types of asset-price bubbles are credit-driven bubbles and those driven by irrational exuberance. Credit-driven bubbles occur when, as a result of overly easy monetary policy, credit becomes relatively available at low interest rates. This fuels the demand for different classes of assets causing their prices to rise, creating the expectation of further price rises and yet further increases in demand. When these bubbles end, the falling asset prices cause widespread financial problems leading to possibly a financial crisis. Bubbles driven by irrational exuberance are fueled by overly optimistic expectations. The bursting of these bubbles cause losses to speculators but not a widespread financial crisis.

Diff: 2 Type: ES Skill: Applied Objective: 17.6 Summarize the arguments for and against central bank policy responses to asset-price bubbles 3) Give five reasons why central banks should not try to prick an asset-price bubble.

Answer: The answer should include (1) a discussion of how difficult it is to identify asset-price bubbles, (2) the recognition that rising interest rates may reinforce the expectations of rising prices, (3) the possibility that raising interest rates to deal with one particular asset-price bubble might adversely affect the values of other assets, (4) the recognition that the attempts to prick an asset-price bubble might have detrimental effects on the overall economy , and (5) the possibility of an aggressive response by monetary authorities to offset the repercussions of the bursting of an asset-price bubble.

Diff: 3 Type: ES Skill: Recall Objective: 17.6 Summarize the arguments for and against central bank policy responses to asset-price bubbles

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4) What are credit booms and why might a policy of leaning against a credit boom be preferred to leaning against asset-price bubbles?

Answer: Credit booms occur when it becomes much easier for investors to borrow because of lower interest costs and laxer credit standards and consequently greater risk taking by investors.

Policies designed to ensure that credit standards do not become laxer will do a better job of dealing with credit-driven bubbles which are more damaging to the economy.

Diff: 3 Type: ES Skill: Applied Objective: 17.6 Summarize the arguments for and against central bank policy responses to asset-price bubbles 5) Why might a policy of low interest rates encourage excessive risk taking?

Answer: When yields on safe investments become very low and real returns are extremely low, investors are induced to seek higher returns and are therefore subject to higher risk levels.

Diff: 2 Type: ES Skill: Recall Objective: 17.6 Summarize the arguments for and against central bank policy responses to asset-price bubbles 17.7 Tactics: Choosing the Policy Instrument 1) Which of the following is not an operating instrument?

A) Nonborrowed reserves B) Monetary base C) Overnight interest rate D) Bank rate Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 2) Which of the following is a potential operating instrument (i.e., policy instrument) for the central bank? A) The monetary base B) The M1 + C) GDP D) M2+ Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument

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3) Which of the following is not an operating instrument (i.e., policy instrument)?

A) Nonborrowed reserves B) Monetary base C) Overnight funds interest rate D) Long term interest rates Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 4) Which of the following is a potential operating instrument (i.e., policy instrument) for the central bank?

A) The monetary base B) The exchange rate C) The inflation rate D) Long term interest rates Answer: A Diff: 1 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 5) Which of the following is a potential operating instrument (i.e., policy instrument) for the central bank?

A) Nonborrowed reserves B) The overnight funds rate C) The monetary base D) All of the above Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 6) A potential policy instrument (i.e., operating instrument) for the Bank of Canada is ________. A) the monetary base B) borrowed reserves C) the overnight rate D) the nonborrowed monetary base E) All of the above. Answer: E

Diff: 1 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument

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7) Which of the following is not a criterion when choosing a policy instrument? ________.

A) The instrument must be observable and measurable.

B) The instrument must be controllable by the central bank.

C) The instrument must have a predictable effect on the goals.

D) The instrument must be closely linked to the goals of monetary policy.

Answer: D Diff: 2 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 8) If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because ________.

A) of fluctuations in the demand for reserves B) of fluctuations in the consumption function C) bond values will tend to remain stable D) of fluctuations in the business cycle Answer: A Diff: 2 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 9) Fluctuations in the demand for reserves cause the Bank of Canada to lose control over a monetary aggregate if the Bank of Canada targets ________.

A) a monetary aggregate B) the monetary base C) an interest rate D) nominal GDP Answer: C Diff: 2 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 10) Interest rates are difficult to measure because ________.

A) data on them are not available in a timely manner B) real interest rates depend on the hard-to-determine expected inflation rate C) they fluctuate too often to be accurate D) they cannot be controlled by the Bank of Canada Answer: B Diff: 1 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument

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11) Which of the following criteria need not be satisfied when choosing an intermediate target?

A) The variable must be measurable.

B) The variable must be controllable.

C) The variable must be predictable.

D) The variable must be stable.

Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 12) Which of the following is not a requirement when selecting an intermediate target?

A) Measurability B) Controllability C) Flexibility D) Predictability Answer: C Diff: 1 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 13) When it comes to choosing a policy instrument, both the ________ rate and ________ aggregates are measured accurately and are available daily with almost no delay.

A) three-month T-bill; monetary B) three-month T-bill; reserve C) overnight rate; monetary D) overnight rate; reserve Answer: D Diff: 1 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 14) Which of the following best explains why the Bank of Canada does not use nominal GDP as an intermediate target?

A) Nominal GDP has little connection with Bank of Canada policy goals.

B) Nominal GDP is unaffected by open market operations.

C) The Bank of Canada has little direct control over nominal GDP. D) None of the above.

Answer: C Diff: 2 Type: MC Skill: Applied Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument

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15) Which of the following criteria must be satisfied when selecting an intermediate target?

A) The variable must be measurable and frequently available.

B) The variable must be controllable with the use of the central bank's policy tools.

C) The variable must have a predictable impact on the policy goal.

D) All of the above.

Answer: D Diff: 2 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 16) If the desired intermediate target is an interest rate, then the preferred policy instrument will be a(n) ________ variable like the ________.

A) interest rate; three-month T-bill rate B) interest rate; overnight rate C) monetary aggregate; monetary base D) monetary aggregate; nonborrowed base Answer: B Diff: 1 Type: MC Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 17) Explain and demonstrate graphically how targeting nonborrowed reserves can result in overnight rate instability.

Answer: When nonborrowed reserves are held constant, increases in the demand for reserves result in the overnight rate increasing and decreases in the demand for nonborrowed reserves result in the overnight rate declining. Since fluctuations in demand do not cause monetary policy actions, the result is the overnight rate will fluctuate. See Figure 18-3 in the textbook.

Diff: 3 Type: ES Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 18) Explain and demonstrate graphically how targeting the overnight rate can result in fluctuations in nonborrowed reserves.

Answer: With an overnight rate target, fluctuations in demand for reserves require similar changes in the nonborrowed reserves to keep the overnight rate constant. See Figure 18-4 in the textbook.

Diff: 3 Type: ES Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 19) What criteria apply when choosing a policy instrument?

Answer: Three criteria apply when choosing a policy instrument: The instrument must be observable and measurable, it must be controllable by the central bank, and it must have a predictable effect on the goals.

Diff: 3 Type: ES Skill: Recall Objective: 17.7 Describe and assess the three criteria for choosing a policy instrument 18 .

17.8 Tactics: The Taylor Rule 1) According to the Taylor rule, the Bank of Canada should raise the overnight interest rate when inflation ________ the Bank of Canada's inflation target or when real GDP ________ the Bank of Canada's output target.

A) rises above; drops below B) drops below; drops below C) rises above; rises above D) drops below; rises above Answer: C Diff: 2 Type: MC Skill: Recall Objective: 17.8 Interpret and assess the performance of the Taylor rule as a hypothetical policy instrument for setting the overnight interest rate 2) According to the Taylor rule, the overnight interest rate should be set at ________.

A) π + ior - 0.5(π - π*) - 0.5(y - y) B) π + ior + 0.5(π - π*) + 0.5(y - y) C) r + π D) r - π Answer: B Diff: 1 Type: MC Skill: Recall Objective: 17.8 Interpret and assess the performance of the Taylor rule as a hypothetical policy instrument for setting the overnight interest rate 3) According to the Taylor rule, the overnight interest rate should be set at ________.

A) π + ior - 0.5(π - π*) - 0.5(y - y) B) π - ior - 0.5(π - π*) - 0.5(y - y) C) r + π D) r - π E) None of the above.

Answer: E Diff: 1 Type: MC Skill: Recall Objective: 17.8 Interpret and assess the performance of the Taylor rule as a hypothetical policy instrument for setting the overnight interest rate

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4) Using Taylor's rule, when the equilibrium real overnight rate is 3 percent, the positive output gap is 2 percent, the target inflation rate is 1 percent, and the actual inflation rate is 2 percent, the nominal overnight rate target should be ________.

A) 5 percent B) 5.5 percent C) 6 percent D) 6.5 percent Answer: D Diff: 1 Type: MC Skill: Applied Objective: 17.8 Interpret and assess the performance of the Taylor rule as a hypothetical policy instrument for setting the overnight interest rate 5) Using Taylor's rule, when the equilibrium real overnight rate is 2 percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal overnight rate should be ________. A) 0 percent B) 1 percent C) 2 percent D) 3 percent Answer: B

Diff: 1 Type: MC Skill: Applied Objective: 17.8 Interpret and assess the performance of the Taylor rule as a hypothetical policy instrument for setting the overnight interest rate 6) According to the Taylor Principle, when the inflation rate rises, the nominal interest rate should be ________ by ________ than the inflation rate increase.

A) increased; more B) increased; less C) decreased; more D) decreased; less Answer: A Diff: 1 Type: MC Skill: Recall Objective: 17.8 Interpret and assess the performance of the Taylor rule as a hypothetical policy instrument for setting the overnight interest rate

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7) If the Taylor Principle is not followed and nominal interest rates are increased by less than the increase in the inflation rate, then real interest rates will ________ and monetary policy will be too ________.

A) rise; tight B) rise; loose C) fall; tight D) fall; loose Answer: D Diff: 3 Type: MC Skill: Applied Objective: 17.8 Interpret and assess the performance of the Taylor rule as a hypothetical policy instrument for setting the overnight interest rate 8) The rate of inflation tends to remain constant when ________.

A) the unemployment rate is above the NAIRU B) the unemployment rate equals the NAIRU C) the unemployment rate is below the NAIRU D) the unemployment rate increases faster than the NAIRU increases Answer: B Diff: 1 Type: MC Skill: Recall Objective: 17.8 Interpret and assess the performance of the Taylor rule as a hypothetical policy instrument for setting the overnight interest rate 9) The rate of inflation increases when ________.

A) the unemployment rate equals the NAIRU B) the unemployment rate exceeds the NAIRU C) the unemployment rate is less than the NAIRU D) the unemployment rate increases faster than the NAIRU increases Answer: C Diff: 1 Type: MC Skill: Recall Objective: 17.8 Interpret and assess the performance of the Taylor rule as a hypothetical policy instrument for setting the overnight interest rate

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10) Explain the Taylor rule, including the formula for setting the overnight rate target, and the components of the formula. If the Bank of Canada were to use this rule, how many goals would it use to set monetary policy?

Answer: The Taylor rule specifies that the target overnight rate should be set to equal the equilibrium real overnight rate, plus the rate of inflation (for the Fisher effect), plus one-half times the output gap, plus one-half times the inflation gap. The formula is overnight rate target = equilibrium real overnight rate + inflation rate(output + gap) + (inflation gap) The output gap is the percentage deviation of real GDP from potential full-employment real GDP. The inflation gap is the difference between actual inflation and the central bank's target rate of inflation. The equilibrium real overnight rate is the real rate consistent with full employment in the long run. The inflation rate is the actual rate of inflation. The Taylor rule sets the overnight rate recognizing the goals of low inflation and full employment (or equilibrium long-run economic growth).

Diff: 3 Type: ES Skill: Recall Objective: 17.8 Interpret and assess the performance of the Taylor rule as a hypothetical policy instrument for setting the overnight interest rate

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Economics of Money, Banking, and Fin. Markets, 8Ce (Mishkin) Chapter 18 The Foreign Exchange Market 18.1 Foreign Exchange Market 1) The exchange rate is ________.

A) the price of one currency relative to gold B) the value of a currency relative to inflation C) the change in the value of money over time D) the price of one currency relative to another Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 2) Exchange rates are determined in ________.

A) the money market B) the foreign exchange market C) the stock market D) the capital market Answer: B Diff: 1 Type: MC Skill: Recall Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 3) Although foreign exchange market trades are said to involve the buying and selling of currencies, most trades involve the buying and selling of ________.

A) assets denominated in different currencies B) SDRs C) gold D) ECUs Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important

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4) The immediate (two-day) exchange of one currency for another is a ________.

A) forward transaction B) spot transaction C) money transaction D) exchange transaction Answer: B Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 5) An agreement to exchange dollar bank deposits for euro bank deposits in one month is a ________.

A) spot transaction B) future transaction C) forward transaction D) deposit transaction Answer: C Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 6) Today 1 euro can be purchased for $1.10. This is the ________.

A) spot exchange rate B) forward exchange rate C) fixed exchange rate D) financial exchange rate Answer: A Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 7) In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the ________.

A) spot exchange rate B) money exchange rate C) forward exchange rate D) fixed exchange rate Answer: C Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important

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8) When the value of the British pound changes from $1.25 to $1.50, the pound has ________ and the Canadian dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: C

Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 9) When the value of the British pound changes from $1.50 to $1.25, then the pound has ________ and the Canadian dollar has ________.

A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: Diff: 1 B Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 10) When the value of the dollar changes from £0.5 to £0.75, then the British pound has ________ and the Canadian dollar has ________.

A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: B Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 11) When the value of the dollar changes from £0.75 to £0.5, then the British pound has ________ and the Canadian dollar has ________.

A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: C Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 3 .

12) When the exchange rate for the Mexican peso changes from 9 pesos to the Canadian dollar to 10 pesos to the Canadian dollar, then the Mexican peso has ________ and the Canadian dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: B

Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 13) When the exchange rate for the Mexican peso changes from 10 pesos to the Canadian dollar to 9 pesos to the Canadian dollar, then the Mexican peso has ________ and the Canadian dollar has ________.

A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: C Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 14) At one time, one Canadian dollar traded on the foreign exchange market for about 0.75 euros. Therefore, one euro would have purchased, at that time, about ________ Canadian dollars. A) 0.75 B) 1.00 C) 1.33 D) 1.75 Answer: C

Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important

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15) At one time, one Canadian dollar traded on the foreign exchange market for about 49.0 Indian rupees. Thus, one Indian rupee would have purchased, at that time, about ________ Canadian dollars.

A) 0.02 B) 1.20 C) 7.00 D) 49.0 Answer: A Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 16) At one time, one Canadian dollar traded on the foreign exchange market for about 1.15 Swiss francs. Therefore, one Swiss franc would have purchased, at that time, about ________ Canadian dollars. A) 0.30 B) 0.87 C) 1.15 D) 3.10 Answer: B

Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 17) At one time, one Canadian dollar traded on the foreign exchange market for about 3.33 Romanian new lei. Therefore, one Romanian new lei would have purchased, at that time, about ________ Canadian dollars. A) 0.30 B) 1.86 C) 2.86 D) 3.33 Answer: A

Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important

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18) If the Canadian dollar appreciates from 1.25 Swiss franc per Canadian dollar to 1.5 francs per dollar, then the franc depreciates from ________ Canadian dollars per franc to ________ Canadian dollars per franc. A) 0.80; 0.67 B) 0.67; 0.80 C) 0.50; 0.33 D) 0.33; 0.50 Answer: A

Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 19) If the British pound appreciates from $0.50 per pound to $0.75 per pound, the Canadian dollar depreciates from ________ per dollar to ________ per dollar.

A) £2; £2.5 B) £2; £1.33 C) £2; £1.5 D) £2; £1.25 Answer: B Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 20) If the Japanese yen appreciates from $0.01 per yen to $0.02 per yen, the Canadian dollar depreciates from ________ per dollar to ________ per dollar.

A) 100¥; 50¥ B) 10¥; 5¥ C) 5¥; 10¥ D) 50¥; 100¥ Answer: A Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important

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21) If the dollar appreciates from 1.5 Brazilian reals per dollar to 2.0 reals per dollar, the real depreciates from ________ per real to ________ per real. A) $0.67; $0.50 B) $0.33; $0.50 C) $0.75; $0.50 D) $0.50; $0.67 E) $0.50; $0.75 Answer: A

Diff: 1 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 22) When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound, then, holding everything else constant, the pound has ________ and ________ expensive.

A) appreciated; British cars sold in Canada become more B) appreciated; British cars sold in Canada become less C) depreciated; American wheat sold in Britain becomes more D) depreciated; American wheat sold in Britain becomes less Answer: C Diff: 2 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 23) If the dollar depreciates relative to the Swiss franc, ________.

A) Swiss chocolate will become cheaper in Canada B) American computers will become more expensive in Switzerland C) Swiss chocolate will become more expensive in Canada D) Swiss computers will become cheaper in Canada Answer: C Diff: 2 Type: MC Skill: Applied Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important

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24) Everything else held constant, when a country's currency appreciates, the country's goods abroad become ________ expensive and foreign goods in that country become ________ expensive.

A) more; less B) more; more C) less; less D) less; more Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important 25) Everything else held constant, when a country's currency depreciates, its goods abroad become ________ expensive while foreign goods in that country become ________ expensive.

A) more; less B) more; more C) less; less D) less; more Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.1 Explain how the foreign exchange market works and why exchange rates are important

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18.2 Exchange Rates in the Long Run 1) According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is ________.

A) 40 pesos per real B) 100 pesos per real C) 25 pesos per real D) 0.4 pesos per real Answer: C Diff: 2 Type: MC Skill: Applied Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 2) The starting point for understanding how exchange rates are determined is a simple idea called ________, which states: if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it. A) Gresham's law B) the law of one price C) purchasing power parity D) arbitrage Answer: B

Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 3) The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.

A) theory of purchasing power parity B) law of one price C) theory of money neutrality D) quantity theory of money Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 4) The theory of PPP suggests that if one country's price level rises relative to another's, its currency should ________. A) depreciate B) appreciate C) float D) do none of the above Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 9 .

5) The theory of PPP suggests that if one country's price level falls relative to another's, its currency should ________. A) depreciate B) appreciate C) float D) do none of the above Answer: B

Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 6) The theory of PPP suggests that if one country's price level falls relative to another's, its currency should ________. A) depreciate in the long run B) appreciate in the long run C) appreciate in the short run D) depreciate in the short run Answer: B

Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 7) The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in ________.

A) the trade balances of the two countries B) the current account balances of the two countries C) fiscal policies of the two countries D) the price levels of the two countries Answer: D Diff: 2 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 8) If the real exchange rate between Canada and Japan is ________, then it is cheaper to buy goods in Japan than in Canada. A) greater than 1.0 B) greater than 0.5 C) less than 0.5 D) less than 1.0 Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run

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9) According to PPP, the real exchange rate between two countries will always equal ________. A) 0.0 B) 0.5 C) 1.0 D) 1.5 Answer: C

Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 10) The theory of PPP suggests that if one country's price level rises relative to another's, its currency should ________. A) depreciate in the long run B) appreciate in the long run C) depreciate in the short run D) appreciate in the short run Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 11) In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a fall in the country's relative price level causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate Answer: C

Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 12) If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will ________. A) rise by 6 percent B) rise by 2 percent C) fall by 6 percent D) fall by 2 percent Answer: D

Diff: 3 Type: MC Skill: Applied Objective: 18.2 Identify the main factors that affect exchange rates in the long-run

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13) Assume that the following are the predicted inflation rates in these countries for the year: 2 percent for Canada, 3 percent for Canada; 4 percent for Mexico, and 5 percent for Brazil.

According to the theory of purchasing power parity and everything else held constant, which of the following would we expect to happen?

A) The Brazilian real will depreciate against the Canadian dollar.

B) The Mexican peso will depreciate against the Brazilian real.

C) The Canadian dollar will depreciate against the Mexican peso.

D) The Canadian dollar will depreciate against the Canadian dollar.

Answer: A Diff: 3 Type: MC Skill: Applied Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 14) According to the theory of purchasing power parity , a rise in Canada price level of 5 percent, and a rise in the Mexican price level of 6 percent cause ________.

A) the dollar to appreciate 1 percent relative to the peso B) the dollar to depreciate 1 percent relative to the peso C) the dollar to depreciate 5 percent relative to the peso D) the to appreciate 5 percent relative to the peso Diff: 2 dollar Type: MC Answer: A Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 15) Higher tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant.

A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 16) Lower tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant.

A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long Answer: C Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run

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17) Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________, everything else held constant.

A) depreciate; lower B) depreciate; higher C) appreciate; lower D) appreciate; higher Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 18) Everything else held constant, increased demand for a country's ________ causes its currency currency to appreciate in the long run, while increased demand for ________ causes its to depreciate.

A) imports; imports B) imports; exports C) exports; imports D) exports; exports Answer: C Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run

19) Everything else held constant, increased demand for a country's exports causes its currency to ________ in the long run, while increased demand for imports causes its currency to ________.

A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate Answer: B Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 20) Everything else held constant, if a factor increases the demand for ________ goods relative to ________ goods, the domestic currency will appreciate.

A) foreign; domestic B) foreign; foreign C) domestic; domestic D) domestic; foreign Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 13 .

21) Everything else held constant, if a change in a factor that can affect the exchange rate leads to a decrease in demand for ________ goods relative to ________ goods, the domestic currency will depreciate.

A) foreign; domestic B) foreign; foreign C) domestic; domestic D) domestic; foreign Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 22) An increase in a country's level of productivity will cause its currency to ________ because it can now produce goods at a ________ price, everything else held constant.

A) depreciate; lower B) appreciate; lower C) depreciate; higher D) appreciate; higher Answer: B Diff: 1 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 23) If, in retaliation for "unfair" trade practices, the Canadian government imposes a 30 percent tariff on Japanese TV's, but at the same time the demand by Canadians for Japanese goods increases, then, in the long run, ________, everything else held constant. A) the Japanese yen should appreciate relative to the Canadian dollar B) the Japanese yen should depreciate relative to the Canadian dollar C) there is no effect on the Japanese yen relative to the Canadian dollar D) the Japanese yen could appreciate, depreciate, or remain constant relative to the Canadian dollar Answer: D

Diff: 2 Type: MC Skill: Applied Objective: 18.2 Identify the main factors that affect exchange rates in the long-run

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24) If Canada imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices, and Japanese demand for Canadian exports increases at the same time, then, in the long run ________, everything else held constant.

A) the Japanese yen will appreciate relative to the Canadian dollar B) the Japanese yen will depreciate relative to the Canadian dollar C) the Japanese yen will either appreciate, depreciate, or remain constant against the Canadian dollar D) there will be no effect on the Japanese yen relative to the Canadian dollar Answer: B Diff: 2 Type: MC Skill: Applied Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 25) If the inflation rate in Canada is higher than that in Mexico and productivity is growing at a slower rate in Canada compared to Mexico, then, in the long run, ________, everything else held constant. A) the Mexican peso will appreciate relative to the Canadian dollar B) the Mexican peso will depreciate relative to the Canadian dollar C) the Mexican peso will either appreciate, depreciate, or remain constant relative to the Canadian dollar D) there will be no effect on the Mexican peso relative to the Canadian dollar Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 26) If the Brazilian demand for Canadian exports rises while Canadian productivity is rising relative to Brazilian productivity, then, in the long run, ________, everything else held constant. A) the Brazilian real will appreciate relative to the Canadian dollar B) the Brazilian real will depreciate relative to the Canadian dollar C) the Brazilian real will either appreciate, depreciate, or remain constant relative to the Canadian dollar D) there is no effect on the Brazilian real relative to the Canadian dollar Answer: B

Diff: 2 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run

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27) The theory of purchasing power parity cannot fully explain exchange rate movements because ________.

A) all goods are identical even when produced in different countries B) monetary policy differs across countries C) some goods are not traded between countries D) fiscal policy differs across countries Answer: C Diff: 2 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 28) Which of the following can cause a depreciation of the domestic currency in the long run?

I. An increase in domestic price level.

II. An increase in tariffs.

III. An increase in imports demand.

IV. An increase in export demand.

V. An increase in productivity.

A) I and II. B) I, II, and III. C) I and III. D) IV and V. Answer: C Diff: 2 Type: MC Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 29) Explain the law of one price and the theory of purchasing power parity. Why doesn't purchasing power parity explain all exchange rate movements? What factors determine long-run exchange rates?

Answer: With no trade barriers and low transport costs, the law of one price states that the price of traded goods should be the same in all countries. The purchasing power parity theory extends the law of one price to total economies. PPP states that exchange rates should adjust to reflect changes in the price levels between two countries. PPP may fail to fully explain exchange rates because goods are not identical, and price levels include traded and nontraded goods and services. Long-run exchange rates are determined by domestic price levels relative to foreign price levels, trade barriers, import and export demand, and productivity.

Diff: 1 Type: ES Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run

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30) What is the theory of purchasing power parity? Why cannot it not fully explain exchange rates?

Answer: The theory of PPP suggests that if one country's price level rises relative to another's, its currency should depreciate. PPP cannot fully explain exchange rates in the long run because some of the assumptions for PPP to hold are violated. These assumptions are that the goods traded are identical between countries, transportation costs are minimal and finally that trade barriers do not exist.

Diff: 2 Type: ES Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 31) What are the factors that affect exchange rates in the long-run?

Answer: a. Relative price levels: According to PPP when domestic price level rises relative to foreign, the domestic currency will depreciate. b. Trade barriers: when we impose trade barriers to imports then domestic currency will appreciate. c. Preferences for domestic versus foreign goods: when foreigners develop an appetite for Canadian goods, then the Canadian dollar will appreciate. d. Productivity: In the long-run as a country becomes more productive relative to other countries, its currency appreciates.

Diff: 3 Type: ES Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 32) Explain how trade barriers affect exchange rates in the long-run.

Answer: Increasing trade barriers cause a country's currency to appreciate in the long run. For example, suppose that Canada increases its tariff or puts a lower quota on Japanese cars. These increases in trade barriers increase the demand for Canadian cars, and the dollar tends to appreciate because Canadian cars will still sell well even with a higher value of the dollar.

Diff: 3 Type: ES Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run 33) Explain how productivity affects exchange rates in the long-run Answer: When productivity in a country rises, it tends to rise in domestic sectors that produce traded goods rather than nontraded goods. Higher productivity is therefore associated with a decline in the price of domestically produced traded goods relative to foreign-traded goods. As a result, the demand for domestic goods rises, and the domestic currency tends to appreciate.

Diff: 3 Type: ES Skill: Recall Objective: 18.2 Identify the main factors that affect exchange rates in the long-run

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18.3 Exchange Rates in the Short Run: A Supply and Demand Analysis 1) One way to understand the short-run behaviour of exchange rates is ________.

A) to use the theory of portfolio choice B) to understand the exchange rate is the price of one asset in terms of another C) to examine the long-run trends D) A and B only.

Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange 2) The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets.

A) theory of asset demand B) law of one price C) interest parity condition D) theory of foreign capital mobility Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange 3) The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another.

A) interest rate B) risk C) expected return D) liquidity Answer: C Diff: 1 Type: MC Skill: Recall Objective: 18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange

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4) The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is ________.

A) the level of trade and capital flows B) the expected return on these assets relative to one another C) the liquidity of these assets relative to one another D) the riskiness of these assets relative to one another Answer: B Diff: 1 Type: MC Skill: Recall Objective: 18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange 5) The demand curve for the domestic currency ________.

A) is downward sloping B) is vertical because the amount of foreign exchange is finite C) shifts when the exchange rate changes D) A and C only Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange 6) Everything else held constant, when the current value of the domestic currency increases, the ________ domestic assets ________.

A) demand for; increases B) quantity demanded of; increases C) demand for; decreases D) quantity demanded of; decreases Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange 7) Everything else held constant, when the current value of the domestic exchange rate increases, the ________ of domestic assets ________.

A) quantity supplied; does not change B) supply; decreases C) quantity supplied; increases D) supply; increases Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange 19 .

18.4 Explaining Changes in Exchange Rates 1) An increase in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 2) As the relative expected return on dollar assets increases, foreigners will want to hold more ________ assets and less ________ assets, everything else held constant.

A) foreign; foreign B) foreign; dollar C) dollar; foreign D) dollar; dollar Answer: C Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 3) When Canadians or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets.

A) dollar; dollar B) dollar; foreign C) foreign; dollar D) foreign; foreign Answer: B Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 4) When Canadians or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a ________ demand for dollar assets, everything else held constant.

A) dollar; foreign; constant B) dollar; foreign; higher C) foreign; dollar; higher D) foreign; dollar; constant Answer: B Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 20 .

5) When Canadians or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a ________ demand for dollar assets and a correspondingly ________ demand for foreign assets. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: B

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 6) An increase in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

A) right; appreciate B) right; depreciate C) left; appreciate D) left; Diff: 1 depreciate Type: MC Answer: A Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 7) A decrease in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 8) A decrease in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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9) ________ in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 10) ________ in the domestic interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 11) ________ in the domestic interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.

A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: D

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 12) ________ in the domestic interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: D

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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13) ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 14) ________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant.

A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 15) ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 16) ________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant.

A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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17) Suppose that the Bank of Canada enacts expansionary policy. Everything else held constant, this will cause the demand for Canadian assets to ________ and the Canadian dollar to ________.

A) increase; appreciate B) decrease; appreciate C) increase; depreciate D) decrease; depreciate Answer: D Diff: 3 Type: MC Skill: Applied Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 18) Suppose that the Bank of Canada sells bonds to the chartered banks. Everything else held constant, this will cause the demand for Canadian assets to ________ and the Canadian dollar will ________.

A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: A Diff: 3 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 19) An increase in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 20) An increase in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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21) A decrease in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 22) A decrease in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 23) ________ in the foreign interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: C

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 24) ________ in the foreign interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: C

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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25) ________ in the foreign interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: B

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 26) ________ in the foreign interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: B

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 27) ________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease Answer: C Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 28) ________ in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant.

A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left Answer: C Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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29) ________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease Answer: B Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 30) ________ in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant.

A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left Answer: B Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 31) Suppose that the European Central Bank enacts expansionary policy. Everything else held constant, this will cause the demand for Canadian assets to ________ and the Canadian dollar to ________.

A) increase; appreciate B) decrease; appreciate C) increase; depreciate D) decrease; depreciate Answer: A Diff: 3 Type: MC Skill: Applied Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 32) Suppose that the European Central Bank conducts a main refinancing sale. Everything else held constant, this would cause the demand for Canadian assets to ________ and the Canadian dollar will ________.

A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: D Diff: 3 Type: MC Skill: Applied Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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33) An increase in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 34) An increase in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 35) A decrease in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 36) A decrease in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate Answer: D

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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37) ________ in the expected future domestic exchange rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 38) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 39) ________ in the expected future domestic exchange rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: D

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 40) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: D

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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41) ________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 42) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant.

A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left Answer: A Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 43) ________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 44) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant.

A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left Answer: D Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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45) Suppose the Bank of Canada releases a policy statement today which leads people to believe that the Bank will be enacting expansionary monetary policy in the near future. Everything else held constant, the release of this statement would immediately cause the demand for Canadian assets to ________ and the Canadian dollar to ________.

A) increase; appreciate B) decrease; appreciate C) increase; depreciate D) decrease; depreciate Answer: D Diff: 3 Type: MC Skill: Applied Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 46) Suppose a report was released today that showed the Euro-Zone inflation rate is running above the European Central Bank's inflation rate target. This leads people to expect that the European Central Bank will enact contractionary policy in the near future. Everything else held constant, the release of this report would immediately cause the demand for Canadian assets to ________ and the Canadian dollar will ________.

A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: D Diff: 3 Type: MC Skill: Applied Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 47) Suppose that the latest Consumer Price Index (CPI) release shows a higher inflation rate than was expected. Everything else held constant, the release of the CPI report would immediately cause the demand for Canadian assets to ________ and the Canadian dollar would ________.

A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: A Diff: 1 Type: MC Skill: Applied Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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48) During the beginning on the subprime crisis in the United States when the effects of the crisis were mostly confined within the United States, the U. S. dollar ________ because demand for U.S. assets ________. A) appreciated; increased B) depreciated; increased C) appreciated; decreased D) depreciated; decreased Answer: D

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 49) When the effects of the subprime crisis started to spread more quickly throughout the rest of the world, the U.S. dollar ________ because demand for U.S. assets ________. A) appreciated; increased B) depreciated; increased C) appreciated; decreased D) depreciated; decreased Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 50) The Brexit vote in June 2016 resulted in higher expected trade barriers. Therefore, the expected value of the pound would be ________ in the future. The result was the sharp ________ in the equilibrium exchange rate for the British pound.

A) lower; fall B) higher; fall C) lower; rise D) higher; rise Answer: A Diff: 1 Type: MC Skill: Applied Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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51) The Brexit vote in June 2016 resulted in higher expected trade barriers. The relative expected return on British (pound) assets therefore ________ and so the quantity demanded of pound assets ________ at any given exchange rate, shifting the demand curve for pound assets to the ________.

A) fell; declined; left B) fell; increased; right C) fell; declined; right D) rose; declined; left E) rose; increased; left Answer: A Diff: 1 Type: MC Skill: Applied Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 52) Which of the following will cause the public to expect a depreciation of the domestic currency?

I. An increase in domestic price level.

II. An increase in tariffs.

III. An increase in imports demand.

IV. An increase in export demand.

V. An increase in productivity.

A) I and II. B) I, II, and III. C) I and III. D) IV and V. Answer: C Diff: 2 Type: MC Skill: Applied Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 53) The Brexit vote in June 2016 in the United Kingdom shifted the ________ curve for British pounds on foreign currency markets to the ________.

A) supply; right B) demand; right C) supply; left D) demand; left Answer: D Diff: 2 Type: MC Skill: Applied Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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54) Explain and show graphically the effect of an increase in the expected future exchange rate on the equilibrium exchange rate, everything else held constant.

Answer: See figure below.

When the expected future exchange rate increases, the relative expected return on the domestic assets increases. This will cause the demand for domestic assets to increase, and the current value of the exchange rate will appreciate.

Diff: 2 Type: ES Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 55) In the model of the demand and supply of dollar assets use a graph to explain how a change in the domestic interest rate affects the equilibrium exchange rate.

Answer: In the model of the equilibrium in the foreign exchange market, when the domestic interest rate iD rises, holding the current exchange rate Et and everything else constant, the return on dollar assets increases relative to foreign assets, so people will want to hold more dollar assets. The quantity of dollar assets demanded increases at every value of the exchange rate, as it can be shown on the graph by a rightward shift of the demand curve. At the new equilibrium point the exchange rate rises.

Diff: 2 Type: ES Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 34 .

56) In the model of the demand and supply of dollar assets use a graph to explain how a change in the foreign interest rate affects the equilibrium exchange rate.

Answer: When the foreign interest rate iF rises, holding current exchange rate Et and everything else constant, the return on foreign assets rises relative to dollar assets. Thus the relative expected return on dollar assets falls. Now people want to hold fewer dollar assets, and the quantity demanded decreases at every value of the exchange rate. This can be shown by a leftward shift of the demand curve for dollar assets. The new equilibrium is reached at a point where the value of the dollar has fallen.

Diff: 2 Type: ES Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run 57) Why are exchange rates so volatile?

Answer: The asset market approach of exchange rate determination gives us a straightforward explanation of volatile exchange rates. Because expected appreciation of the domestic currency affects the expected return on foreign deposits for both the domestic and the foreign investors, expectations on the price level, inflation, trade barriers, productivity, import demand, export demand, and the money supply play important roles in determining the exchange rate. When expectations about any of these variables change, our model indicates that there will be an immediate effect on the expected return of foreign deposits and therefore on the exchange rate. because expectations about all these variables change with just about any bit of news that appears, it is not surprising that the exchange rate is volatile. In addition, money supply increases produce exchange rate overshooting and this is an additional reason for the high volatility of exchange rates.

Diff: 3 Type: ES Skill: Recall Objective: 18.4 List and illustrate the factors that affect the exchange rate in the short-run

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Economics of Money, Banking, and Fin. Markets, 8Ce (Mishkin) Chapter 19 The International Financial System 19.1 Intervention in the Foreign Exchange Market 1) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base, everything else held constant.

A) sale; purchase B) sale; sale C) purchase; sale D) purchase; purchase Answer: C Diff: 1 Type: MC Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 2) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal increase in its international reserves and the monetary base, everything else held constant.

A) sale; purchase B) sale; sale C) purchase; sale D) purchase; purchase Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 3) Suppose that the Bank of Japan buys Canadian dollar assets with yendenominated assets. Everything else held constant, this transaction will cause ________ in the foreign assets held by the Bank of Canada and ________ in the Canadian monetary base. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: A

Diff: 1 Type: MC Skill: Applied Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets

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4) Suppose that the Bank of Japan buys yen-denominated assets with Canadian dollar assets. Everything else held constant, this transaction will cause ________ in the foreign assets held by the Bank of Canada and ________ in the Canadian monetary base. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: D

Diff: 1 Type: MC Skill: Applied Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 5) When the central bank allows the purchase or sale of domestic currency to influence the monetary base, it is called ________.

A) an unsterilized foreign exchange intervention B) a sterilized foreign exchange intervention C) an exchange rate feedback rule D) a money neutral foreign exchange intervention Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 6) A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called ________.

A) an unsterilized foreign exchange intervention B) a sterilized foreign exchange intervention C) an exchange rate feedback rule D) a money neutral foreign exchange intervention Answer: B Diff: 1 Type: MC Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets

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7) Everything else held constant, if a central bank makes an unsterilized purchase of foreign assets, then the domestic money supply will ________ and the domestic currency will ________.

A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: B Diff: 1 Type: MC Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 8) Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will increase, and the domestic currency will ________.

A) purchase; appreciate B) purchase; depreciate C) sale; appreciate Diff: 1 depreciate Type: MC D) sale; Skill: Recall Answer: B Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 9) Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will ________ and the domestic currency will appreciate.

A) purchase; increase B) purchase; decrease C) sale; increase D) sale; decrease Answer: D Diff: 1 Type: MC Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets

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10) Everything else held constant, if a central bank makes an unsterilized sale of foreign assets, then the domestic money supply will ________ and the domestic currency will ________.

A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: C Diff: 1 Type: MC Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 11) Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will decrease, and the domestic currency will ________.

A) purchase; appreciate B) purchase; depreciate C) sale; appreciate Diff: 1 depreciate Type: MC D) sale; Skill: Recall Answer: C Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 12) Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will ________ and the domestic currency will depreciate.

A) purchase; increase B) purchase; decrease C) sale; increase D) sale; decrease Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets

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13) Everything else held constant, if a central bank makes a sterilized purchase of foreign assets, then the domestic currency will ________. A) appreciate B) depreciate C) either appreciate, depreciate, or remain constant D) not be affected Answer: D

Diff: 1 Type: MC Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 14) Because sterilized interventions mean offsetting open market operations, there is no impact on the monetary base and the money supply, and therefore a sterilized intervention ________.

A) causes the exchange rate to overshoot in the short run B) causes the exchange rate to undershoot in the short run C) causes the exchange rate to depreciate in the short run, but has no effect on the exchange rate in the long run D) has no effect on the exchange rate Answer: D Diff: 2 Type: MC Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 15) Everything else held constant, if a central bank makes a sterilized sale of foreign assets, then the domestic currency will ________.

A) appreciate B) depreciate C) either appreciate, depreciate, or remain constant D) not be affected Answer: D Diff: 1 Type: MC Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 16) Explain how an unsterilized purchase of foreign assets impacts the exchange rate everything else held constant.

Answer: An unsterilized intervention in which domestic currency is bought and foreign assets are sold leads to a fall in international reserves, a fall in the money supply, and an appreciation of the domestic currency.

Diff: 2 Type: ES Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 5 .

17) Explain what the unsterilized foreign exchange intervention is.

Answer: Unsterilized foreign exchange intervention is the one where a central bank allows the purchase or sale of domestic currency to have an effect on the monetary base. For example, when a central bank's purchase of domestic currency and corresponding sale of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base.

Diff: 2 Type: ES Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 18) Explain what the sterilized foreign exchange intervention is. Give an example.

Answer: A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called a sterilized foreign exchange intervention. For example, in the case of a $1 billion purchase of dollars by the Bank of Canada and a corresponding $1 billion sale of foreign assets, which as we know would decrease the monetary base by $1 billion, the Bank can conduct an open market purchase of $1 billion of government bonds, which would increase the monetary base by the same amount, exactly offsetting the purchase of dollars.

Diff: 2 Type: ES Skill: Recall Objective: 19.1 Use graphs and T-accounts to illustrate the distinctions between the effects of sterilized and unsterilized interventions on foreign exchange markets 19.2 Balance of Payments 1) The difference between merchandise exports and imports is called the ________ balance.

A) current account B) capital account C) official reserve transactions D) trade Answer: D Diff: 1 Type: MC Skill: Recall Objective: 19.2 Interpret the relationships among the current account and the financial account in the balance of payments 2) The account that shows international transactions involving currently produced goods and services is called the ________.

A) trade balance B) current account C) balance of payments D) capital account Answer: B Diff: 1 Type: MC Skill: Recall Objective: 19.2 Interpret the relationships among the current account and the financial account in the balance of payments 6 .

3) The account that shows international transactions involving financial transactions (stocks, bonds, bank loans, etc.) is called the ________.

A) trade balance B) current account C) balance of payments D) capital account Answer: D Diff: 1 Type: MC Skill: Recall Objective: 19.2 Interpret the relationships among the current account and the financial account in the balance of payments 4) Which of the following does not appear in the current account part of the balance of payments?

A) A loan of $1 million from CIBC to Brazil B) Foreign aid to El Salvador C) An Air France ticket bought by a Canadian D) Income earned by GM from its plants abroad Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.2 Interpret the relationships among the current account and the financial account in the balance of payments 5) Of the following, the one that appears in the current account of the balance of payments is ________.

A) an Italian investor's purchase of TD stock B) income earned by Canadian subsidiaries of Barclay's Bank of London C) a loan by a Swiss bank to a Canadian corporation D) a purchase of a British Treasury bond by the Bank of Canada Answer: B Diff: 2 Type: MC Skill: Applied Objective: 19.2 Interpret the relationships among the current account and the financial account in the balance of payments

7 .

6) Capital ________ are Canadian purchases of foreign assets, and capital ________ are foreign purchases of American assets.

A) inflows; outflows B) inflows; inflows C) outflows; outflows D) outflows; inflows Answer: D Diff: 2 Type: MC Skill: Recall Objective: 19.2 Interpret the relationships among the current account and the financial account in the balance of payments 7) Which of the following appears in the capital account part of the balance of payments?

A) A gift to a Canadian from his English aunt B) A purchase by the Honda corporation of a Canadian Treasury bill C) A purchase by the Bank of England of a Canadian Treasury bill D) Income earned by the Honda corporation on its automobile plant in Ontario Answer: B Diff: 2 Type: MC Skill: Applied Objective: 19.2 Interpret the relationships among the current account and the financial account in the balance of payments 8) The net amount of international reserves that move between governments to finance international transactions is called the ________ balance.

A) capital account B) current account C) trade D) official reserve transactions Answer: D Diff: 2 Type: MC Skill: Recall Objective: 19.2 Interpret the relationships among the current account and the financial account in the balance of payments 9) If the current account balance shows a surplus, and the capital account also shows a surplus, then the official reserve transactions balance ________.

A) must be positive B) must be negative C) must be zero D) can either be positive, negative, or zero Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.2 Interpret the relationships among the current account and the financial account in the balance of payments 8 .

10) A current account surplus indicates that Canada is ________ its claims on foreign wealth, while a deficit indicates that this country is ________ its claims on foreign wealth. A) reducing; reducing B) reducing; increasing C) increasing; reducing D) increasing; increasing Answer: C

Diff: 2 Type: MC Skill: Recall Objective: 19.2 Interpret the relationships among the current account and the financial account in the balance of payments 11) Because it provides some indication of what is happening to Canadian claims on foreign wealth and the demand for imports and exports, the ________ is closely followed by economists wanting information on the future movement of exchange rates.

A) trade balance B) capital account C) current account balance D) statistical discrepancy Answer: C Diff: 2 Type: MC Skill: Recall Objective: 19.2 Interpret the relationships among the current account and the financial account in the balance of payments 12) Economists closely follow the current account balance because they believe it can provide information on the future movement of ________.

A) interest rates B) gold flows C) exchange rates D) special drawing rights Answer: C Diff: 2 Type: MC Skill: Recall Objective: 19.2 Interpret the relationships among the current account and the financial account in the balance of payments

9 .

13) What is the current account? Why does the current account receive so much attention from economists?

Answer: The current account shows international transactions that involve currently produced goods and services. The current account tells us whether Canada (private sector and government combined) is increasing or decreasing its claims on foreign wealth. A surplus indicates that Canada is increasing its claims on foreign wealth, and is thus increasing its holdings of foreign capital, and a deficit indicates that Canada is reducing its holdings of foreign capital and foreign countries are increasing their claims on Canada.

Diff: 3 Type: ES Skill: Recall Objective: 19.2 Interpret the relationships among the current account and the financial account in the balance of payments 19.3 Exchange Rate Regimes in the International Financial System 1) Under a gold standard in which one dollar could be turned in to the Bank of Canada and exchanged for 1/20th of an ounce of gold and one German mark could be exchanged for 1/100th of an ounce of gold, an exchange rate of ________ marks to the dollar would stimulate a flow of gold from Canada to Germany. A) 7 B) 6 C) 5 D) 4 Answer: D

Diff: 2 Type: MC Skill: Applied Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 2) A balance of payments deficit is associated with a ________ of international reserves, while a balance of payments surplus is associated with a ________.

A) loss; loss B) loss; gain C) gain; loss D) gain; gain Answer: B Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

10 .

3) When gold production was low in the 1870s and 1880s, the money supply grew ________ causing ________.

A) rapidly; inflation B) rapidly; disinflation C) slowly; deflation D) slowly; disinflation Answer: C Diff: 2 Type: MC Skill: Applied Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 4) The fixed exchange rate regime established at a meeting in New Hampshire in 1944 has been known as the ________.

A) General Agreement on Tariffs and Trade B) Bretton Woods system C) International Settlement Fund D) Balance of Payments Compliance Accord Answer: B Diff: 1 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 5) Under the Bretton Woods system, the organization assigned the task of making loans to countries that were experiencing balance of payments difficulties is known as the ________.

A) World Bank B) International Development Association C) International Monetary Fund D) Bank of Canada Answer: C Diff: 1 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

11 .

6) The Bretton Woods agreement created the ________, which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties.

A) IMF B) World Bank C) Central Settlements Bank D) Bank of International Settlements Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 7) The World Bank is an international organization that ________.

A) promotes the growth of trade by setting rules for how tariffs and quotas are set by countries B) makes loans to countries to finance projects such as dams and roads C) makes loans to countries with balance of payment difficulties D) helps developing countries that have been having difficulties in repaying their loans to come to terms with lenders in the West Answer: B Diff: 1 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 8) Under the Bretton Woods system, the United States was designated as the ________.

A) reserve-currency country B) fixed-rate country C) par-standard country D) dollar-standard country Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

12 .

9) Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to sell the domestic currency by purchasing foreign assets.

A) overvalued; below B) overvalued; above C) undervalued; below D) undervalued; above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 10) Under a fixed exchange rate regime, if the domestic currency is initially undervalued, that is, above par, the central bank must intervene to sell the ________ currency by purchasing ________ assets.

A) domestic; foreign B) domestic; domestic C) foreign; foreign D) foreign; domestic Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 11) Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to purchase the domestic currency by selling foreign assets.

A) overvalued; below B) overvalued; above C) undervalued; below D) undervalued; above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

13 .

12) Under a fixed exchange rate regime, if the domestic currency is initially overvalued, that is, below par, the central bank must intervene to purchase the ________ currency by selling ________ assets.

A) domestic; foreign B) domestic; domestic C) foreign; foreign D) foreign; domestic Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 13) When the domestic currency is initially overvalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to ________ the domestic currency, thereby allowing the money supply to ________.

A) purchase; decline B) sell; decline C) purchase; increase D) sell; increase Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 14) When the domestic currency is initially undervalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to ________ the domestic currency, thereby allowing the money supply to ________.

A) purchase; decline B) sell; decline C) purchase; increase D) sell; increase Answer: D Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

14 .

15) Under a fixed exchange rate regime, if a country has an overvalued exchange rate, then its central bank's attempt to keep its currency from ________ will result in a ________ of international reserves.

A) depreciating; gain B) depreciating; loss C) appreciating; gain D) appreciating; loss Answer: B Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 16) Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its central bank's attempt to keep its currency from depreciating will result in a ________ of international reserves.

A) undervalued; gain B) undervalued; loss C) overvalued; gain D) overvalued; loss Answer: D Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 17) Under a fixed exchange rate regime, if a country has an undervalued exchange rate, then its central bank's attempt to keep its currency from ________ will result in a ________ of international reserves.

A) depreciating; gain B) depreciating; loss C) appreciating; gain D) appreciating; loss Answer: C Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

15 .

18) Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its central bank's attempt to keep its currency from appreciating will result in a ________ of international reserves.

A) undervalued; gain B) undervalued; loss C) overvalued; gain D) overvalued; loss Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 19) Under a fixed exchange rate regime, if a country's central bank runs out of international reserves, it cannot keep its currency from ________.

A) depreciating B) appreciating C) deflating D) inflating Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 20) Under a fixed exchange rate regime, a country that depletes its international reserves in an attempt to keep its currency from ________ will be forced to ________ its currency.

A) depreciating; revalue B) depreciating; devalue C) appreciating; revalue D) appreciating; devalue Answer: B Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

16 .

21) Under a fixed exchange rate regime, a central bank that does not want to acquire international reserves to keep its currency from ________ will decide to ________ its currency.

A) depreciating; revalue B) depreciating; devalue C) appreciating; revalue D) appreciating; devalue Answer: C Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 22) Under a fixed exchange rate system, countries that ran large, persistent balance of payments deficits their would ________ international reserves, thereby pressuring them into ________

exchange rate.

A) gain; devaluing B) gain; revaluing C) lose; devaluing D) lose; revaluing Diff: 2 C Type: MC Answer: Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 23) Under a fixed exchange rate system, countries that ran large, persistent balance of payments surpluses would ________ international reserves, thereby pressuring them into ________ their exchange rate.

A) gain; devaluing B) gain; revaluing C) lose; devaluing D) lose; revaluing Answer: B Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

17 .

24) A balance of payments ________ is associated with a loss of international reserves, while a balance of payments ________ is associated with a gain. A) surplus; surplus B) surplus; deficit C) deficit; surplus D) deficit; deficit Answer: C

Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 25) Under a fixed exchange rate regime, if a central bank must intervene to purchase the ________ currency by selling ________ assets, then, like an open market sale, this action reduces the monetary base and the money supply, causing the interest rate on domestic assets to rise.

A) domestic; foreign B) domestic; domestic C) foreign; foreign D) foreign; domestic Answer: A Diff: 3 Type: MC Skill: Applied Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 26) Under a fixed exchange rate regime, if a central bank must intervene to purchase the domestic currency by selling foreign assets, then, like an open market sale, this action ________ the monetary base and the money supply, causing the interest rate on domestic assets to ________. A) increases; rise B) increases; fall C) reduces; rise D) reduces; fall Answer: C

Diff: 3 Type: MC Skill: Applied Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

18 .

27) To keep from running out of international reserves under the Bretton Woods system, a country had to implement ________ monetary policy to ________ its currency.

A) expansionary; strengthen B) expansionary; weaken C) contractionary; strengthen D) contractionary; weaken Answer: C Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 28) Under the Bretton Woods system, when a country adopted an expansionary monetary policy, thereby causing a balance of payments ________, the country would eventually be forced to implement ________ monetary policy.

A) deficit; expansionary B) deficit; contractionary C) surplus; expansionary D) surplus; contractionary Answer: B Diff: 2 Type: MC Skill: Applied Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 29) Because the United States was the reserve-currency country under the Bretton Woods system, it could run large balance of payments ________ without ________ significant amounts of international reserves.

A) deficits; losing B) deficits; gaining C) surpluses; losing D) surpluses; gaining Answer: A Diff: 3 Type: MC Skill: Applied Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

19 .

30) The Bretton Woods system was one in which central banks ________. A) bought and sold their own currencies to keep their exchange rates fixed B) agreed not to intervene in the foreign exchange market to maintain a fixed exchange rate regime that had existed prior to World War I C) agreed to limit domestic money growth to the average of the five largest industrial nations D) agreed to limit domestic money growth to the average of the seven largest industrial nations Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 31) The Bretton Woods system broke down in the early 1970s for all but one of the following reasons.

A) Deficit countries losing international reserves were not willing to devalue their currencies.

B) Surplus countries were not willing to revalue their currencies upwards.

C) Surplus countries were not willing to pursue more expansionary policies.

D) America had been pursuing an inflationary monetary policy to reduce domestic unemployment.

Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 32) To maintain fixed exchange rates when countries had balance of payments deficits and were losing international reserves, the ________ would loan ________ countries international reserves contributed by other members.

A) IMF; deficit B) IMF; surplus C) World Bank; deficit D) World Bank; surplus Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

20 .

33) Under the Bretton Woods system, the IMF could encourage ________ countries to pursue ________ monetary policies that would strengthen their currency or eliminate their balance of payment deficits. A) surplus; expansionary B) surplus; contractionary C) deficit; expansionary D) deficit; contractionary Answer: D

Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 34) Under the Bretton Woods system, the IMF could encourage deficit countries to pursue contractionary monetary policies that would ________ their currency or eliminate their balance of payment ________.

A) strengthen; surpluses B) strengthen; deficits C) weaken; surpluses D) weaken; deficits Answer: B Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 35) A weakness of the Bretton Woods system was that the ________ had no way to force surplus countries to either revalue their exchange rates upwards or pursue more expansionary policies.

A) IMF B) World Bank C) European Exchange Rate Mechanism (ERM) D) Bank of International Settlements Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

21 .

36) Under the Bretton Woods system, a country running a balance of payments deficit ________ international reserves and had to implement ________ monetary policy to strengthen its currency.

A) lost; expansionary B) lost; contractionary C) gained; expansionary D) gained; contractionary Answer: B Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 37) Under the Bretton Woods system, a country running a balance of payments ________ lost international reserves and had to implement ________ monetary policy to strengthen its currency.

A) surplus; expansionary B) surplus; contractionary C) deficit; expansionary D) deficit; contractionary Answer: D Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 38) Under the Bretton Woods system, a country running a balance of payments surplus ________ international reserves and had to implement ________ monetary policy to weaken its currency.

A) lost; expansionary B) lost; contractionary C) gained; expansionary D) gained; contractionary Answer: C Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

22 .

39) Under the Bretton Woods system, if IMF loans were insufficient to prevent ________ of a currency, then the country was allowed to devalue its currency by setting a new, ________ exchange rate.

A) depreciation; lower B) depreciation; higher C) appreciation; lower D) appreciation; higher Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 40) As a result of its power to dictate loan terms to borrowing countries (under the Bretton Woods system), the IMF could encourage ________ countries to pursue ________ monetary policies that would strengthen their currency or eliminate their balance of payments deficits.

A) surplus; contractionary B) surplus; expansionary C) deficit; contractionary D) deficit; expansionary Answer: C Diff: 3 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 41) Because central banks have not been willing to give up their option of intervening in the foreign exchange market, the current international financial system can best be described as a ________.

A) variable-pegged exchange rate system B) moving-pegged exchange rate system C) hybrid of a fixed exchange rate and flexible exchange rate system D) flexible-exchange, dollar-pegged exchange rate system Answer: C Diff: 3 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

23 .

42) The current international financial system is a managed float exchange rate system because ________.

A) exchange rates fluctuate in response to, but are not determined solely by, market forces B) all countries keep their currencies pegged to the dollar, which is not allowed to fluctuate C) all countries allow their exchange rates to fluctuate in response to market forces D) all countries peg their currencies to the dollar which is allowed to fluctuate in response to market forces Answer: A Diff: 3 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 43) Policymakers in a country with a balance of payments surplus may not want to see their country's currency appreciate because this would ________.

A) hurt consumers in their country by making foreign goods more expensive B) hurt domestic businesses by making foreign goods cheaper in their country C) increase inflation in their country D) decrease the wealth of the country Answer: B Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 44) Under the current managed float exchange rate regime, countries with balance of payments deficits frequently do not want to see their currencies depreciate because it makes ________ goods more expensive for ________ consumers and can stimulate inflation.

A) foreign; foreign B) foreign; domestic C) domestic; foreign D) domestic; domestic Answer: B Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

24 .

45) Countries with surpluses in their balance of payments frequently do not want to see their currencies ________ because it makes their goods ________ expensive abroad.

A) appreciate; less B) appreciate; more C) depreciate; less D) depreciate; more Answer: B Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 46) Countries with balance of payments deficits do not want to see their currencies ________ because it makes foreign goods ________ expensive for domestic consumers.

A) appreciate; less B) appreciate; more C) depreciate; less D) depreciate; more Answer: D Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 47) Under the current managed float exchange rate regime, countries with ________ in their balance of payments frequently do not want to see their currencies ________ because it makes their goods more expensive abroad and foreign goods cheaper in their countries.

A) surpluses; depreciate B) deficits; depreciate C) surpluses; appreciate D) deficits; appreciate Answer: C Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

25 .

48) Under the current managed float exchange rate regime; countries with surpluses in their balance of payments frequently do not want to see their currencies appreciate because it makes their goods ________ expensive abroad and foreign goods ________ in their countries.

A) more; cheaper B) more; costlier C) less; cheaper D) less; costlier Answer: A Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 49) Under the current managed float exchange rate regime, countries with balance of payments ________ frequently do not want to see their currencies ________ because it makes foreign goods more expensive for domestic consumers and can stimulate inflation.

A) surpluses; depreciate B) deficits; depreciate C) surpluses; appreciate D) deficits; appreciate Answer: B Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 50) Which of the following is true?

A) Special drawing rights are loans to countries made by the IMF. B) Changes in the quantity of special drawing rights are tied to changes in the quantity of gold.

C) Special drawing rights are a paper substitute for gold.

D) Special drawing rights are not held as international reserves.

Answer: C Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 51) An ECU was ________.

A) a paper substitute for gold issued by the IMF B) a loan by European countries to the IMF C) a paper currency issued by the European Common Market D) a monetary unit created by the European Monetary System Answer: D Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 26 .

52) Under the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the Bank of England was required to buy ________ and sell ________, thereby ________ international reserves. A) pounds; marks; losing B) pounds; marks; gaining C) marks; pounds; gaining D) marks; pounds; losing Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 53) Under the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the German central bank was required to buy ________ and sell ________, thereby ________ international reserves. A) pounds; marks; losing B) pounds; marks; gaining C) marks; pounds; gaining D) marks; pounds; losing Answer: B

Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 54) Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the Bank of England was required to buy ________ and sell ________, thereby ________ international reserves. A) pounds; marks; losing B) pounds; marks; gaining C) marks; pounds; gaining D) marks; pounds; losing Answer: C

Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

27 .

55) Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the German central bank was required to buy ________ and sell ________, thereby ________ international reserves. A) pounds; marks; losing B) pounds; marks; gaining C) marks; pounds; gaining D) marks; pounds; losing Answer: D

Diff: 2 Type: MC Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 56) In September 1992, the Bundesbank attempted to keep the mark from appreciating relative to the British pound, but it failed because participants in the foreign exchange market came to expect the ________. A) appreciation of the mark B) depreciation of the mark C) revaluation of the dollar D) end of the Exchange Rate Mechanism Answer: A

Diff: 2 Type: MC Skill: Applied Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 57) The East Asia currency crisis in 1997 started in ________.

A) Japan B) Thailand C) South Korea D) the Philippines Answer: B Diff: 2 Type: MC Skill: Applied Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

28 .

58) Between May and July 1997, concerns about the large current account deficit in Thailand and the weakness in the Thai financial system caused speculators to suspect that Thailand might be forced to ________.

A) devalue its currency B) sell baht to prop up its value C) buy dollars to prop up the baht D) impose capital controls Answer: A Diff: 2 Type: MC Skill: Applied Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

29 .

59) Explain and demonstrate graphically the situation of an overvalued exchange rate in a fixed exchange rate system. What alternative policies are available to eliminate the overvaluation of the exchange rate?

Answer: See the figure below.

The par value is above the equilibrium value, resulting in overvaluation of the exchange rate.

One approach is to pursue contractionary monetary policies, raising interest rates and increasing the demand for domestic assets. This process continues until equilibrium at par value is restored.

Another alternative is for the central bank to purchase domestic currency by selling foreign assets.

Type: ES Diff: 2 Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

30 .

60) What is the gold standard? What are the pros and cons of this system?

Answer: Before World War I, the world economy operated under the gold standard, a fixed exchange rate regime in which most currencies were convertible directly into gold at fixed rates, so exchange rates between countries were also fixed. The important advantage of this system of exchange rates was that fixed exchange rates encouraged world trade by eliminating the uncertainty that occurs when exchange rates fluctuate. The disadvantages are that the countries that use the gold standard have no control over their monetary policy because its money supply is determined by gold flows between countries. Moreover monetary policy throughout the world was greatly influenced by the production of gold and gold discoveries.

Diff: 3 Type: ES Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 61) How would the Bank of Canada operate in a fixed exchange rate regime when the dollar is overvalued and undervalued? What are the effects on international reserves?

Answer: When the domestic currency is overvalued then the Bank of Canada must purchase domestic currency to keep the exchange rate fixed, but as a result it loses international reserves.

When the domestic currency is undervalued, the Bank of Canada must sell Canadian dollars to keep the exchange rate fixed, but as a result it gains international reserves.

Diff: 2 Type: ES Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes 62) Assume that a fixed exchange rate is overvalued. Describe the situation of a speculative crisis against this currency. What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?

Answer: When the speculative attack begins, the expected depreciation of the domestic currency increases substantially, decreasing the demand for domestic assets. Contractionary monetary policy is needed to increase domestic interest rates enough to defend the currency. The cost to the central bank in terms of the costs of intervention and the contractionary effect on the economy may make devaluation preferable.

Diff: 2 Type: ES Skill: Recall Objective: 19.3 Identify the mechanisms for maintaining a fixed exchange rate, and assess the challenges faced by fixed rate regimes

31 .

19.4 Capital Controls 1) Which of the following is not a disadvantage of controls on capital outflows?

A) The controls may lead to excessive risk taking by the domestic banks.

B) They are seldom effective during a crisis.

C) Capital flight may increase after they are put in place.

D) Controls often lead to an increase in government corruption.

Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.4 Summarize the advantages and disadvantages of capital controls 2) A capital ________ can promote financial instability in an emerging-market country because it is what forces a country to ________ its currency.

A) inflow; devalue B) inflow; revalue C) outflow; devalue D) outflow; revalue Answer: C Diff: 1 Type: MC Skill: Recall Objective: 19.4 Summarize the advantages and disadvantages of capital controls 3) A capital ________ can promote financial instability in an emerging-market country because it can lead to a lending boom and excessive risk-taking on the part of banks, which helps trigger a ________.

A) inflow; financial crisis B) inflow; currency devaluation C) outflow; financial crisis D) outflow; currency devaluation Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.4 Summarize the advantages and disadvantages of capital controls 4) A case for capital inflow controls can be made because capital inflows ________.

A) can cause a lending boom and lead to excessive risk taking B) never finance productive investments C) always finance productive investments D) are less likely to cause financial crises than regulation of banking activities Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.4 Summarize the advantages and disadvantages of capital controls

32 .

19.5 The Role of the IMF 1) In the 1990s, this agency has acted like an international lender of last resort to cope with financial instability.

A) World Bank B) European Central Bank C) IMF D) International Bank for Reconstruction and Development Answer: C Diff: 1 Type: MC Skill: Recall Objective: 19.5 Assess the role of the IMF as an international lender of last resort 2) An international lender of last resort creates a serious ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs.

A) moral hazard B) adverse selection C) public choice D) strategic choice Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.5 Assess the role of the IMF as an international lender of last resort 3) An international lender of last resort creates a serious moral hazard problem because ________ and other ________ of banking institutions expect that they will be protected if a crisis occurs.

A) depositors; debtors B) depositors; creditors C) borrowers; debtors D) borrowers; creditors Answer: B Diff: 1 Type: MC Skill: Recall Objective: 19.5 Assess the role of the IMF as an international lender of last resort 4) Critics of the IMF contend that its lending in the Mexican crisis, which was used to bail out foreign ________, set the stage for the ________ crisis because these ________ expected to be bailed out if things went wrong.

A) lenders; East Asian; borrowers B) lenders; East Asian; lenders C) borrowers; Russian; borrowers D) borrowers; Russian; lenders Answer: B Diff: 1 Type: MC Skill: Applied Objective: 19.5 Assess the role of the IMF as an international lender of last resort 33 .

5) Critics of the IMF contend that its lending in the ________ crisis, which was used to bail out foreign lenders, set the stage for the ________ crisis because these lenders expected to be bailed out if things went wrong and thus provided funds that were used to fuel excessive risk taking.

A) Russian; Mexican B) Russian; East Asian C) Mexican; Russian D) Mexican; East Asian Answer: D Diff: 1 Type: MC Skill: Applied Objective: 19.5 Assess the role of the IMF as an international lender of last resort 6) An advantage of an international lender of last resort is its ability to prevent ________, in which a successful speculative attack on one currency leads to attacks on others.

A) contagion B) adverse selection C) moral hazard D) currency virus Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.5 Assess the role of the IMF as an international lender of last resort 7) An advantage of an international lender of last resort is its ability to prevent ________, in which a successful speculative attack on one currency leads to attacks on others; its disadvantage is the problem of ________ if creditors expect to be protected if a crisis occurs.

A) contagion; moral hazard B) contagion; adverse selection C) currency virus; moral hazard D) currency virus; adverse selection Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.5 Assess the role of the IMF as an international lender of last resort

34 .

19.6 International Considerations and Monetary Policy 1) In the early 1970s, the United States ran large balance of payments ________, causing an ________ dollar and an ________ German mark. A) deficits; undervalued; overvalued B) deficits; overvalued; undervalued C) surpluses; undervalued; overvalued D) surpluses; overvalued; undervalued Answer: B

Diff: 1 Type: MC Skill: Applied Objective: 19.6 Identify the ways in which international monetary policy and exchange-rate arrangements can affect domestic monetary policy operations 2) In response to the overvalued dollar in the early 1970s, the German Bundesbank bought ________ and sold ________ to keep the exchange rate fixed, gaining international reserves.

A) marks; dollars B) marks; pounds C) dollars; marks D) dollars; pounds Answer: C Diff: 1 Type: MC Skill: Applied Objective: 19.6 Identify the ways in which international monetary policy and exchange-rate arrangements can affect domestic monetary policy operations 3) In response to the overvalued dollar in the early 1970s, the German Bundesbank bought dollars and sold marks to keep the exchange rate fixed, gaining international reserves. The huge purchase of international reserves meant that the German monetary base began to ________, leading to ________ growth in the German money supply.

A) decline; sluggish B) decline; rapid C) grow; sluggish D) grow; rapid Answer: D Diff: 1 Type: MC Skill: Applied Objective: 19.6 Identify the ways in which international monetary policy and exchange-rate arrangements can affect domestic monetary policy operations

35 .

4) The German central bank gained international reserves in the early 1970s because it sold ________ to prevent mark ________.

A) marks; appreciation B) dollars; appreciation C) marks; depreciation D) dollars; depreciation Answer: A Diff: 1 Type: MC Skill: Applied Objective: 19.6 Identify the ways in which international monetary policy and exchange-rate arrangements can affect domestic monetary policy operations 5) Since the abandonment of the Bretton Woods system, balance of payments considerations have become ________ important, and exchange rate considerations ________ important in the conduct of monetary policy.

A) more; less B) more; more C) less; less D) less; more Answer: D Diff: 1 Type: MC Skill: Recall Objective: 19.6 Identify the ways in which international monetary policy and exchange-rate arrangements can affect domestic monetary policy operations 6) If a central bank does not want to see its currency fall in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby strengthening its currency.

A) expansionary; raise B) contractionary; raise C) expansionary; lower D) contractionary; lower Answer: B Diff: 1 Type: MC Skill: Recall Objective: 19.6 Identify the ways in which international monetary policy and exchange-rate arrangements can affect domestic monetary policy operations

36 .

7) If a central bank does not want to see its currency ________ in value, it may pursue contractionary monetary policy to raise the domestic interest rate, thereby ________ its currency.

A) fall; strengthening B) fall; weakening C) rise; strengthening D) rise; weakening Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.6 Identify the ways in which international monetary policy and exchange-rate arrangements can affect domestic monetary policy operations 8) If a central bank does not want to see its currency rise in value, it may pursue ________ monetary currency. policy to ________ the domestic interest rate, thereby weakening its

A) expansionary; raise B) contractionary; raise C) expansionary; lower D) contractionary; lower Diff: 1 C Type: MC Answer: Skill: Recall Objective: 19.6 Identify the ways in which international monetary policy and exchange-rate arrangements can affect domestic monetary policy operations 9) If a central bank does not want to see its currency ________ in value, it may pursue expansionary monetary policy to lower the domestic interest rate, thereby ________ its currency.

A) fall; strengthening B) fall; weakening C) rise; strengthening D) rise; weakening Answer: D Diff: 1 Type: MC Skill: Recall Objective: 19.6 Identify the ways in which international monetary policy and exchange-rate arrangements can affect domestic monetary policy operations

37 .

10) If a central bank does not want to allow the domestic currency to appreciate, it will ________ international reserves by selling its currency, thereby ________ the monetary base and increasing the risk of higher inflation.

A) lose; decreasing B) lose; increasing C) acquire; decreasing D) acquire; increasing Answer: D Diff: 1 Type: MC Skill: Applied Objective: 19.6 Identify the ways in which international monetary policy and exchange-rate arrangements can affect domestic monetary policy operations 11) If a central bank does not want to allow the domestic currency to depreciate, it will ________ international reserves by purchasing its currency, thereby ________ the monetary base and increasing the risk of higher unemployment.

A) lose; decreasing B) lose; increasing C) acquire; decreasing D) acquire; increasing Answer: A Diff: 1 Type: MC Skill: Applied Objective: 19.6 Identify the ways in which international monetary policy and exchange-rate arrangements can affect domestic monetary policy operations 12) A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of its currency leads to ________ international reserves which ________ the monetary base.

A) purchase; higher; increases B) purchase; lower; decreases C) sale; lower; decreases D) sale; higher; increases Answer: D Diff: 2 Type: MC Skill: Applied Objective: 19.6 Identify the ways in which international monetary policy and exchange-rate arrangements can affect domestic monetary policy operations

38 .

13) A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of foreign currencies leads to ________ international reserves which ________ the monetary base.

A) purchase; higher; increases B) purchase; lower; decreases C) sale; lower; decreases D) sale; higher; increases Answer: A Diff: 2 Type: MC Skill: Applied Objective: 19.6 Identify the ways in which international monetary policy and exchange-rate arrangements can affect domestic monetary policy operations 19.7 To Peg or Not To Peg: Exchange-Rate Targeting as an Alternative Monetary Policy Strategy 1) A monetary policy strategy that uses a fixed exchange rate regime that ties the value of a currency to the currency of a large, low inflation country is called ________ targeting.

A) exchange-rate B) currency C) monetary D) inflation Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 2) Under an exchange-rate targeting rule for monetary policy, a crawling peg ________.

A) fixes the value of the domestic currency to a commodity such as gold B) fixes the value of the domestic currency to that of a large, low-inflation country C) allows the domestic currency to depreciate at a steady rate so that inflation in the pegging country can be higher than that of the anchor country D) allows the domestic currency to depreciate at a steady rate so that inflation in the pegging country can be lower than that of the anchor country Answer: C Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting

39 .

3) An advantage of exchange-rate targeting is it helps keep inflation under control by tying the inflation rate for ________ traded goods to what is found in the ________ country.

A) domestically; anchor B) domestically; domestic C) internationally; anchor D) internationally; domestic Answer: C Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 4) Exchange-rate targeting allows a central bank to ________, thus this will ________ the probability of policy developing a timeinconsistency problem. A) be governed by a policy rule; decrease B) follow discretionary policy; decrease C) be governed by a policy rule; increase D) follow discretionary policy; increase Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 5) Which of the following is not an advantage to exchange-rate targeting?

A) It provides a strong nominal anchor to keep inflation under control.

B) It provides an automatic rule for policy to help avoid the time-inconsistency problem.

C) It is simple and clear so that the public can easily understand it.

D) It increases the accountability of policymakers.

Answer: D Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchangerate targeting 6) Under exchange-rate targeting, the central bank in the targeting country ________ lose the ability to pursue its own independent monetary policy and any shocks to the anchor country is ________ transmitted to the targeting country. A) does; directly B) does not; directly C) does; not directly D) does not; not directly Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting

40 .

7) Both France and the United Kingdom successfully used exchange-rate targeting to lower inflation in the late 1980s and early 1990s by tying the value of their currencies to the ________.

A) American dollar B) German mark C) Swiss franc D) Euro Answer: B Diff: 1 Type: MC Skill: Applied Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 8) Which of the following is not a disadvantage of exchange-rate targeting?

A) It relies on a stable money-inflation relationship.

B) The targeting country gives up an independent monetary policy.

C) The targeting country is left open for a speculative attack.

D) It can weaken the accountability of policymakers.

Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 9) Two reasons for an industrialized country to adopt an exchange-rate targeting regime are if the country ________ conduct successful monetary policy on its own, and if the country wants to ________ integration of the domestic economy with its neighbors.

A) cannot; encourage B) cannot; discourage C) can; encourage D) can; discourage Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 10) Because many emerging market countries have not developed the political or monetary institutions that allow the successful use of discretionary monetary policy, ________.

A) they have little to gain from pegging their exchange rate to an anchor country like the U.S. or Germany B) they have little to gain from using a nominal anchor, because it would mean a monetary policy that is overly expansionary C) they have very little to gain from an independent monetary policy, but a lot to lose D) they would be better off giving their central bankers the independence to use discretion, rather than take their discretion away through any nominal anchor Answer: C Diff: 3 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 41 .

11) Emerging market countries are in effect between a rock and a hard place because ________.

A) they would be wise to adopt the monetary policy of the United States by pegging their currencies to the dollar, but this policy leaves them open to speculative attacks B) to avoid speculative attacks on their currencies they must peg their exchange rates to an anchor country, but this means giving central bankers in these countries too much discretion C) to avoid speculative attacks on their currencies they must peg their exchange rates to an anchor country, but this means giving central bankers in these countries too little discretion D) by adopting the monetary policy of the anchor country through an exchange rate peg, these countries allow for too little monetary expansion and thereby sacrifice economic growth for price stability Answer: A Diff: 2 Type: MC Skill: Applied Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 12) When a domestic currency is completely backed by a foreign currency and the note-issuing authority establishes a fixed exchange rate to this foreign currency, then the country is said to have ________.

A) created a currency board B) undergone dollarization C) adopted a managed exchange system D) adopted an exchange rate monetary system Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 13) When a country forgoes its own currency and starts using another country's currency as its own, we say that this country has ________.

A) created a currency board B) undergone dollarization C) adopted a managed exchange system D) adopted an exchange rate monetary system Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting

42 .

14) The revenue a government earns from issuing money is known as ________.

A) interest B) rent C) seignorage D) the national dividend E) the inflation tax Answer: C Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 15) A country that dollarizes ________.

A) maximizes its seignorage B) earns the same amount of seignorage as it would with a currency board C) earns the same amount of seignorage as it would with exchange-rate targeting D) eliminates its seignorage E) must pay seignorage to other governments for using their currency Answer: D Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 16) The seignorage for a government is greater for ________ than for ________.

A) dollarization; a currency board B) dollarization; exchange-rate targeting C) dollarization; monetary targeting D) dollarization; inflation targeting E) exchange-rate targeting; dollarization Answer: E Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 17) Exchange-rate targeting is not an option for the U.S. because ________.

A) the U.S. is already dollarized B) the U.S. is too large C) the Fed has adopted a monetary targeting strategy D) the Fed has adopted an inflation targeting strategy Answer: B Diff: 1 Type: MC Skill: Applied Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting

43 .

18) The monetary policy strategy that provides an automatic rule for the conduct of monetary policy is ________.

A) exchange-rate targeting B) monetary targeting C) inflation targeting D) the implicit nominal anchor Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 19) The monetary policy strategy that does not allow the policy to focus on domestic considerations is ________.

A) exchange-rate targeting B) monetary targeting C) inflation targeting D) the implicit nominal anchor Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 20) The monetary policy strategy that results in the loss of an independent monetary policy is ________.

A) exchange-rate targeting B) monetary targeting C) inflation targeting D) the implicit nominal anchor Answer: A Diff: 1 Type: MC Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 21) The monetary policy strategy that directly ties down the price of internationally traded goods is ________.

A) exchange-rate targeting B) monetary targeting C) inflation targeting D) the implicit nominal anchor Answer: A Diff: 3 Type: MC Skill: Applied Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting

44 .

22) Which of the following is not a weakness of dollarization?

A) Loss of seignorage.

B) Increased exposure to shocks from the anchor country.

C) Dollarization can be abandoned, which can lead to a change in value of the currency.

D) The inability of the central bank to create money and act as a lender of last resort.

Answer: C Diff: 2 Type: MC Skill: Applied Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting 23) Explain an additional disadvantage for a country undergoing dollarization compared to a currency board or other exchange-rate targeting regimes.

Answer: The additional disadvantage to dollarization is that the government loses seignorage.

Seignorage is the income that a government earns by issuing its own currency.

Diff: 2 Type: ES Skill: Recall Objective: 19.7 Summarize the advantages and disadvantages of exchangerate targeting 24) Explain the 1992 crisis that led to the breakdown of the European Union's Exchange Rate Mechanism. What disadvantages of exchange-rate targeting were exhibited during this crisis? Answer: The 1992 crisis began with Germany raising interest rates in 1990 to stem inflationary pressures from reunification. This demand shock was immediately transmitted to the other nations in the exchange-rate mechanism. Thus, these countries did not have independent monetary policies and were subject to shocks from the anchor country. This gave rise to the second problem. Speculators bet that these other countries would not want the increased unemployment resulting from the tight monetary policy. Betting that their commitment was weak, speculators bet against these currencies, and a number were forced to devalue or drop out of the ERM. The disadvantages illustrated by this are the lack of independent policy subjecting member nations to shocks from the anchor nation, and the possibility of speculative attacks when commitment is felt to be weak.

Diff: 3 Type: ES Skill: Applied Objective: 19.7 Summarize the advantages and disadvantages of exchange-rate targeting

45 .

Economics of Money, Banking, and Fin. Markets, 8Ce (Mishkin) Chapter 20 Quantity Theory, Inflation, and the Demand for Money 20.1 Quantity Theory of Money 1) The quantity theory of money is a theory of how ________.

A) the money supply is determined B) interest rates are determined C) the nominal value of aggregate income is determined D) the real value of aggregate income is determined Answer: C Diff: 1 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 2) Which events created the perfect storm for the Canadian economy in 2007-2008?

A) An oil price shock and the global financial crisis.

B) Housing prices had doubled in most major metropolitan areas.

C) Prime mortgage interest rates were rising.

D) All of the above.

Answer: A Diff: 1 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 3) The effect of money on the economy is called ________.

A) monetary supply B) monetary policy C) fiscal policy D) monetary demand Answer: B Diff: 1 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money

1 .

4) The average number of times that a dollar is spent in buying the total amount of final goods and services produced during a given period is known as ________.

A) gross national product B) the spending multiplier C) the money multiplier D) velocity Answer: D Diff: 1 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 5) Because the quantity theory of money tells us how much money is held for a given amount of aggregate income, it is also a theory of ________.

A) interest-rate determination B) the demand for money C) exchange-rate determination D) the demand for assets Answer: B Diff: 1 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 6) The velocity of money is ________.

A) the average number of times that a dollar is spent in buying the total amount of final goods and services B) the ratio of the money stock to high-powered money C) the ratio of the money stock to interest rates D) the average number of times a dollar is spent in buying financial assets Answer: A Diff: 1 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 7) If the money supply is $600 and nominal income is $3000, the velocity of money is ________.

A) 1/50 B) 1/5 C) 5 D) 50 Answer: C Diff: 2 Type: MC Skill: Applied Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 2 .

8) If nominal GDP is $8 trillion, and the money supply is $2 trillion, the velocity of money is ________. A) 0.25 B) 4 C) 8 D) 16 Answer: B

Diff: 2 Type: MC Skill: Applied Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 9) If nominal GDP is $10 trillion, and velocity of money is 10, the money supply is ________.

A) $1 trillion B) $5 trillion C) $10 trillion D) $100 trillion Answer: A Diff: 2 Type: MC Skill: Applied Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 10) If the money supply is $20 trillion and velocity of money is 2, then nominal GDP is ________.

A) $2 trillion B) $10 trillion C) $20 trillion D) $40 trillion Answer: D Diff: 2 Type: MC Skill: Applied Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 11) The velocity of money is defined as ________.

A) P + M + Y B) (P × M)/Y C) (Y × M)/P D) (P × Y)/M Answer: D Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 3 .

12) The velocity of money is defined as ________.

A) real GDP divided by the money supply B) nominal GDP divided by the money supply C) real GDP times the money supply D) nominal GDP times the money supply Answer: B Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 13) The equation of exchange states that the quantity of money multiplied by the number of times this money is spent each year must equal ________.

A) nominal income B) real income C) real gross national product D) velocity Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 14) In the equation of exchange, the concept that provides the link between M and PY is known as ________.

A) the velocity of money B) aggregate demand C) aggregate supply D) the money multiplier Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 15) The equation of exchange is ________. A) M × P = V × Y B) M + V = P + Y C) M + Y = V + P D) M × V = P × Y Answer: D

Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money

4 .

16) Irving Fisher's view that velocity is constant in the short run transforms the equation of exchange into the ________.

A) Friedman's theory of income determination B) quantity theory of money C) Keynesian theory of income determination D) monetary theory of income determination Answer: B Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 17) The demand for money represents ________.

A) the quantity of money that people want to hold B) the relationship between inflation rates and the quantity of money C) the relationship between interest rates and income D) All of the above.

Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 18) Irving Fisher took the view that the institutional features of the economy which affect velocity change ________ over time so that velocity will be fairly ________ in the short run.

A) rapidly; erratic B) rapidly; stable C) slowly; stable D) slowly; erratic Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 19) In Irving Fisher's quantity theory of money, velocity was determined by ________.

A) interest rates B) real GDP C) the institutions in an economy that affect individuals' transactions D) the price level Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money

5 .

20) The classical economists' conclusion that nominal income is determined by movements in the money supply rested on their belief that ________ could be treated as ________ in the short run. A) the velocity of money; constant B) the velocity of money; variable C) money; constant D) money; variable Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 21) The view that the velocity of money is constant in the short run transforms the equation of exchange into the quantity theory of money. According to the quantity theory of money when the money supply doubles ________.

A) velocity falls by 50 percent B) velocity also doubles C) nominal incomes fall by 50 percent D) nominal income also doubles Answer: D Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 22) Cutting the money supply by one-third is, according to the quantity theory of money, predicted to cause ________.

A) a sharp decline of one-third of real output in the short run, and a fall in the price level by onethird in the long run B) a decline in real output by one-third C) a decline in output by one-sixth, and a decline in the price level of one-sixth D) a decline in the price level by one-third Answer: D Diff: 2 Type: MC Skill: Applied Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money

6 .

23) The classical economists believed that if the quantity of money doubled, ________.

A) output would also double B) prices would fall C) prices would also double D) prices would remain constant Answer: C Diff: 2 Type: MC Skill: Applied Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 24) Classical economists' prediction that prices double when the money supply doubles is based on their belief that in the short run the velocity of money is ________ and that real GDP is ________.

A) constant; constant B) constant; variable C) variable; variable D) variable; constant Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 25) For the classical economists, the quantity theory of money provided an explanation for movements in the price level. Accordingly, movements in the price level result ________.

A) solely from changes in the quantity of money B) primarily from changes in the quantity of money C) only partially from changes in the quantity of money D) from changes in factors other than the quantity of money Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 26) If initially the money supply is $1 trillion, the velocity of money is 5, the price level is 1, and real GDP is $5 trillion, then an increase in the money supply to $2 trillion will ________.

A) increase real GDP to $10 trillion B) cause velocity to fall to 2.5 C) increase the price level to 2 D) increase the price level to 2 and velocity to 10 Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 7 .

27) If initially the money supply is $2 trillion, the velocity of money is 5, the price level is 2, and real GDP is $5 trillion, then a fall in the money supply to $1 trillion will ________.

A) reduce real GDP to $2.5 trillion B) cause velocity to rise to 10 C) decrease the price level to 1 D) decrease the price level to 1 and decreases velocity to 2.5 Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 28) 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 no effect on the demand for money D) an increase in money will cause the demand for money to fall Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 29) Fisher's quantity theory of money suggests that the demand for money is purely a function of ________, and ________ no effect on the demand for money.

A) income; interest rates have B) interest rates; income has C) government spending; interest rates have D) expectations; income has Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 30) ________ quantity theory of money suggests that the demand for money is purely a function of income, and interest rates have no effect on the demand for money.

A) Keynes's B) Fisher's C) Friedman's D) Tobin's Answer: B Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 8 .

31) Canadian empirically evidence of the long-term quantity of money shows ________.

A) a strong positive relationship between inflation and money growth rates B) a weak positive relationship between inflation and money growth rates C) a weak negative relationship between inflation and money growth rates D) a strong negative relationship between inflation and money growth rates Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 32) A plot of Canadian inflation against annual money growth rate between 1971 and 2020 shows ________.

A) money supply lags by two years B) money supply lags by one year C) that the two are contemporaneously correlated D) are uncorrelated Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 33) For the period 2009 to 2019, international evidence suggests that ________.

A) for many countries there is only a weak relationship between the growth rate of money in the long run and inflation B) for many countries there is a strong relationship between short run money growth rates and inflation but only a weak relationship but that in the long run, the relationship is uncertain C) a strong relationship exists between the growth rate of money in the long run and inflation only for Canada and the U.S. D) for many countries there is a strong relationship between the growth rate of money in the long run and inflation Answer: D Diff: 2 Type: MC Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money

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34) Give the equation of exchange and explain the variables used in it. Why we call it an identity?

Answer: The equation of exchange is given by M × V = P × Y, where M is the money supply, V is the velocity of money, P is the price level and Y is aggregate output or income. It is an identity because it is a relationship that is true by definition. It does not tell us, for example, that when the money supply M changes, nominal income (P × Y) changes in the same direction: a rise in M for example could be offset by a fall in V that leaves M × V unchanged and therefore P × Y unchanged.

Diff: 2 Type: ES Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money 35) Explain the conclusion that the quantity theory of money is a good theory of inflation in the long run, but not in the short run. How does is this conclusion related to flexible wages and prices.

Answer: Inflation is always and everywhere a monetary phenomenon. is accurate in the long run but not supported empirically in the short run. The classical assumption that wages and prices are completely flexible may not be a good assumption for short-run fluctuations in inflation and aggregate output.

Diff: 2 Type: ES Skill: Recall Objective: 20.1 Assess the relationship between money growth and inflation in the short run and the long run as implied by the quantity theory of money

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20.2 Budget Deficits and Inflation 1) Budget deficits can be an important source of ________ monetary policy.

A) inflationary B) recessionary C) federal D) fiscal Answer: A Diff: 1 Type: MC Skill: Recall Objective: 20.2 Identify the circumstances under which budget deficits can lead to inflationary monetary policy 2) The government can ________ by ________.

A) raise revenue; levying taxes B) go into debt; issuing government bonds C) create money; levying taxes D) A and B only.

Answer: D Diff: 1 Type: MC Skill: Recall Objective: 20.2 Identify the circumstances under which budget deficits can lead to inflationary monetary policy 3) If the government deficit is financed by selling bonds to the public then ________.

A) there is no effect on the monetary base B) there is no effect on the money supply C) the money supply will increase D) A and B only.

Answer: D Diff: 1 Type: MC Skill: Recall Objective: 20.2 Identify the circumstances under which budget deficits can lead to inflationary monetary policy 4) One part of monetizing the debt is for the central bank to ________.

A) conduct an open market purchase B) conduct an open market sale C) increasing the overnight rate D) decreasing the overnight rate Answer: A Diff: 1 Type: MC Skill: Recall Objective: 20.2 Identify the circumstances under which budget deficits can lead to inflationary monetary policy

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5) Financing a debt through the direct-issue of currency is called ________.

A) printing money B) monetizing the debt C) open market purchases D) open market sales Answer: A Diff: 1 Type: MC Skill: Recall Objective: 20.2 Identify the circumstances under which budget deficits can lead to inflationary monetary policy 6) In March 2007, the inflation rate in Zimbabwe reached ________.

A) over 1500 percent B) over 150 percent C) over 15 percent D) over 15000 percent Answer: A Diff: 1 Type: MC Skill: Recall Objective: 20.2 Identify the circumstances under which budget deficits can lead to inflationary monetary policy 7) The Zimbabwean hyperinflation was caused by ________.

A) the government printing too much currency B) wars between rebel factions C) persistent budget surpluses in recent years D) above average agricultural yields Answer: A Diff: 1 Type: MC Skill: Recall Objective: 20.2 Identify the circumstances under which budget deficits can lead to inflationary monetary policy 8) Explain how financing a persistent deficit by money creation will lead to sustained inflation.

Answer: A budget deficient can lead to an increase in the money supply if it is financed by the creation of high-powered money. Because the quantity theory of money explains inflation only in the long run, to produce inflation, the budget deficit must be persistent.

Diff: 1 Type: ES Skill: Recall Objective: 20.2 Identify the circumstances under which budget deficits can lead to inflationary monetary policy

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20.3 Keynesian Theories of Money Demand 1) The Keynesian theory of money demand emphasizes the importance of ________.

A) a constant velocity B) irrational behavior on the part of some economic agents C) interest rates on the demand for money D) expectations Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 2) Keynes hypothesized that the transactions component of money demand was primarily determined by the level of ________.

A) interest rates B) velocity C) income D) stock market prices Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 3) Keynes argued that the transactions component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________.

A) transactions; income B) transactions; age C) incomes; wealth D) incomes; age Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand

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4) Keynes hypothesized that the precautionary component of money demand was primarily determined by the level of ________.

A) interest rates B) velocity C) income D) stock market prices Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 5) Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________.

A) incomes; wealth B) incomes; age C) transactions; income D) transactions; age Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 6) The demand for money as a cushion against unexpected contingencies is called the ________.

A) transactions motive B) precautionary motive C) insurance motive D) speculative motive Answer: B Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 7) Keynes hypothesized that the speculative component of money demand was primarily determined by the level of ________.

A) interest rates B) velocity C) income D) stock market prices Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 14 .

8) The speculative motive for holding money is closely tied to what function of money? A) Store of wealth B) Unit of account C) Medium of exchange D) Standard of deferred payment Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 9) Of the three motives for holding money suggested by Keynes, which did he believe to be the most sensitive to interest rates?

A) The transactions motive B) The precautionary motive C) The speculative motive D) The altruistic motive Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 10) Because Keynes assumed that the expected return on money was zero, he argued that people would ________.

A) never hold money B) never hold money as a store of wealth C) hold money as a store of wealth when the expected return on bonds was negative D) hold money as a store of wealth only when forced to by law Answer: C Diff: 2 Type: MC Skill: Applied Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 11) The Keynesian theory of money demand predicts that people will increase their money holdings if they believe that ________.

A) interest rates are about to fall B) bond prices are about to rise C) expected inflation is about to fall D) bond prices are about to fall Answer: D Diff: 2 Type: MC Skill: Applied Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 15 .

12) If people expect nominal interest rates to be higher in the future, the expected return on bonds ________, and the demand for money ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: C

Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 13) If people expect nominal interest rates to be lower in the future, the expected return on bonds will ________, and the demand for money will ________.

A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 14) Keynes argued that when interest rates were low relative to some normal value, people would expect bond prices to ________ so the quantity of money demanded would ________.

A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 15) Keynes argued that when interest rates were high relative to some normal value, people would expect bond prices to ________ , so the quantity of money demanded would ________.

A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: B Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 16 .

16) According to Keynes's liquidity preference theory, velocity increases when ________.

A) income increases B) wealth increases C) brokerage commissions increase D) interest rates increase Answer: D Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 17) Keynes's theory of the demand for money implies that the velocity of money is ________.

A) not constant but fluctuates with movements in interest rates B) not constant but fluctuates with movements in the price level C) not constant but fluctuates with movements in the time of year D) a constant Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 18) Because interest rates can fluctuate substantially , the ________ theory of the demand for money tells us that the velocity of money has substantial fluctuations as well.

A) classical B) Cambridge C) liquidity preference D) Pigouvian Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 19) Keynes's liquidity preference theory tells us 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 incomes and interest rates D) is a function of both government spending and income Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand

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20) Keynes's model of the demand for money suggests that the velocity of money is ________.

A) constant B) positively related to interest rates C) negatively related to interest rates D) positively related to bond values Answer: B Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 21) Keynes's liquidity preference theory tells us that the demand for money is ________.

A) constant B) positively related to interest rates C) negatively related to interest rates D) negatively related to bond values Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 22) Keynes's model of the demand for money suggests that the velocity of money is ________ related to ________. A) positively; interest rates B) negatively; interest rates C) positively; bond values D) positively; stock prices Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 23) Keynes's liquidity preference theory tells us that the demand for money is ________ related to ________.

A) negatively; interest rates B) positively; interest rates C) negatively; income D) negatively; wealth Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand

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24) The Keynesian demand for real balances can be expressed as ________.

A) Md = f(i,Y) B) Md/P = f(i) C) Md/P = f(Y) D) Md/P = f(i,Y) Answer: D Diff: 2 Type: MC Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 25) Explain the Keynesian theory of money demand. What motives did Keynes think determined money demand? What are the two reasons why Keynes thought velocity could not be treated as a constant?

Answer: Keynes believed the demand for money depended on income and interest rates. Money was held to facilitate normal transactions and as a precaution for unexpected transactions. For both motives, money demand depended on income. People also held money as an asset, for speculative purposes. The speculative motive depends on income and interest rates. People hold more money for speculative purposes when they expect bond prices to fall, generating a negative return on bonds. Since money demand varies with interest rates, velocity changes when interest rates change. Also, since money demand depends upon expectations about future interest rates, unstable expectations can make money demand, and thus velocity, unstable.

Diff: 2 Type: ES Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 26) Explain the transactions motive for holding money in Keynes's liquidity preference theory.

Answer: Following the classical approach, Keynes emphasized that the transactions component of the demand for money is determined primarily by the level of people's transactions. Because he believed that these transactions were proportional to income, like the classical economists he took the transactions component of the demand for money to be proportional to income.

Diff: 1 Type: ES Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand

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27) Explain the precautionary motive for holding money in Keynes's liquidity preference theory.

Answer: Keynes went beyond the classical analysis by recognizing that people in addition to holding money to carry out current transactions, they also hold money as a cushion against an unexpected need. These money balances are useful when consumers find unexpected opportunities for purchases of goods and services in the case of sales etc. Also precautionary money is helpful when consumers need money to pay an unexpected bill. Keynes, postulated that precautionary money demand is proportional to income.

Diff: 2 Type: ES Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand 28) Explain the speculative motive for holding money in Keynes's liquidity preference theory.

Answer: Keynes took the view that people also hold money as a store of wealth, and he called this reason for people holding money the speculative motive. Since he believed that wealth is closely tied to income, the speculative component of money demand would be related to income.

However, Keynes looked more carefully at the factors that influence the decisions regarding how much money to hold as a store of wealth, especially interest rates. He divided the assets that can be used to store wealth into two categories: money and bonds. Keynes assumed that the expected return to money was zero because in his time unlike today, most chequable deposits did not earn interest. For bonds there are two components of the expected return: the interest payment and the expected rate of capital gains. If interest rates are below some normal value then people expect interest rates on bonds to rise and so expect to suffer capital loses on them. As a result, the demand for money will increase.

Type: ES Diff: 2 Skill: Recall Objective: 20.3 Summarize the three motives underlying the liquidity preference theory of money demand

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20.4 Portfolio Theories of Money Demand 1) The theory of portfolio choice says that the demand for an asset is ________ related to ________.

A) positively; wealth B) negatively; expected return C) negatively; wealth D) positively; risk Answer: A Diff: 1 Type: MC Skill: Recall Objective: 20.4 Identify the factors underlying the portfolio choice theory of money demand 2) According to the theory of portfolio choice, currency and chequable deposits are said to be ________.

A) dominated assets B) risky assets C) interest bearing D) income Answer: A Diff: 1 Type: MC Skill: Recall Objective: 20.4 Identify the factors underlying the portfolio choice theory of money demand 3) According to the theory of portfolio choice, money is extremely safe ________.

A) in real terms B) in nominal terms C) relative to currency D) relative to inflation hedges Answer: B Diff: 1 Type: MC Skill: Recall Objective: 20.4 Identify the factors underlying the portfolio choice theory of money demand 4) Inflation hedges ________.

A) are assets that have real returns that are less affected by inflation B) increase the risk and return from holding currency C) are assets that exhibit a rate of return of zero D) are assets denominated in nominal terms Answer: A Diff: 1 Type: MC Skill: Recall Objective: 20.4 Identify the factors underlying the portfolio choice theory of money demand

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5) Examples of assets that qualify as inflation hedges include ________. A) real return bonds B) the stock market C) bonds D) currency Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 20.4 Identify the factors underlying the portfolio choice theory of money demand 6) Financial innovation will ________ and ________.

A) improve the liquidity of alternative assets; decrease the demand for money B) improve the liquidity of alternative assets; increase the demand for money C) reduce the relative liquidity of money; increase the demand for money D) A and C only.

Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.4 Identify the factors underlying the portfolio choice theory of money demand 7) There are ________ factors that affect the demand for money.

A) three B) five C) six D) seven Answer: D Diff: 1 Type: MC Skill: Recall Objective: 20.4 Identify the factors underlying the portfolio choice theory of money demand 8) An improvement in payment technologies will ________ the demand for money because ________.

A) decrease; more resources are put into money B) decrease; there is less need for money for transaction purposes C) increase; there is less need for money for transaction purposes D) increase; more resources are put into money Answer: B Diff: 1 Type: MC Skill: Recall Objective: 20.4 Identify the factors underlying the portfolio choice theory of money demand

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9) Describe the factors that affect the demand for money.

Answer: The demand for money using Keynesian and portfolio theories indicates that seven factors affect the demand for money. These are interest rates, income, payment technology, wealth, riskiness of other assets, inflation risk, and liquidity of other assets.

Diff: 1 Type: ES Skill: Recall Objective: 20.4 Identify the factors underlying the portfolio choice theory of money demand 20.5 Empirical Evidence for the Demand for Money 1) The evidence on the interest sensitivity of the demand for money suggests that the demand for money is ________ to interest rates, and there is ________ evidence that a liquidity trap exists.

A) sensitive; substantial B) sensitive; little C) insensitive; substantial D) insensitive; little Answer: B Diff: 2 Type: MC Skill: Recall Objective: 20.5 Assess and interpret the empirical evidence on the validity of the liquidity preference and portfolio theories of money demand 2) In the case of a liquidity trap, monetary policy has ________ effect on aggregate spending because a change in the money supply has ________ effect on interest rates.

A) no; no B) no; a large C) no; a small D) a large; a large Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.5 Assess and interpret the empirical evidence on the validity of the liquidity preference and portfolio theories of money demand 3) In the case of a liquidity trap, monetary policy ________.

A) has a large impact on interest rates B) has a small impact on interest rates C) has no impact on interest rates D) has a proportionate impact on interest rates Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.5 Assess and interpret the empirical evidence on the validity of the liquidity preference and portfolio theories of money demand

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4) In the case of a liquidity trap, the money demand curve ________.

A) is horizontal B) is vertical C) is negatively sloped D) is positively sloped Answer: A Diff: 2 Type: MC Skill: Recall Objective: 20.5 Assess and interpret the empirical evidence on the validity of the liquidity preference and portfolio theories of money demand 5) Evidence suggests that a liquidity trap can occur when ________.

A) real interest rates are at zero B) real interest rates are at or just above zero C) nominal interest rates are at zero D) nominal interest rates are at or just above zero Answer: C Diff: 2 Type: MC Skill: Recall Objective: 20.5 Assess and interpret the empirical evidence on the validity of the liquidity preference and portfolio theories of money demand 6) The reason that economists are so interested in the stability of the velocity of money is because if the demand for money is volatile, then the steady growth of the money supply ________. A) is going to promote price stability at the expense of low unemployment B) is going to promote low unemployment at the expense of price stability C) is an ineffective way to conduct monetary policy D) can still be used to conduct monetary policy if the goal is price stability Answer: C

Diff: 2 Type: MC Skill: Recall Objective: 20.5 Assess and interpret the empirical evidence on the validity of the liquidity preference and portfolio theories of money demand 7) If the demand for money is volatile then ________.

A) the velocity of money will be unpredictable B) the quantity of money is not linked to aggregate spending C) the aggregate spending rises D) A and B only.

Answer: D Diff: 2 Type: MC Skill: Recall Objective: 20.5 Assess and interpret the empirical evidence on the validity of the liquidity preference and portfolio theories of money demand

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8) Until the early 1970s, evidence strongly supported ________.

A) the stability of the money demand function B) the volatility of money demand C) increasing financial innovation D) the increasing importance of fiscal policy to affect the economy Answer: A Diff: 1 Type: MC Skill: Recall Objective: 20.5 Assess and interpret the empirical evidence on the validity of the liquidity preference and portfolio theories of money demand 9) If the money demand function is volatile then ________.

A) the velocity of money will be unstable and monetary policy will be more effective B) monetary policy will be ineffective C) fiscal policy will be more effective than monetary policy D) neither fiscal nor monetary policy will impact aggregate output Answer: A Diff: 1 Type: MC Skill: Recall Objective: 20.5 Assess and interpret the empirical evidence on the validity of the liquidity preference and portfolio theories of money demand 10) Describe what the liquidity trap is. Explain how it can be problematic for monetary policymakers.

Answer: The liquidity trap describes the situation in which the demand for money is insensitive to changes in interest rates (i.e., the money demand curve is infinitely elastic). In this case, monetary policy has no direct effect on aggregate spending because a change in the money supply will not affect interest rates.

Diff: 2 Type: ES Skill: Recall Objective: 20.5 Assess and interpret the empirical evidence on the validity of the liquidity preference and portfolio theories of money demand

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Economics of Money, Banking, and Fin. Markets, 8Ce (Mishkin) Chapter 21 The IS Curve 21.1 Planned Expenditure and Aggregate Demand 1) His analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure, planned investment spending, government spending, and net exports.

A) John Maynard Keynes B) Sir John Hicks C) Milton Friedman D) Paul A. Samuelson Answer: A Diff: 2 Type: MC Skill: Recall Objective: 21.1 Explain the relationship between planned expenditure and aggregate demand 2) Keynes's motivation in developing the aggregate output determination model stemmed from his concern with explaining ________.

A) the hyperinflations of the 1920s B) why the Great Depression occurred C) the high unemployment in Great Britain before World War I D) the high unemployment in Great Britain after World War II Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.1 Explain the relationship between planned expenditure and aggregate demand 3) Keynes was especially interested in explaining movements of ________ because he wanted to explain why the Great Depression had occurred and how government policy could be used to increase ________ in a similar economic situation.

A) aggregate output; wages B) aggregate output; employment C) wage rates; wages D) wage rates; employment Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.1 Explain the relationship between planned expenditure and aggregate demand

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4) Keynes was especially concerned with explaining the ________.

A) recession of 1920-21 B) low levels of output and employment during the Great Depression C) strong economic growth of the 1920s D) high unemployment in Great Britain during the 1920s Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.1 Explain the relationship between planned expenditure and aggregate demand 5) Keynes was especially concerned with explaining the ________ level of output and employment during the ________.

A) low; 1920s B) low; 1930s C) high; 1920s D) high; 1930s Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.1 Explain the relationship between planned expenditure and aggregate demand 6) In the simple Keynesian model, equilibrium aggregate output is determined by ________.

A) aggregate demand B) aggregate supply C) the national demand for labor D) the price level Answer: A Diff: 2 Type: MC Skill: Recall Objective: 21.1 Explain the relationship between planned expenditure and aggregate demand 7) Under Keynesian analysis, aggregate demand can be written as ________.

A) adY = C + I + G + NX B) adY = C + I + G - NX C) adY = C - I - G - NX D) adY = C + I - G - NX Answer: A Diff: 2 Type: MC Skill: Recall Objective: 21.1 Explain the relationship between planned expenditure and aggregate demand

2 .

8) During the Covid-19 pandemic, the unemployment rate in Canada rose to a peak of approximately ________. A) 10% B) 12% C) 14% D) 20% Answer: C

Diff: 1 Type: MC Skill: Recall Objective: 21.1 Explain the relationship between planned expenditure and aggregate demand 21.2 The Components of Aggregate Demand 1) Keynes reasoned that consumer expenditure is most closely related to ________.

A) the level of interest rates B) the price level C) disposable income D) the marginal tax rate Answer: C Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 2) In the Keynesian model of income determination, consumer expenditure includes spending by ________.

A) consumers on personal computers B) businesses on personal computers C) governments on personal computers D) foreigners on domestic personal computers Answer: A Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 3) The marginal propensity to consume (mpc) can be defined as the fraction of ________.

A) a change in income that is spent B) a change in income that is saved C) income that is spent D) income that is saved Answer: A Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 3 .

4) If the consumption function is expressed as C = a + mpc × YD, then "mpc" represents ________.

A) autonomous consumer expenditure B) the marginal propensity to consume C) the expenditure multiplier D) disposable income Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 5) If the consumption function is expressed as C = a + mpc × YD, then "a" represents ________.

A) autonomous consumer expenditure B) the marginal propensity to consume C) the expenditure multiplier D) disposable income Answer: A Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 6) If the consumption function is C = 20 + 0.5YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by ________.

A) $25 B) $70 C) $50 D) $100 Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 7) If the consumption function is C = 20 + 0.8YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by ________.

A) $58 B) $64 C) $80 D) $100 Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 4 .

8) Assume that autonomous consumption equals $200 and that the mpc equals 0.8. If disposable income equals $1000, then total consumption equals ________. A) $80 B) $200 C) $800 D) $1000 Answer: D

Diff: 2 Type: MC Skill: Applied Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 9) Assume that autonomous consumption equals $200 and disposable income equals $1000. If total consumption equal $800, then the mpc equals ________.

A) 0.2 B) 0.6 C) 0.8 D) 1.0 Answer: Diff: 2 B Type: MC Skill: Applied Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 10) Assume that disposable income equals $1000 and the mpc equals 0.6. If total consumption equal $800, then autonomous consumption is equal to ________.

A) $0 B) $200 C) $800 D) $1000 Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 11) Everything else held constant, if total consumption increases from $600 to $800 because of an increase of disposable income of $400, then the mpc is equal to ________.

A) 0.2 B) 0.4 C) 0.5 D) 0.6 Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 5 .

12) Everything else held constant, if consumption expenditure increases by 65 for a 100 increase in disposable income, the mpc is ________.

A) 0 B) 0.5 C) 0.65 D) 1 Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 13) Everything else held constant, if disposable income increases by 200 and consumption expenditure increases by 150, the mpc is ________.

A) 0 B) 0.15 C) 0.5 D) 0.75 Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 14) Everything else held constant, if consumption expenditure falls by 160 when disposable income falls by 200, the mpc is ________.

A) 0 B) 0.2 C) 0.4 D) 0.8 Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

6 .

15) Economists define investment spending as the purchase of ________.

A) a new physical asset such as a new machine or a new house B) any physical asset, whether new or not, used by business to increase production C) any physical asset used by business to increase production and the repurchase of common stock D) business spending on capital and household spending on durable goods Answer: A Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 16) Planned investment spending, a component of aggregate demand, is equal to ________.

A) fixed investment plus actual inventory investment B) fixed investment plus unplanned inventory investment C) fixed investment D) fixed investment plus planned inventory investment Answer: D Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 17) There are two types of investment spending: ________ investment–the spending by business firms on equipment and structures, and planned spending on residential houses–and ________ investment–spending by business firms on additional holdings of raw materials, parts, and finished goods.

A) planned; gross B) planned; inventory C) fixed; gross D) fixed; inventory Answer: D Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 18) A fall in inventories is synonymous with ________ investment.

A) negative fixed B) positive fixed C) positive inventory D) negative inventory Answer: D Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 7 .

19) A difference between inventory investment and fixed investment is that ________.

A) fixed investment is never unplanned B) fixed investment is never planned C) inventory investment is never unplanned D) unplanned inventory investment is always zero Answer: A Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 20) Keynes mentioned two factors that influenced planned investment spending. They are ________.

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 Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 21) Factors that influence planned investment spending include ________.

A) real interest rates B) financial frictions C) emotional waves of optimism and pessimism D) all of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 22) Planned investment spending is higher ________.

A) when real interest rates are higher B) during financial frictions C) when businesses are optimistic about the future D) A and C only Answer: C Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

8 .

23) Aggregate demand in an economy in the absence of government or foreign trade is equal to ________.

A) consumer expenditure plus actual investment B) consumer expenditure plus planned investment C) consumer expenditure plus inventory investment D) consumer expenditure plus fixed investment Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 24) What is the marginal propensity to consume according to Keynes's consumption theory?

Provide an example.

Answer: Marginal propensity to consume or mpc is the slope of the consumption function line or ΔC/ΔYD and reflects the change in consumer expenditure that results from an additional dollar of disposable income. Keynes assumed that mpc is constant between the values of Diff: 2 Type: ES 0 and 1.

Skill: Recall If for example mpc = 0.5, this means that when disposable income increases by $1, the Objective: consumer 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) will increase her consumption by $0.50.

25) What do economists mean by "investment"?

Answer: Economists use the word investment somewhat differently from other people. When people say that they are making an investment, they are normally referring to the purchase of common stocks or bonds, purchases that do not necessarily involve newly produced goods and services. But when economists speak of investment spending, they are referring to the purchase of new physical assets such as new machines or new house–purchases that add to aggregate demand.

Diff: 2 Type: ES Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

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26) What types of investment exist according to Keynes's theory of the determination of aggregate output? what is a major difference between the two according to Keynes?

Answer: According to Keynes there are two types of investment. The first type is fixed investment, the spending by firms on equipment and structures and spending on housing. The second type is inventory investment, spending by firms on additional holdings of raw materials, parts, and finished goods, calculated as the change in holdings of these items in a given period say a year. The main difference between the two types of investment is that according to Keynes fixed investment is always planned, while inventory investment can be unplanned.

Diff: 2 Type: ES Skill: Recall Objective: 21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure) 27) How is Keynes's consumption function defined? describe the terms used in this function?

Answer: According to Keynes the consumer expenditure is related not to aggregate income, but

to disposable income, the total income available for spending, equal to aggregate income (which is equivalent to aggregate output) minus taxes: Y - T. Keynes called the relationship between disposable income YD and consumer expenditure C the consumption function and Diff: 2 Type: ES Skill: Recallit expressed Objective: and describe factors determine the fourtocomponents of aggregate as: C = a +21.2 (mpcList × YD).

The termthe mpc is thethat marginal propensity consume, the term a stands demand (or planned expenditure) for autonomous consumer expenditure, the amount of consumer expenditure that is independent of disposable income.

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21.3 Goods Market Equilibrium 1) If unplanned investment is positive, firms will ________ production and output will ________.

A) cut; rise B) cut; fall C) increase; rise D) increase; fall Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 2) If unplanned investment is negative, firms will ________ production and output will ________.

A) cut; rise B) cut; fall C) increase; rise D) increase; fall Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 3) In the Keynesian framework, as long as output is below the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to ________ production.

A) negative; lower B) negative; raise C) positive; lower D) positive; raise Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 4) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to raise production.

A) below; negative B) above; negative C) below; positive D) above; positive Answer: A Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium

11 .

5) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to lower production.

A) below; negative B) above; negative C) below; positive D) above; positive Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 6) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain positive and firms will continue to ________ production.

A) below; lower B) above; lower C) below; raise D) above; raise Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 7) In the Keynesian framework, as long as output is above the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to ________ production.

A) negative; lower B) negative; raise C) positive; lower D) positive; raise Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 8) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain negative, and firms will continue to ________ production.

A) below; lower B) above; lower C) below; raise D) above; raise Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium

12 .

9) In the Keynesian framework, as long as output is below the equilibrium level, unplanned inventory investment will remain negative, firms will continue to ________ production, and output will continue to ________. A) lower; fall B) lower; rise C) raise; fall D) raise; rise Answer: D

Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 10) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________, firms will continue to raise production, and output will continue to rise.

A) below; negative B) above; negative C) below; positive D) above; positive Answer: A Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 11) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________, firms will continue to lower production, and output will continue to fall.

A) below; negative B) above; negative C) below; positive D) above; positive Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 12) An increase in unplanned inventory investment for the entire economy equals the excess of ________.

A) output over aggregate supply B) output over aggregate demand C) aggregate supply over output D) aggregate demand over output Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 13 .

13) A decrease in unplanned inventory investment for the entire economy equals the excess of ________.

A) output over aggregate supply B) output over aggregate demand C) aggregate supply over output D) aggregate demand over output Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 14) If aggregate demand is less than the level of aggregate output, then ________ inventory investment will be ________.

A) planned; positive B) actual; positive C) actual; negative D) planned; negative Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 15) If aggregate demand falls short of current output, business firms will ________ production to ________ inventories.

A) cut; keep from accumulating B) expand; keep from accumulating C) cut; build up D) expand; build up Answer: A Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 16) If aggregated demand is less than actual output, unplanned inventory ________ will cause output to ________.

A) accumulation; rise B) depletion; fall C) depletion; rise D) accumulation; fall Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium

14 .

17) If actual output is less than equilibrium output, firms will ________ output to keep from ________ inventories.

A) increase; accumulating B) increase; depleting C) decrease; depleting D) decrease; accumulating Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 18) If actual output is greater than equilibrium output, firms will ________ output to keep from ________ inventories.

A) increase; accumulating B) increase; depleting C) decrease; depleting D) decrease; accumulating Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 19) When the level of unplanned inventory investment is equal to zero, the economy is ________.

A) in disequilibrium B) in a recession C) in equilibrium D) overheating Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 20) If aggregate demand equals output, ________.

A) the economy is in a recession B) output will increase C) output will fall D) the economy is at its equilibrium level Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium

15 .

Situation 21-1 Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9.

21) Using the information in Situation 21-1, if aggregate output is equal to $10000, then unplanned inventory investment equals ________.

A) -$1000 B) -$100 C) $0 D) $100 Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 22) Using the information in Situation 21-1, if aggregate output equals $8000, the unplanned inventory investment equals ________. A) -$100 B) $0 C) $100 D) $500 Answer: A

Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 23) Using the information in Situation 21-1, the equilibrium level of aggregate output is ________. A) $900 B) $8000 C) $9000 D) $10000 Answer: C

Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium

16 .

24) Using the information contained in Situation 21-1, if autonomous consumption increases by $100, then equilibrium aggregate output will change by ________.

A) -$1000 B) -$100 C) $100 D) $1000 Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 25) Using the information contained in Situation 21-1, if planned investment decreases by $100, the equilibrium aggregate output will change by ________.

A) -$1000 B) $-100 C) $100 D) $1000 Answer: A Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 26) Keynes believed that changes in autonomous spending were dominated by changes in ________.

A) consumer expenditure B) autonomous consumer expenditure C) investment spending D) taxes E) none of the above Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 27) Keynes believed that changes in autonomous spending were dominated by unstable fluctuations in ________, which are influenced by emotional waves of optimism and pessimism– factors he referred to as "animal spirits."

A) unplanned investment spending B) actual investment spending C) planned investment spending D) autonomous consumer expenditures Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium

17 .

28) In the simple Keynesian framework, declines in planned investment spending that produce high unemployment can be offset by raising ________.

A) taxes B) government spending C) consumer confidence D) business confidence Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 29) The Keynesian framework indicates that government can play an important role in determining aggregate output by ________.

A) changing the level of government spending or taxes B) raising consumer confidence C) raising investor confidence D) changing the money supply and interest rates Answer: A Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 30) A tax cut initially ________.

A) increases consumption expenditure by an amount greater than the tax cut B) increases consumption expenditure by an amount equal to the tax cut C) increases consumption expenditure by an amount that is less than the value of the tax cut D) has no effect on consumption expenditure E) reduces consumption expenditure by an amount that is less than the value of the tax cut Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 31) Assume equilibrium at full employment for an economy characterized by the simple Keynesian model. If the government raises taxes to eliminate a budget deficit, then ________.

A) the rate of unemployment will increase B) the level of aggregate output will increase C) the price level will increase D) the rate of interest will fall Answer: A Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium

18 .

Situation 21-2 Assume a closed economy. Suppose that autonomous consumption equals $400, planned investment equals $500, government expenditure equals $200, net taxes equals $50, and the mpc equals 0.9.

32) Using the information in situation 21-2, if government spending increases by $100, then the equilibrium aggregate output will change by ________.

A) -$1000 B) -$100 C) $100 D) $1000 Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 33) Using the information in Situation 21-2, if taxes increase by $10, then the equilibrium aggregate output will change by ________. A) -$90 B) -$10 C) $10 D) $90 Answer: A

Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 34) Using the information in situation 21-2, if government increases their spending by $50 and increases net taxes by 50, then equilibrium aggregate output will change by ________.

A) -$100 B) -$50 C) $50 D) $100 Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium

19 .

35) In a closed economy, aggregate demand is the sum of ________.

A) consumer expenditure, actual investment spending, and government spending B) consumer expenditure, planned investment spending, and government spending C) consumer expenditure, actual investment spending, government spending, and net exports D) consumer expenditure, planned investment spending, government spending, and net exports Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 36) In an open economy, aggregate demand is the sum of ________.

A) consumer expenditure, actual investment spending, and government spending B) consumer expenditure, planned investment spending, and government spending C) consumer expenditure, actual investment spending, government spending, and net exports D) consumer expenditure, planned investment spending, government spending, and net exports Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 37) If net exports increase by 100 and the mpc is 0.75, equilibrium aggregate output increases by ________. A) 100 B) 250 C) 400 D) 750 Answer: C

Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 38) If net exports increase by 250 and the mpc is 0.75, equilibrium aggregate output increases by ________. A) 250 B) 500 C) 750 D) 1000 Answer: D

Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium

20 .

39) If net exports decrease by 250 and the mpc is 0.75, equilibrium aggregate output ________.

A) increases by 1000 B) increases by 750 C) decreases by 750 D) decreases by 1000 Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 40) Aggregate output is ________ related to autonomous consumer expenditure, and is ________ related to planned investment spending. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively Answer: D

Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 41) Aggregate output is ________ related to autonomous consumer expenditure and is ________ related to the level of taxes. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively Answer: C

Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 42) Aggregate output is increased by a decrease in ________. A) autonomous consumption B) government spending C) planned investment D) net taxes Answer: D

Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium

21 .

43) Equilibrium output is reduced by an increase in ________.

A) planned investment B) taxes C) government spending D) net exports Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 44) Keynes believed that unstable investment caused the Great Depression. Using the simple Keynesian model, explain how a fall in investment affects equilibrium output.

Answer: A fall in investment will reduce aggregate output by a greater amount that the initial fall in investment. This happens because of the multiplier effect.

Diff: 2 Type: ES Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 45) Describe Keynes's equilibrium condition and what it implies.

Answer: Equilibrium occurs when the total quantity of the output equals the total amount of aggregate demand or planned expenditure. When Y = YAD producers are able to sell all their output and have no reason to change their production because there is no unplanned inventory investment.

Diff: 2 Type: ES Skill: Applied Objective: 21.3 Solve for the goods market equilibrium 46) Define the IS curve.

Answer: The IS curve shows the relationship between aggregate output and the real interest rate when the goods market is in equilibrium.

Diff: 2 Type: ES Skill: Applied Objective: 21.3 Solve for the goods market equilibrium

22 .

21.4 Understanding the IS Curve 1) If the interest rate falls, other things being equal, investment spending will ________.

A) fall B) rise C) either rise, fall, or remain unchanged D) not be affected Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 2) When the interest rate rises, ________.

A) planned investment falls B) planned investment rises C) planned investment will be unaffected D) equilibrium income increases Answer: A Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 3) When the interest rate is ________, ________ investments in physical capital will earn more than the cost of borrowed funds, so planned investment spending is ________.

A) high; few; high B) high; few; low C) low; few; high D) low; many; low E) high; many; high Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

23 .

4) When interest rates rise in Canada (with the price level fixed), the value of the dollar ________, domestic goods become ________ expensive, and net exports ________. A) falls; less; fall B) falls; more; rise C) rises; more; fall D) rises; less; fall Answer: C

Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 5) When interest rates fall in Canada (with the price level fixed), the value of the dollar ________, domestic goods become ________ expensive, and net exports ________.

A) falls; less; fall B) falls; less; rise C) falls; more; fall D) rises; less; fall Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 6) An increase in interest rates ________.

A) increases the value of the dollar, net exports, and equilibrium output B) increases the value of the dollar, reducing net exports and equilibrium output C) reduces the value of the dollar, net exports, and equilibrium output D) reduces the value of the dollar, increasing net exports and equilibrium output Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 7) A decrease in interest rates ________.

A) increases the value of the dollar, net exports, and equilibrium output B) increases the value of the dollar, reducing net exports and equilibrium output C) reduces the value of the dollar, net exports, and equilibrium output D) reduces the value of the dollar, increasing net exports and equilibrium output Answer: D Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

24 .

8) The negative relation between investment spending and the interest rate is what gives the ________ curve its ________ slope.

A) IS; upward B) IS; downward C) LM; downward D) LM; upward Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 9) Points on the IS curve satisfy ________ market equilibrium. A) money B) goods C) stock D) bond Answer: B

Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 10) The ________ traces out the points for which total quantity of goods produced equals total quantity of goods demanded.

A) LM curve B) IS curve C) consumption function D) investment schedule Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 11) The ________ describes points for which the goods market is in equilibrium.

A) LM curve B) IS curve C) consumption function D) investment schedule Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

25 .

12) Everything else held constant, if aggregate output is to the right of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 13) Everything else held constant, if aggregate output is to the left of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________.

A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: Diff: 2 D Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 14) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess supply of goods which will cause aggregate output to ________.

A) right; fall B) right; rise C) left; fall D) left; rise Answer: A Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 15) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess demand of goods which will cause aggregate output to ________.

A) right; fall B) right; rise C) left; fall D) left; rise Answer: D Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 26 .

16) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess ________ of goods which will cause aggregate output to fall.

A) right; supply B) right; demand C) left; supply D) left; demand Answer: A Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 17) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess ________ of goods which will cause aggregate output to rise.

A) right; supply B) right; demand C) left; supply D) left; demand Answer: D Diff: 2 Type: MC Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 18) Describe how the economy heads towards equilibrium and why it has a tendency to settle there.

Answer: When production is above the equilibrium level, output will exceed aggregate demand and firms will continue cutting production and aggregate output will decrease. When aggregate output is below the equilibrium level of output, firms want to increase production because inventories are declining by more than they desire and aggregate output will increase. When aggregate demand equals aggregate output there is no further tendency for output to change.

Diff: 2 Type: ES Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 19) The Bank of Canada increases interest rates when they want to reduce aggregate demand to fight inflation. How do increases in the interest rate reduce aggregate demand?

Answer: Increases in interest rates reduce planned investment. The decrease in investment reduces equilibrium output by a multiple amount due to the multiplier effect. Also, increases in interest rates increase the value of the dollar, reducing net exports, which reduce aggregate demand and equilibrium output by a multiple amount.

Diff: 2 Type: ES Skill: Recall Objective: 21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium 27 .

21.5 Factors That Shift the IS Curve 1) Other things equal, a decrease in autonomous consumption shifts the ________ curve to the ________.

A) IS; right B) IS; left C) LM; left D) LM; right Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 2) In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant. A) up; rise B) up; fall C) down; rise D) down; fall Answer: D

Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 3) An increase in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant. A) up; rise B) up; fall C) down; rise D) down; fall Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve

28 .

4) An increase in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant.

A) up; left B) up; right C) down; left D) down; right Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 5) A decline in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant.

A) up; left B) up; right C) down; left D) down; right Answer: C Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 6) A decline in autonomous consumer expenditure causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

A) rise; left B) rise; right C) fall; left D) fall; right Answer: C Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 7) An increase in autonomous consumer expenditure causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

A) rise; left B) rise; right C) fall; left D) fall; right Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 29 .

8) An increase in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. A) rise; LM; right B) rise; IS; right C) fall; LM; left D) fall; IS; left Answer: B

Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 9) A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

A) rise; LM; right B) rise; IS; right C) fall; IS; left D) fall; LM; left Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 10) Everything else held constant, changes in the interest rate affect planned investment spending and hence the equilibrium level of output, but this change in investment spending ________.

A) merely causes a movement along the IS curve and not a shift B) is crowded out by higher taxes C) is crowded out by higher government spending D) is crowded out by lower consumer expenditures Answer: A Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 11) A rise in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.

A) rise; LM; right B) rise; IS; right C) fall; IS; left D) fall; LM; left Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 30 .

12) A decline in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.

A) rise; LM; right B) rise; IS; right C) fall; IS; left D) fall; LM; left Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 13) A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.

A) up; rise B) up; fall C) down; rise D) down; fall Diff: 2 Type: MC Answer: D Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 14) An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.

A) up; rise B) up; fall C) down; rise D) down; fall Answer: A Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve

31 .

15) An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant.

A) up; left B) up; right C) down; left D) down; right Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 16) A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant.

A) up; left B) up; right C) down; left D) down; right Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 17) A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

A) rise; left B) rise; right C) fall; left D) fall; right Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve

32 .

18) An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

A) rise; left B) rise; right C) fall; left D) fall; right Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 19) A decrease in autonomous planned investment spending, other things equal, shifts the ________ curve to the ________.

A) IS; right B) IS; left C) LM; left D) LM; right Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 20) An increase in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

A) rise; LM; right B) rise; IS; right C) fall; IS; left D) fall; LM; left Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 21) A reduction in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

A) rise; LM; right B) fall; IS; left C) fall; LM; left D) rise; IS; right Answer: B Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 33 .

22) The IS curve shifts to the left when ________.

A) taxes increase B) government spending increases C) the money supply increases D) autonomous planned investment spending increases Answer: A Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 23) A decline in taxes ________ consumer expenditure and shifts the ________ curve to the ________, everything else held constant.

A) raises; LM; right B) lowers; IS; left C) raises; IS; right D) lowers; LM; left Answer: C Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 24) A tax increase ________ disposable income, ________ consumption expenditure, and shifts the IS curve to the ________, everything else held constant. A) increases; increases; right B) increases; decreases; left C) decreases; increases; left D) decreases; decreases; left Answer: D

Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 25) A tax cut ________ disposable income, ________ consumption expenditure, and shifts the IS curve to the ________, everything else held constant.

A) increases; increases; right B) increases; decreases; right C) decreases; increases; left D) decreases; decreases; left Answer: A Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve

34 .

26) If Canadian university students decide that drinking Mexican-brewed beer helps one get noticed, net exports will tend to fall, causing aggregate demand to ________ and the ________ curve to shift to the left, everything else held constant.

A) fall; LM B) fall; IS C) rise; LM D) rise; IS Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 27) If young business professionals in Canada suddenly decide that driving German-made cars is an important status symbol, net exports will tend to ________ causing aggregate demand to ________, everything else held constant.

A) fall; fall B) fall; rise C) rise; fall D) rise; rise Answer: A Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 28) An autonomous depreciation of the Canadian dollar makes Canadian goods ________ relative to foreign goods and results in a ________ in Canadian net exports, everything else held constant.

A) cheaper; decline B) cheaper; rise C) more expensive; decline D) more expensive; rise Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 29) An autonomous appreciation of the Canadian dollar makes Canadian goods ________ expensive relative to foreign goods which ________ net exports in Canada.

A) less; decreases B) less; increases C) more; decreases D) more; increases Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 35 .

30) A shift in tastes that now favours foreign goods ________ net exports in Canada and causes the quantity of aggregate output demanded to ________ in Canada, everything else held constant. A) decreases; rise B) decreases; fall C) increases; rise D) increases; fall Answer: B

Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 31) Everything else held constant, a shift in tastes in Canada that now favours Mexican goods will ________ net exports in Canada and cause the quantity of aggregate output demanded to ________ in Mexico.

A) decrease; rise B) decrease; fall C) increase; rise D) increase; fall Answer: A Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 32) A shift in tastes in Canada that now favours American goods ________ net exports in Canada. and causes the quantity of aggregate output demanded to ________ in Canada, everything else held constant.

A) decreases; rise B) decreases; fall C) increases; rise D) increases; fall Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 33) Everything else held constant, a shift in tastes in Canada that now favours Canadian goods will ________ net exports in Canada and cause the quantity of aggregate output demanded to ________ in Mexico.

A) decrease; rise B) decrease; fall C) increase; rise D) increase; fall Answer: D Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 36 .

34) A shift in tastes toward Canadian goods ________ net exports in Canada and causes the IS curve to shift to the ________ in Canada, everything else held constant.

A) decreases; right B) decreases; left C) increases; right D) increases; left Answer: C Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 35) A shift in tastes toward foreign goods ________ net exports in Canada and causes the IS curve to shift to the ________ in Canada everything else held constant.

A) decreases; right B) decreases; left C) increases; right D) increases; left Answer: B Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 36) A depreciation of the Canadian dollar makes Canadian goods cheaper relative to foreign goods, resulting in a ________ in net exports in Canada and a ________ shift of the IS curve in Canada, everything else held constant. A) fall; leftward B) rise; leftward C) fall; rightward D) rise; rightward Answer: D

Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 37) An appreciation of the Canadian dollar makes foreign goods cheaper relative to Canadian goods, resulting in a ________ in net exports in Canada and a ________ shift of the IS curve in Canada, everything else held constant. A) fall; leftward B) rise; leftward C) fall; rightward D) rise; rightward Answer: A

Diff: 2 Type: MC Skill: Applied Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 37 .

38) Which of the following does not shift the IS curve?

A) An increase in autonomous consumption.

B) An increase in government spending.

C) A decline in government spending.

D) A fall in the interest rate.

Answer: D Diff: 2 Type: MC Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 39) What are the factors that can shift the IS curve to the right?

Answer: The factors that can shift the IS curve to the right are: an increase in autonomous consumer demand, an increase in investment spending unrelated to the interest rate, an increase in government spending, a decrease in taxes, and an increase in net exports.

Diff: 2 Type: ES Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve 40) What is the role of the government, according to Keynes, in stimulating the economy, raising aggregate output and reducing unemployment when the economy is in a recession?

Answer: Keynes realized that government spending and taxes could also affect the position of the aggregate demand function and hence be manipulated to restore the economy to full employment and Yad = C + I + G + NX. Thus, government spending adds directly to aggregate demand, while taxes do not affect aggregate demand directly. This is why when there are taxes disposable income does not equal aggregate output. It equals output Y minus taxes T: YD = Y T. According to Keynes's analysis an equal increase in government spending and taxes in the economy that is in recession can restore full employment output as government spending leads to a multiplied change in aggregate output through the expenditure multiplier: × G. The equal increase in taxes, only reduces consumer expenditure by mpc × T. Thus the final result is an increase in aggregate output.

Diff: 2 Type: ES Skill: Recall Objective: 21.5 List the factors that shift the IS curve, and describe how they shift the IS curve

38 .

Economics of Money, Banking, and Fin. Markets, 8Ce (Mishkin) Chapter 22 The Monetary Policy and Aggregate Demand Curves 22.1 The Bank of Canada and Monetary Policy 1) The Bank of Canada conducts monetary policy by ________.

A) setting the overnight interest rate B) buying and selling bonds in open market operations C) changing the tax rate to influence aggregate demand D) changing the exchange rate to influence aggregate demand Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.1 Recognize the impact of changes in the nominal overnight interest rate on short-term real interest rates 2) The Bank of Canada controls the overnight rate by ________.

A) varying the settlement balances it provides to the banking system B) dictating terms of the LVTS C) managing government savings D) borrowing from the provincial government Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.1 Recognize the impact of changes in the nominal overnight interest rate on short-term real interest rates 3) Because prices are slow to move in the short-run, when the Bank of Canada lowers the overnight rate, ________.

A) nominal interest rates rise B) real interest rates fall C) inflation falls D) real interest rates rise Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.1 Recognize the impact of changes in the nominal overnight interest rate on short-term real interest rates

1 .

4) Because prices are sticky in the short-run, when the Bank of Canada raises the overnight rate, ________.

A) nominal interest rates fall B) real interest rates rise C) inflation falls D) real interest rates fall Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.1 Recognize the impact of changes in the nominal overnight interest rate on short-term real interest rates 5) The overnight interest rate is a ________ interest rate, but it is the ________ interest rate that affects net exports and business spending, thereby determining the level of ________ .

A) real; nominal; equilibrium output B) nominal; real; equilibrium output C) real; nominal; expected inflation D) nominal; real; expected inflation Answer: Diff: 2 B Type: MC Skill: Recall Objective: 22.1 Recognize the impact of changes in the nominal overnight interest rate on short-term real interest rates 6) Explain the relationship between Bank of Canada's overnight rate and the real interest rate.

Answer: Because prices are sticky–changes in monetary policy will not have an immediate effect on inflation and expected inflation. As a result, when the Bank of Canada lowers the overnight interest rate, real interest rates fall; and when the Bank of Canada raises the overnight rate, real interest rates rise.

Diff: 2 Type: ES Skill: Recall Objective: 22.1 Recognize the impact of changes in the nominal overnight interest rate on short-term real interest rates 7) Explain the relationship between real and nominal interest rates when inflation is expected to remain unchanged in the short run.

Answer: The Fisher equation states that real interest rate equals the nominal interest rate minus expected inflation. If there is no change in expected inflation, then over the short run, the real and nominal rates will be the same.

Diff: 2 Type: ES Skill: Recall Objective: 22.1 Recognize the impact of changes in the nominal overnight interest rate on short-term real interest rates

2 .

22.2 The Monetary Policy Curve 1) The monetary policy (MP) curve indicates the relationship between ________.

A) the overnight rate and the real interest rate B) the overnight rate and the inflation rate C) the inflation rate and the expected inflation rate D) the real interest rate the central bank sets and the inflation rate Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 2) An increase in the interest rate due to Taylor principle changes result in ________.

A) a movement up the monetary policy curve B) a movement down the monetary policy curve C) an upward shift of the monetary policy curve D) a downward shift of the monetary policy curve Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 3) If the central bank did not follow the Taylor principle ________.

A) inflation would spiral out of control B) it could rely on autonomous monetary policy changes C) it could rely on non-conventional monetary policy tools D) B and C only Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 4) If the central bank did not follow the Taylor principle so that the real interest rate fell when inflation rose, ________.

A) inflation would increase B) the nominal interest rate would not change C) expected inflation would be equal to zero D) output would remain unchanged Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 3 .

5) If the monetary policy rule is given by r = 1.0 + 0.5p, then 1.0 represents ________.

A) the autonomous component of the real interest rate set by the central bank B) the responsiveness of the real interest rate to the inflation rate C) the nominal rate as described by the Taylor principle D) none of the above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 6) If the monetary policy rule is given by r = 1.0 + 0.5p, then 0.5 represents ________.

A) the autonomous component of the real interest rate set by the central bank B) the responsiveness of the real interest rate to the inflation rate C) the nominal rate as described by the Taylor principle D) none of the above Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 7) If the monetary policy rule is given by r = 1.0 + 0.5p, then r represents ________.

A) the autonomous component of the real interest rate set by the central bank B) the responsiveness of the real interest rate to the inflation rate C) the real interest rate that is sent by the central bank D) none of the above Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 8) Central banks aim to ________.

A) keep inflation stable B) keep expected inflation equal to zero C) reduce inflation to zero D) A and B only Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve

4 .

9) The reason inflation spiraled in Canada in the 1970s can be attributed to ________.

A) the central bank not following the Taylor Principle B) the OPEC oil embargo C) changing policies at the federal government level D) an aggressive central bank policy buying bonds Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 10) In the 1970s, the inflation rate in Canada reach levels over ________ percent. A) 2 B) 5 C) 10 D) 12 Answer: C

Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 11) The Taylor Principle differs from the Taylor rule because ________.

A) it does not provide a rule for how monetary policy should react to conditions in the economy B) the Taylor principle relates to real interest rates and the Taylor rule pertains to nominal interest rates C) the Taylor principle is exclusively used by the Bank of Canada while the Taylor rule is used by the U.S. Fed D) the Taylor rule relates to inflation rates while the Taylor principle is applied to real interest rates Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 12) Higher inflation results from higher interest rates due to ________.

A) the Taylor principle B) the Taylor rule C) the slope of the monetary policy curve D) the Fisher equation Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 5 .

13) Tightening monetary policy refers to ________.

A) higher real interest rates B) higher nominal interest rates C) lower real interest rates D) lower nominal interest rates Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 14) The upward slope of the MP curve indicates that ________.

A) the central bank lowers real interest rates when inflation rises B) the central bank raises real interest rates when inflation falls C) the central bank raises nominal interest rates when inflation rises D) the central bank raises real interest rates when inflation rises Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 15) The Taylor Principle states that central banks raise nominal rates by ________ than any rise in expected inflation so that real interest rates ________ when there is a rise in inflation.

A) less; rise B) more; fall C) less; fall D) more; rise Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 16) An autonomous tightening of monetary policy ________.

A) causes an upward movement along the monetary policy curve B) causes a downward movement along the monetary policy curve C) shifts the monetary policy curve upward D) shifts the monetary policy curve downward Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve

6 .

17) An autonomous easing of monetary policy ________.

A) causes an upward movement along the monetary policy curve B) causes a downward movement along the monetary policy curve C) shifts the monetary policy curve upward D) shifts the monetary policy curve downward Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 18) Based on the Taylor Principle, a central bank's endogenous response of raising interest rates when inflation rises ________.

A) causes an upward movement along the monetary policy curve B) causes a downward movement along the monetary policy curve C) shifts the monetary policy curve upward D) shifts the monetary policy curve downward Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 19) Based on the Taylor Principle, a central bank's endogenous response of decreasing interest rates when inflation falls ________.

A) causes an upward movement along the monetary policy curve B) causes a downward movement along the monetary policy curve C) shifts the monetary policy curve upward D) shifts the monetary policy curve downward Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 20) When the financial crisis started in August 2007, inflation was rising and the Bank of Canada began an aggressive easing lowering of the overnight rate, which indicated that ________.

A) the Bank of Canada pursued an autonomous monetary policy tightening B) the Bank of Canada pursued an autonomous monetary policy easing C) the Bank of Canada had an automatic negative response to inflation based on the Taylor rule D) the Bank of Canada had an automatic positive response to inflation based on the Taylor rule Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 7 .

21) An increase in the money supply, other things equal, shifts the ________ curve to the ________.

A) IS; right B) IS; left C) MP; left D) MP; right Answer: D Diff: 1 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 22) An expansionary monetary policy shifts the MP curve to the ________, reducing ________, everything else held constant.

A) left; output and increasing interest rates B) left; both real output and interest rates C) right; both interest rates and real output D) right; interest rates and increasing real output Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 23) If the Bank of Canada conducts open market purchases, the money supply ________, shifting the MP curve to the ________, everything else held constant.

A) decreases; right B) decreases; left C) increases; right D) increases; left Answer: C Diff: 1 Type: MC Skill: Applied Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 24) 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) increases; right D) increases; left Answer: B Diff: 1 Type: MC Skill: Applied Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 8 .

25) If the Bank of Canada conducts open market ________, the money supply ________, shifting the MP curve to the right, everything else held constant.

A) purchases; decreases B) sales; decreases C) purchases; increases D) sales; increases Answer: C Diff: 2 Type: MC Skill: Applied Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 26) If the Bank of Canada conducts open market ________, the money supply ________, shifting the MP curve to the left, everything else held constant.

A) purchases; decreases B) sales; decreases C) purchases; increases D) sales; increases Answer: B Diff: 2 Type: MC Skill: Applied Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 27) A decline in the money ________ shifts the MP curve to the ________, causing the interest rate to rise and output to fall, everything else held constant.

A) demand; right B) demand; left C) supply; right D) supply; left Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve

9 .

28) A decline in the money supply shifts the MP curve to the left, causing the interest rate to ________ and output to ________, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: B

Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 29) An increase in the money ________ shifts the MP curve to the ________, causing the interest rate to fall and output to rise, everything else held constant.

A) demand; right B) demand; left C) supply; right D) supply; left Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 30) An increase in the money supply shifts the MP curve to the right, causing the interest rate to ________ and output to ________, everything else held constant.

A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 31) When the central bank ________ the money supply, the MP curve shifts to the right, interest rates ________, and equilibrium aggregate output ________, everything else held constant.

A) increases; fall; increases B) increases; rise; decreases C) decreases; rise; decreases D) decreases; fall; increases Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 10 .

32) An autonomous decrease in money demand, other things equal, shifts the ________ curve to the ________.

A) IS; right B) IS; left C) MP; left D) MP; right Answer: D Diff: 2 Type: MC Skill: Applied Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 33) An autonomous increase in money demand, other things equal, shifts the ________ curve to the ________.

A) IS; right B) IS; left C) MP; left D) MP; right Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 34) As bonds become a riskier asset, the demand for money ________ and, all else constant, the equilibrium interest rate ________.

A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: A Diff: 3 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve

11 .

35) An autonomous rise in ________ shifts the MP curve to the ________, everything else held constant.

A) net exports; right B) net exports; left C) money demand; right D) money demand; left Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 36) Despite an expansionary monetary policy, an economy experiences a recession. Everything else held constant, the recession could occur in spite of the rightward shift of the MP curve if ________.

A) consumer confidence decreases sharply B) there is an investment boom C) the money supply increases D) taxes are cut Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 37) When there is a rise in inflation and the central bank does not increase liquidity in the banking system, households and firms would try to increase their money holdings by selling bonds, which would ________ nominal interest rates. Because in the short run inflation expectations are unchanged, nominal and real interest rates move together. This leads to a/an ________ monetary policy (MP) curve.

A) raise; downward-sloping B) lower; downward-sloping C) lower; upward-sloping D) raise; upward-sloping Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve

12 .

38) Based on the Taylor Principle, a central bank's endogenous response of decreasing interest rates when inflation falls ________.

A) causes an upward movement along the monetary policy curve B) causes a downward movement along the monetary policy curve C) shifts the monetary policy curve upward D) shifts the monetary policy curve downward Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 39) An autonomous tightening of monetary policy ________.

A) causes an upward movement along the monetary policy curve B) causes a downward movement along the monetary policy curve C) shifts the monetary policy curve upward D) shifts the monetary policy curve downward Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 40) An autonomous easing of monetary policy________.

A) causes an upward movement along the monetary policy curve B) causes a downward movement along the monetary policy curve C) shifts the monetary policy curve upward D) shifts the monetary policy curve downward Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 41) Inflationary pressures caused the FOMC to increase the federal funds rate by ¼ of a percentage point in June 2004, and by exactly the same amount at every subsequent FOMC meeting through June of 2006. These actions ________.

A) caused an upward movement along the monetary policy curve B) caused a downward movement along the monetary policy curve C) shifted the monetary policy curve upward D) shifted the monetary policy curve downward Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 13 .

42) When it became clear that the coronavirus was spreading out of control, the Bank of Canada decided to lower the overnight interest rate. This translated into ________.

A) a downward shift in the monetary policy curve B) an upward shift of the monetary policy curve C) a movement towards the left along the monetary policy curve D) a movement towards the right along the monetary policy curve Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 43) Changes in monetary policy that shift the monetary policy curve are known as ________ changes, while changes that are reflected in movements along the monetary policy curve are ________ adjustments to interest rates.

A) Taylor principle-driven; automatic B) automatic; automatic C) autonomous; automatic D) Taylor principle-driven; autonomous Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 44) Describe how the Bank of Canada would apply the Taylor principle.

Answer: To stabilize inflation, the Bank of Canada raises nominal rates by more than any rise in expected inflation so that real interest rates rise when there is a rise in inflation.

Diff: 2 Type: ES Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 45) Explain the difference between autonomous changes in monetary policy and the Taylor principle.

Answer: The Bank of Canada uses autonomous monetary policy to shift the monetary policy curve to change in inflation rate, for example. The Taylor principle changes the real interest rate which does not impact the monetary policy curve.

Diff: 2 Type: ES Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve

14 .

46) Describe monetary easing at the Bank of Canada during the 2007-2009 Financial Crisis.

Answer: The Bank pursued autonomous monetary policy easing because of the negative shock to the economy from the disruption to financial markets indicated that despite current high inflation rates, the economy was likely to weaken in the near future and the inflation rate would fall.

Diff: 2 Type: ES Skill: Recall Objective: 22.2 Define and illustrate the monetary policy (MP) curve, and explain shifts in the MP curve 22.3 The Aggregate Demand Curve 1) 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 Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 2) The aggregate demand curve is derived from the ________.

A) IS curve B) MP curve C) LM curve D) A and B only Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 3) Suppose the aggregate demand curve is given by Y = 12 - r then, if inflation increases by 1 percent ________.

A) aggregate output is unchanged B) aggregate output increases C) the nominal interest changes D) the real interest rate falls Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 15 .

4) Suppose the aggregate demand curve is given by Y = 12 - r then if the nominal interest rate increases by 1 percent ________.

A) aggregate output is unchanged B) aggregate output increases C) the nominal interest changes D) the real interest rate falls Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 5) Higher interest rates lead to reductions in the aggregate output due to ________.

A) reductions in autonomous consumer expenditure B) reductions in planned investment expenditure C) higher expected inflation D) higher employment Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 6) An increase in autonomous consumer expenditure causes the IS curve to shift ________ and the aggregate demand curve to shift ________. A) left; left B) left; right C) right; left D) right; right Answer: A

Diff: 2 Type: MC Skill: Applied Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 7) An increase in financial frictions causes the IS curve to shift ________ and the aggregate demand curve to shift ________. A) left; left B) left; right C) right; left D) right; right Answer: A

Diff: 2 Type: MC Skill: Applied Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 16 .

8) An increase in autonomous investment spending causes the IS curve to shift ________ and the aggregate demand curve to shift ________. A) left; left B) left; right C) right; left D) right; right Answer: A

Diff: 2 Type: MC Skill: Applied Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 9) An increase in government purchases causes the IS curve to shift ________ and the aggregate demand curve to shift ________.

A) left; left B) left; right C) right; left D) right; right Answer: Diff: 2 A Type: MC Skill: Applied Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 10) A decrease in taxes causes the IS curve to shift ________ and the aggregate demand curve to shift ________.

A) left; left B) left; right C) right; left D) right; right Answer: A Diff: 2 Type: MC Skill: Applied Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 11) In the IS and MP framework, an expansionary monetary policy causes aggregate output to ________ and the interest rate to ________, everything else held constant.

A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 17 .

12) Everything else held constant, a monetary expansion is characterized by ________ output and ________ interest rates. A) rising; rising B) rising; falling C) falling; rising D) falling; falling Answer: B

Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 13) A contractionary monetary policy shifts the MP curve to the ________, reducing ________, everything else held constant.

A) left; output and increasing interest rates B) left; both real output and interest rates C) right; both interest rates and real output D) right; interest rates and increasing real output Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 14) Everything else held constant, a monetary contraction is characterized by ________ output and ________ interest rates.

A) rising; rising B) rising; falling C) falling; rising D) falling; falling Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve

18 .

15) In the money market, a condition of excess demand for money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: C

Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 16) In the money market, a condition of excess supply of money can be eliminated by a ________ constant. in aggregate output or a ________ in the interest rate, everything else held A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: B

Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 17) In the IS-MP framework, an expansionary fiscal policy resulting from government purchases, causes aggregate output to ________ and the interest rate to ________, everything else held constant.

A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve

19 .

18) In the IS-MP framework a contractionary fiscal policy causes aggregate output to ________ and the interest rate to ________, everything else held constant.

A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 19) Everything else held constant, an expansionary ________ policy will cause the interest rate to rise, while an expansionary ________ policy will cause the interest rate to fall.

A) monetary; monetary B) monetary; fiscal C) fiscal; monetary D) fiscal; fiscal Answer: Diff: 2 C Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 20) Aggregate output and the interest rate are ________ related to government spending and are ________ related to taxes.

A) positively; positively B) positively; negatively C) negatively; positively D) negatively; negatively Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 21) An increase in spending that results from expansionary ________ policy causes the interest rate to ________, everything else held constant.

A) fiscal; rise B) fiscal; fall C) incomes; rise D) incomes; fall Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 20 .

22) If an economy experiences high interest rates and high unemployment, the ISLM framework predicts that ________ policy has been too ________.

A) fiscal; expansionary B) fiscal; contractionary C) monetary; expansionary D) monetary; contractionary Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 23) Which of the following statements concerning IS - MP analysis is true?

A) For a given change in taxes, the IS curve will shift less than for an equal change in government spending.

B) Changes in net exports arising from a change in interest rates causes a shift in the IS curve.

C) A fall in the money supply shifts the LM curve to the right.

D) Expansionary fiscal policy will cause the interest rate to fall.

Answer: A Diff: 3 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 24) A decline in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant.

A) up; left B) up; right C) down; left D) down; right Answer: C Diff: 1 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve

21 .

25) A decline in autonomous consumer expenditure causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

A) rise; left B) rise; right C) fall; left D) fall; right Answer: C Diff: 1 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 26) An increase in autonomous consumer expenditure causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

A) rise; left B) rise; right C) fall; left D) fall; right Answer: B Diff: 1 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 27) An increase in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. A) rise; MP; right B) rise; IS; right C) fall; MP; left D) fall; IS; left Answer: B

Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve

22 .

28) A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

A) rise; MP; right B) rise; IS; right C) fall; IS; left D) fall; MP; left Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 29) Everything else held constant, changes in the interest rate affect planned investment spending and hence the equilibrium level of output, but this change in investment spending ________.

A) merely causes a movement along the IS curve and not a shift B) is crowded out by higher taxes C) is crowded out by higher government spending D) is crowded out by lower consumer expenditures Answer: A Diff: 3 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 30) A rise in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.

A) rise; MP; right B) rise; IS; right C) fall; IS; left D) fall; MP; left Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve

23 .

31) A decline in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.

A) rise; MP; right B) rise; IS; right C) fall; IS; left D) fall; MP; left Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 32) A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant. A) up; rise B) up; fall C) down; rise D) down; fall Answer: D

Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 33) An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant. A) up; rise B) up; fall C) down; rise D) down; fall Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve

24 .

34) An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant.

A) up; left B) up; right C) down; left D) down; right Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 35) A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant.

A) up; left B) up; right C) down; left D) down; right Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 36) A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

A) rise; left B) rise; right C) fall; left D) fall; right Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve

25 .

37) An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

A) rise; left B) rise; right C) fall; left D) fall; right Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 38) A decrease in autonomous planned investment spending, other things equal, shifts the ________ curve to the ________.

A) IS; right B) IS; left C) MP; left D) MP; right Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 39) An increase in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

A) rise; MP; right B) rise; IS; right C) fall; IS; left D) fall; MP; left Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve

26 .

40) A reduction in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

A) rise; MP; right B) fall; IS; left C) fall; MP; left D) rise; IS; right Answer: B Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 41) A decline in taxes ________ consumer expenditure and shifts the ________ curve to the ________, everything else held constant.

A) raises; MP; right B) lowers; IS; left C) raises; IS; right D) lowers; MP; left Answer: C Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 42) If Canadian college students decide that drinking Mexican-brewed beer helps one get noticed, net exports will tend to fall, causing aggregate demand to ________ and the ________ curve to shift to the left, everything else held constant.

A) fall; MP B) fall; IS C) rise; MP D) rise; IS Answer: B Diff: 2 Type: MC Skill: Applied Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve

27 .

43) Other things equal, a decrease in autonomous consumption shifts the ________ curve to the ________.

A) IS; right B) IS; left C) MP; left D) MP; right Answer: B Diff: 1 Type: MC Skill: Applied Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 44) A decline in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held

constant.

A) up; rise B) up; fall C) down; rise D) down; fall Diff: 1 D Type: MC Answer: Skill: Applied Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 45) The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to raise ________ interest rates, thereby ________ the level of equilibrium aggregate output., everything else held constant.

A) real; lowering B) real; raising C) nominal; lowering D) nominal; raising Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve

28 .

46) The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to ________ real interest rates, thereby ________ the level of equilibrium aggregate output, everything else held constant.

A) raise; lowering B) raise; raising C) reduce; lowering D) reduce; raising Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 47) Everything else held constant, an increase in government spending will cause ________.

A) aggregate demand to increase B) aggregate demand to decrease C) the quantity of aggregate demand to increase D) the quantity of aggregate demand to decrease Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 48) Everything else held constant, an autonomous easing of monetary policy will cause ________.

A) the quantity of aggregate demand to increase B) the quantity of aggregate demand to decrease C) aggregate demand to decrease D) aggregate demand to increase Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 49) Everything else held constant, an autonomous tightening of monetary policy will cause ________.

A) the quantity of aggregate demand to increase B) the quantity of aggregate demand to decrease C) aggregate demand to increase D) aggregate demand to decrease Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 29 .

50) Everything else held constant, an autonomous easing of monetary policy will cause ________.

A) aggregate demand to increase B) aggregate demand to decrease C) the quantity of aggregate demand to increase D) the quantity of aggregate demand to decrease Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 51) Everything else held constant, an increase in autonomous consumer spending will cause the IS curve to shift to the ________ and aggregate demand will ________.

A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 52) Everything else held constant, a decrease in autonomous consumer spending will cause the IS curve to shift to the ________ and aggregate demand will ________.

A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve

30 .

53) Everything else held constant, an increase in autonomous planned investment spending will cause the IS curve to shift to the ________ and aggregate demand will ________.

A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 54) Everything else held constant, a decrease in autonomous planned investment spending will cause the IS curve to shift to the ________ and aggregate demand will ________.

A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 55) Everything else held constant, a decrease in net taxes will cause the IS curve to shift to the ________ and aggregate demand will ________.

A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 56) Everything else held constant, an increase in net taxes will cause the IS curve to shift to the ________ and aggregate demand will ________.

A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 31 .

57) Everything else held constant, an appreciation of the domestic currency will cause the IS curve to shift to the ________ and aggregate demand will ________.

A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 58) Everything else held constant, a depreciation of the domestic currency will cause the IS curve to shift to the ________ and aggregate demand will ________.

A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: A Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 59) Everything else held constant, a decrease in government spending will cause the IS curve to shift to the ________ and aggregate demand will ________.

A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D Diff: 2 Type: MC Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve

32 .

60) Using the IS - MP model, explain the effects of a monetary expansion combined with a fiscal contraction. How do the equilibrium level of output and interest rate change?

Answer: The monetary expansion shifts the LM curve to the right which by itself would cause the interest rate to decrease and aggregate output to increase. The fiscal contraction shifts the IS curve to the left which by itself would cause the interest rate to decrease and aggregate output to decrease. Therefore, the equilibrium interest rate unambiguously falls, while the effect on output is indeterminate.

Diff: 2 Type: ES Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 61) List the six factors that cause both the IS and the aggregate demand curve to shift.

Answer: 1. Autonomous consumption expenditure 2. Autonomous investment spending 3. Government purchases 4. Taxes 5. Autonomous net exports 6. Financial frictions.

Diff: 2 Type: ES Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 62) How does autonomous tightening of monetary policy impact the aggregate demand curve.

Answer: A rise in the real interest rate at any given inflation, shifts the monetary policy curve upward. The higher interest rates leads to lower output due to a decline in investment and net exports which lowers aggregate output and therefore the aggregate demand curve to the left.

Diff: 2 Type: ES Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve 63) Describe the relationship between the IS and MP curves and the aggregate demand curve.

Answer: Any factor that shifts the IS curve shifts the aggregate demand curve in the same direction. When the MP curve shifts up, the aggregate demand curve shifts left; when the MP curve shifts down the aggregate demand curve shifts right.

Diff: 2 Type: ES Skill: Recall Objective: 22.3 Explain why the aggregate demand (AD) curve slopes downward, and explain shifts in the AD curve

33 .

Economics of Money, Banking, and Fin. Markets, 8Ce (Mishkin) Chapter 23 Aggregate Demand and Supply Analysis 23.1 Business Cycles and Inflation 1) Aggregate output (real GDP) can be divided into two components: the long-run trend, which is referred to as ________ and fluctuations around this trend, which is referred to as ________.

A) potential output; the business cycle B) the business cycle; potential output C) the business cycle; output gap D) potential output; inflation Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.1 Describe the variables that aggregate demand and supply analysis are trying to explain 2) In the second quarter of 2020, Canadian aggregate output was about 10% below potential output, indicating that the output gap was ________.

A) -10% B) 10% C) -10% × GDP D) 10% × GDP Answer: A Diff: 1 Type: MC Skill: Recall Objective: 23.1 Describe the variables that aggregate demand and supply analysis are trying to explain 3) In the second quarter of 2020, real GDP was $1.84 trillion, while potential GDP was $2.05 trillion. What is the calculation for the output gap for that quarter?

A) -10% B) 10% C) -$0.21 trillion D) $0.21 trillion Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.1 Describe the variables that aggregate demand and supply analysis are trying to explain

1 .

4) The 2007—2009 recession caused by the global financial crisis is known as the ________.

A) Great Recession B) Great Depression C) Great Moderation D) Covid-19 Recession Answer: A Diff: 1 Type: MC Skill: Recall Objective: 23.1 Describe the variables that aggregate demand and supply analysis are trying to explain 5) During business cycle booms, the output gap ________ and the unemployment rate ________. A) rises; declines B) falls; declines C) rises; increases D) falls; increases Answer: A

Diff: 1 Type: MC Skill: Recall Objective: 23.1 Describe the variables that aggregate demand and supply analysis are trying to explain 6) The formula for the output gap is A) (Real GDP — Potential GDP) / Potential GDP B) (Nominal GDP — Potential GDP) / Potential GDP C) (Nominal GDP — Real GDP) / Real GDP D) (Potential GDP — Real GDP) / Real GDP Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.1 Describe the variables that aggregate demand and supply analysis are trying to explain

2 .

23.2 Aggregate Demand 1) The aggregate demand curve is the total quantity of an economy's ________.

A) intermediate goods demanded at different inflation rates B) intermediate goods demanded at a particular inflation rate C) final goods and services demanded at a particular inflation rate D) final goods and services demanded at different inflation rates Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 2) Demand shocks are based on the ________ based factors that can shift the aggregate demand curve.

A) seven B) six C) five D) eight Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 3) The downward slope of the aggregate demand curve is due to ________ and ________.

A) planned investment spending; net exports B) planned investment spending; financial frictions C) net exports; financial frictions D) financial frictions; net transfers Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 4) The total quantity of an economy's final goods and services demanded at different inflation rates is ________.

A) the aggregate supply curve B) the aggregate demand curve C) the Phillips curve D) the aggregate expenditure function Answer: B Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 3 .

5) One way to derive aggregate demand is by looking at its four component parts, which are ________.

A) consumer expenditures, planned investment spending, government spending, and net exports B) consumer expenditures, actual investment spending, government spending, and net exports C) consumer expenditures, planned investment spending, government spending, and gross exports D) consumer expenditures, planned investment spending, government spending, and taxes Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 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 investment spending, and a decline in aggregate output demand B) a decline in real interest rates, a decrease in investment spending, and an increase in aggregate output demand C) a decline in real interest rates, an increase in investment spending, and an increase in aggregate output demand D) an increase in real interest rates, a decline in investment spending, and a decline in aggregate output demand Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 7) By looking at aggregate demand via its component parts, we can conclude that the aggregate demand curve is downward sloping because ________.

A) a lower inflation rate causes the real interest rate to fall, and stimulates planned investment spending B) a lower inflation rate causes the real interest rate to rise, and stimulates planned investment spending C) a higher inflation rate causes the real interest rate to fall, and stimulates planned investment spending D) a higher inflation rate causes the real interest rate to rise, and stimulates planned investment spending Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it

4 .

8) Everything else held constant, an autonomous monetary policy easing ________ aggregate ________.

A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 9) Everything else held constant, an autonomous monetary policy tightening ________ aggregate ________.

A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: B Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 10) Everything else held constant, when financial frictions increase, the real cost of borrowing ________ so that planned investment spending ________ at any given inflation rate.

A) increases; falls B) decreases; falls C) decreases; rises D) increases; rises Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 11) Everything else held constant, an increase in financial frictions ________ aggregate ________.

A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: B Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 5 .

12) Everything else held constant, an increase in government spending ________ aggregate ________.

A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 13) Everything else held constant, a decrease in government spending ________ aggregate ________.

A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: B Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 14) Everything else held constant, a decrease in net taxes ________ aggregate ________.

A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 15) Everything else held constant, an increase in net taxes ________ aggregate ________.

A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: B Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 6 .

16) Everything else held constant, a balanced budget increase in government spending (that is, an increase in government spending that is matched by an identical increase in net taxes) will ________.

A) increase aggregate demand, but not by as much as if just government spending increases B) increase aggregate demand by more than if just government spending increases C) not affect aggregate demand D) decrease aggregate demand Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 17) Everything else held constant, an increase in net exports ________ aggregate ________.

A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 18) Everything else held constant, a decrease in net exports ________ aggregate ________.

A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: B Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 19) Everything else held constant, an increase in planned investment expenditure ________ aggregate ________.

A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 7 .

20) Everything else held constant, a decrease in planned investment expenditure ________ aggregate ________.

A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: B Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 21) Everything else held constant, aggregate demand increases when ________.

A) taxes are cut B) government spending is reduced C) animal spirits decrease D) the money supply is reduced Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 22) Everything else held constant, aggregate demand increases when ________.

A) net exports decrease B) taxes increase C) planned investment spending increases D) the money supply decreases Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 23) Everything else held constant, which of the following does not cause aggregate demand to increase?

A) An increase in net exports B) An increase in government spending C) An increase in taxes D) An increase in consumer optimism Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it

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24) Explain through the component parts of aggregate demand why the aggregate demand curve slopes down with respect to the inflation rate. Be sure to discuss two channels through which changes in inflation rates affect demand.

Answer: A fall in the inflation rate lowers real interest rates. Lower rates increase investment, thereby increasing aggregate demand. Lower interest rates also cause depreciation of the domestic currency, increasing net exports and aggregate demand.

Diff: 2 Type: ES Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 25) What are the factors that can shift the aggregate demand curve to the right?

Answer: These factors are: a. An increase in the money supply b. An increase in government spending c. A decrease in taxes d. An increase in net exports e. An increase in consumer optimism f. An increase in business optimism Diff: 2 Type: ES Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 26) Why is the aggregate demand curve downward sloping?

Answer: The aggregate demand function AD is downward sloping as a decrease in the price level will make the real money supply M/P to increase, which in turn will reduce the nominal interest rate. The fall in the interest rate will make more investment plans profitable, thus increasing spending in planned investment, which will increase aggregate demand.

Diff: 2 Type: ES Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it 27) Explain through the component parts of aggregate demand why the aggregate demand curve slopes down with respect to the price level. Be sure to discuss two channels through which changes in prices affect demand.

Answer: A fall in the price level increases the real value of a fixed nominal money supply. This increase in the real money supply lowers interest rates. Lower rates increase investment, thereby increasing aggregate demand. Lower interest rates also cause depreciation of the domestic currency, increasing net exports and aggregate demand.

Diff: 2 Type: ES Skill: Recall Objective: 23.2 Summarize and illustrate the aggregate demand curve and the factors that shift it

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23.3 Aggregate Supply 1) The aggregate supply curve shows the relationship between ________.

A) the level of inputs and aggregate output B) the price level and the level of inputs C) the wage rate and the level of employment D) the price level and the level of aggregate output supplied Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 2) The aggregate supply curve is ________.

A) the total quantity of raw materials offered for sale at different prices B) the total quantity of final goods and services offered for sale at the current price level C) the total quantity of final goods and services offered for sale at different price levels D) the total quantity of intermediate and final goods and service offered for sale at different price levels Answer: C Diff: 1 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 3) Economists believe the natural rate of unemployment is approximately ________ percent.

A) seven B) six C) five D) four Answer: A Diff: 1 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 4) Some unemployment is always present due to the ________ and ________ components, which are greater than zero.

A) frictional; structural B) frictional; cyclical C) structural; cyclical D) involuntary; frictional Answer: A Diff: 1 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves

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5) The total quantity of final goods and services offered for sale at different price levels is ________.

A) the aggregate supply curve B) the aggregate demand curve C) the 45° line D) A and C only Answer: A Diff: 1 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 6) The long-run rate of unemployment to which an economy always gravitates is the ________.

A) normal rate of unemployment B) natural rate of unemployment C) neutral rate of unemployment D) inflationary rate of unemployment Answer: B Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 7) The long-run aggregate supply curve is ________.

A) a vertical line through the non-inflationary rate of output B) a vertical line through the current level of output C) a vertical line through the natural rate level of output D) a horizontal line through the current level of output Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 8) The long-run aggregate supply curve is a vertical line passing through ________.

A) the natural rate of output B) the natural-rate price level C) the actual rate of unemployment D) the expected rate of inflation Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves

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9) The short-run aggregate supply curve is upward sloping because in the short run, costs of many factors that go into producing goods and services are ________, meaning that the price for a unit of output will ________ relative to input prices and the profit per unit will rise. A) fixed; rise B) fixed; fall C) flexible; rise D) flexible; fall Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 10) The positively sloped short-run aggregate supply curve reflects the assumption that labour prices are ________.

A) more flexible than output prices B) less flexible than output prices C) fixed in the long run D) perfectly flexible in both the short run and the long run Answer: B Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 11) Everything else held constant, an increase in the cost of production ________ aggregate ________.

A) increases; demand B) decreases; demand C) increases; supply D) decreases; supply Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 12) Everything else held constant, a decrease in the cost of production ________ aggregate ________.

A) increases; demand B) decreases; demand C) increases; supply D) decreases; supply Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves

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13) Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, increasing short-run aggregate supply.

A) above; fall B) above; rise C) below; fall D) below; rise Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 14) Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, decreasing short-run aggregate supply.

A) above; fall B) above; rise C) below; fall D) below; rise Answer: B Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 15) Everything else held constant, when actual output exceeds the natural rate of output ________ aggregate supply ________.

A) short-run; decreases B) short-run; increases C) long-run; increases D) long-run; decreases Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 16) If workers demand and receive higher real wages, the cost of production ________ and the short-run aggregate supply curve shifts ________.

A) rises; leftward B) rises; rightward C) falls; leftward D) falls; rightward Answer: A Diff: 2 Type: MC Skill: Applied Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves

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17) Everything else held constant, if workers expect an increase in the price level, ________ aggregate supply ________.

A) long-run; increases B) long-run; decreases C) short-run; decreases D) short-run; increases Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 18) Everything else held constant, a change in workers' expectations about the inflation rate will cause ________ to change.

A) aggregate demand B) short-run aggregate supply C) the production function D) long-run aggregate supply Answer: B Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 19) A decrease in the availability of raw materials that increases the price level is called a ________ shock.

A) unfavourable demand B) favourable demand C) unfavourable supply D) favourable supply Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 20) An unfavourable supply shock causes ________ to ________.

A) aggregate demand; increase B) aggregate demand; decrease C) short-run aggregate supply; decrease D) short-run aggregate supply; increase Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves

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21) A favourable supply shock causes ________ to ________.

A) aggregate demand; increase B) aggregate demand; decrease C) short-run aggregate supply; decrease D) short-run aggregate supply; increase Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 22) 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 increase led by workers C) Expectations of a higher inflation rate D) A technological improvement that increases worker productivity Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 23) What is the shape of the long-run aggregate supply curve? Why? Answer: The long-run aggregate supply curve is vertical. The amount of output that can be produced by the economy in the long-run is determined by the amount of capital, the amount of labour supplied at full employment and the available technology. Some unemployment cannot be eliminated as it is frictional or structural. Thus, full employment is not at zero unemployment but is rather at a level above zero, at which the demand for labor equals the supply of labour. This natural rate of unemployment is where the economy gravitates in the long-run. The level of output produced at the natural rate of unemployment is called the natural rate of output; it is where the economy settles in the long-run for any price level. Hence the long-run aggregate supply curve (LRAS) is vertical at the natural rate of output.

Diff: 3 Type: ES Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves

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24) Explain why the short-run aggregate supply curve has a positive slope.

Answer: Because wages and prices take time to adjust to economic conditions, we say that they are sticky. The goal of businesses is to maximize profits made on each unit of output. If profit rises, more output will be produced, and the quantity of output supplied will increase. In the short-run, costs of many factors that go into producing goods and services are fixed. Wages for example, are often fixed for periods of time due to labor contracts, and raw materials are often bought by firms using long-term contracts that fix the price. Since the costs of production are fixed in the short-run, when the price level rises, the price of a unit of output will rise while the costs associated with it remain the same, thus increasing profit per unit produced. Firms will increase production, and the quantity of aggregate output rises as the price level rises in the short-run, resulting in an upward-sloping aggregate supply curve Diff: 2 Type: ES Skill: Recall Objective: 23.3 Illustrate and interpret the short-run and long-run aggregate supply curves 23.4 Shifts in the Aggregate Supply Curves 1) The long-run aggregate supply curve shifts to the right when there is ________.

A) a decrease in the total amount of capital in the economy B) a decrease in the total amount of labor supplied in the economy C) a decrease in the available technology D) a decline in the natural rate of unemployment Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.4 Illustrate and interpret shifts in the short-run and long-run aggregate supply curves 2) The long-run aggregate supply curve shifts to the right when there is ________.

A) an increase in the total amount of capital in the economy B) an increase in the available technology C) a decrease in the natural rate of unemployment D) all of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.4 Illustrate and interpret shifts in the short-run and long-run aggregate supply curves

16 .

3) The short-run aggregate supply curve shifts to the right when ________.

A) output gap is higher B) output gap is lower C) expected inflation is higher D) expected inflation is lower Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.4 Illustrate and interpret shifts in the short-run and long-run aggregate supply curves 4) Which of the followings does not shift the short-run aggregate supply curve?

A) Supply shocks B) Persistent positive output gap C) Changes in expected inflation D) An increase in output gap Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.4 Illustrate and interpret shifts in the short-run and long-run aggregate supply curves

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23.5 Equilibrium in Aggregate Supply and Demand Analysis 1) The fact that an economy always returns to the natural rate level of output is known as ________.

A) the excess demand hypothesis B) the price-adjustment mechanism C) the self-correcting mechanism D) the natural rate of unemployment Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism 2) Assuming the economy is starting at the natural rate of output and everything else held constant, the effect of ________ in aggregate ________ is a rise in both the inflation rate and output in the short-run, but in the long-run the only effect is a rise in the inflation rate.

A) a decrease; supply B) a decrease; demand C) an increase; supply D) an increase; demand Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism 3) The aggregate demand-aggregate supply framework indicates that the long-run effect of a ________ in the money supply is an increase in ________, everything else held constant.

A) fall; aggregate output B) fall; the inflation rate C) rise; aggregate output D) rise; the inflation rate Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism

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4) 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 Answer: B Diff: 2 Type: MC Skill: Applied Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism 5) 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 long run and ________ in the inflation rate in the short run. A) an increase; an increase B) a decrease; a decrease C) no change; a decrease D) no change; no change Answer: C

Diff: 2 Type: MC Skill: Applied Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism 6) 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 and ________ in the aggregate price level in the long run.

A) an increase; an increase B) a decrease; a decrease C) a decrease; an increase D) no change; no change Answer: D Diff: 2 Type: MC Skill: Applied Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism

19 .

7) In deriving the aggregate demand curve a ________ in the price level leads to ________ in the real money supply because the nominal quantity of dollars can purchase ________ goods and services.

A) decline; an increase; more B) decline; a decrease; more C) rise; an increase; fewer D) rise; a decrease; more Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism 8) In deriving the aggregate demand curve a ________ price level ________ the money supply in real terms, raises interest rates, and ________ the equilibrium level of aggregate output.

A) higher; reduces; raises B) higher; reduces; lowers C) lower; increases; raises D) lower; increases; lowers Diff: 2 B Type: MC Answer: Skill: Applied Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism 9) The aggregate demand curve is downward sloping because a decrease in the price level increases the ________ money supply which ________ interest rates and increases the equilibrium level of aggregate output, everything else held constant.

A) real; lowers B) real; raises C) nominal; lowers D) nominal; raises Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism

20 .

10) The aggregate demand curve has the usual downward slope, since a ________ price level ________ the real money supply, raises interest rates, and lowers the equilibrium level of aggregate output, everything else held constant.

A) lower; reduces B) lower; increases C) higher; reduces D) higher; increases Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism 11) The aggregate demand curve has the usual downward slope, since a higher price level reduces the real money supply, ________ interest rates, and ________ the equilibrium level of aggregate output, everything else held constant.

A) raises; lowers B) raises; raises C) lowers; lowers D) lowers; raises Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism 12) Everything else held constant, an increase in government spending will cause ________.

A) aggregate demand to increase B) aggregate demand to decrease C) the quantity of aggregate demand to increase D) the quantity of aggregate demand to decrease Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism 13) Everything else held constant, expansionary monetary policies will cause ________.

A) the quantity of aggregate demand to increase B) the quantity of aggregate demand to decrease C) aggregate demand to decrease D) aggregate demand to increase Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism 21 .

14) Everything else held constant, contractionary monetary policies will cause ________.

A) the quantity of aggregate demand to increase B) the quantity of aggregate demand to decrease C) aggregate demand to increase D) aggregate demand to decrease Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism 15) Everything else held constant, a purchase of government securities by the Bank of Canada will cause ________.

A) aggregate demand to increase B) aggregate demand to decrease C) the quantity of aggregate demand to increase D) the quantity of aggregate demand to decrease Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism 16) Using the aggregate demand-aggregate supply model, explain and demonstrate graphically the short-run and long-run effects of an increase in the money supply.

Answer: An increase in the money supply increases aggregate demand. In the short run both the price level and real output increase. In the long run, wages adjust, decreasing short-run aggregate supply, raising inflation further and reducing real output until the economy returns to the natural level of output. The long-run result is to only increase the inflation rate.

Diff: 3 Type: ES Skill: Recall Objective: 23.5 Illustrate and interpret the short-run and long-run equilibria and the role of the self-correcting mechanism

22 .

23.6 Changes in Equilibrium: Aggregate Demand Shocks 1) 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 long 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 Answer: D Diff: 2 Type: MC Skill: Applied Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand 2) 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 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 Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand 3) 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 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 Answer: C Diff: 2 Type: MC Skill: Applied Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand

23 .

4) Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence 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 Answer: B Diff: 2 Type: MC Skill: Applied Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand 5) Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the long 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 Answer: D Diff: 2 Type: MC Skill: Applied Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand 6) Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Bank of Canada will cause ________ in real GDP 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 Answer: A Diff: 2 Type: MC Skill: Applied Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand

24 .

7) Suppose the economy is producing at the natural rate of output. An open market purchase of bonds 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) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: C Diff: 2 Type: MC Skill: Applied Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand 8) 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 Answer: B Diff: 2 Type: MC Skill: Applied Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand 9) Suppose the Canadian economy is producing at the natural rate of output. A depreciation of the Canadian dollar will cause ________ in real GDP in the short run and ________ in the inflation rate in the short run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)

A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: A Diff: 2 Type: MC Skill: Applied Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand

25 .

10) Suppose the Canadian economy is producing at the natural rate of output. A depreciation of the Canadian dollar will cause ________ in real GDP in the short run and ________ in the inflation rate in the long run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)

A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: C Diff: 2 Type: MC Skill: Applied Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand 11) Suppose the Canadian economy is producing at the natural rate of output. An appreciation of the Canadian dollar will cause ________ in real GDP in the short run and ________ in the aggregate price level in the short run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.)

A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: B Diff: 2 Type: MC Skill: Applied Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand 12) Suppose the Canadian economy is producing at the natural rate of output. An appreciation of the Canadian dollar will cause ________ in real GDP in the short run and ________ in the aggregate price level in the long run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.)

A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: D Diff: 2 Type: MC Skill: Applied Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand

26 .

13) Suppose the economy is producing below the natural rate of output and the government is suffering from large budget deficits. To deal with the deficit problem, suppose the government takes a policy action to reduce the size of the deficits. This policy action will cause ________ in the unemployment rate in the short run and ________ in the aggregate price level in the short run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) a decrease; an increase D) an increase; a decrease Answer: D

Diff: 2 Type: MC Skill: Applied Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand 14) According to aggregate demand and supply analysis, a positive demand shock caused by a tightening of monetary policy during the 1981 to 1985 period had by 1983 when compared to 1981 ________.

A) increased aggregate output, lowered unemployment, and raised inflation B) decreased aggregate output, raised unemployment, and raised inflation C) increased aggregate output, lowered unemployment, and lowered inflation D) decreased aggregate output, raised unemployment, and lowered inflation Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand 15) According to aggregate demand and supply analysis, a positive demand shock caused by a tightening of monetary policy during the 1981 to 1985 period had by 1985 when compared to 1983 ________.

A) increased aggregate output, lowered unemployment, and raised inflation B) decreased aggregate output, raised unemployment, and raised inflation C) increased aggregate output, lowered unemployment, and lowered inflation D) decreased aggregate output, raised unemployment, and lowered inflation Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.6 Illustrate and interpret the short-run and long-run effects of a shock to aggregate demand

27 .

23.7 Changes in Equilibrium: Aggregate Supply (Inflation) Shocks 1) Suppose the economy is producing at the natural rate of output and the government passes legislation that severely restricts a company's ability to reduce production costs via outsourcing.

Everything else held constant, this policy action will cause ________ in the unemployment rate in the short run and ________ in the aggregate price level in the short run.

A) an increase; an increase B) a decrease; a decrease C) a decrease; an increase D) no change; no change Answer: A Diff: 2 Type: MC Skill: Applied Objective: 23.7 Illustrate and interpret the short-run and long-run effects of temporary and permanent supply shocks 2) 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 aggregate price level 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 Answer: A Diff: 2 Type: MC Skill: Applied Objective: 23.7 Illustrate and interpret the short-run and long-run effects of temporary and permanent supply shocks

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3) In the figure above, a ________ supply shock will shift the aggregate supply curve to AS2 and the economy will return to the long run equilibrium at point ________.

A) negative; 1 B) negative; 3 C) positive; 1 D) positive; 3 Answer: A Diff: 3 Type: MC Skill: Applied Objective: 23.7 Illustrate and interpret the short-run and long-run effects of temporary and permanent supply shocks 4) In the figure above, the shift of the aggregate supply curve from AS1 to AS2 and the following shift back to AS1 is called ________.

A) a self-correcting mechanism B) a self-fulfilling prophecy C) a self-adjusting mechanism D) a long-run correcting mechanism Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.7 Illustrate and interpret the short-run and long-run effects of temporary and permanent supply shocks 29 .

5) In the figure above, at point 2, the shift of the aggregate supply curve from AS1 to AS2 can be the result of ________ wages that ________ production cost.

A) increasing; increase B) increasing; reduce C) decreasing; decrease D) decreasing; increase Answer: A Diff: 2 Type: MC Skill: Applied Objective: 23.7 Illustrate and interpret the short-run and long-run effects of temporary and permanent supply shocks 6) In the figure above, an equilibrium output greater than Yn is ________ attainable in the ________-run.

A) only; short B) only; long C) not; short D) always; long Answer: A Diff: 2 Type: MC Skill: Applied Objective: 23.7 Illustrate and interpret the short-run and long-run effects of temporary and permanent supply shocks 7) In the figure above, output levels below Yn will cause the aggregate ________ function to shift to the ________.

A) supply; right B) supply; left C) demand; left D) A and C only Answer: A Diff: 2 Type: MC Skill: Applied Objective: 23.7 Illustrate and interpret the short-run and long-run effects of temporary and permanent supply shocks

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8) A theory of aggregate economic fluctuations called real business cycle theory holds that ________.

A) changes in the real money supply are the only demand shocks that affect the natural rate of output B) aggregate demand shocks do affect the natural rate of output C) aggregate supply shocks do affect the natural rate of output D) changes in net exports are the only demand shocks that affect the natural rate of output Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.7 Illustrate and interpret the short-run and long-run effects of temporary and permanent supply shocks 9) Because shifts in aggregate demand are not viewed as being particularly important to aggregate output fluctuations, they do not see much need for activist policy to eliminate high unemployment. "They" refers to proponents of ________.

A) the natural rate hypothesis B) monetarism C) the Phillips curve model D) real business cycle theory Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.7 Illustrate and interpret the short-run and long-run effects of temporary and permanent supply shocks 10) This theory views shocks to tastes (workers' willingness to work, for example) and technology (productivity) as the major driving forces behind short-run fluctuations in the business cycle because these shocks lead to substantial short-run fluctuations in the natural rate of output.

A) The natural rate hypothesis B) Hysteresis C) Real business cycle theory D) The Phillips curve model Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.7 Illustrate and interpret the short-run and long-run effects of temporary and permanent supply shocks

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11) According to aggregate demand and supply analysis, the negative supply shocks of 19731975 and 1978-1980 had the effect of ________.

A) increasing aggregate output, lowering unemployment, and raising the price level B) decreasing aggregate output, raising unemployment, and raising the price level C) increasing aggregate output, raising unemployment, and raising the price level D) decreasing aggregate output, raising unemployment, and lowering the price level Answer: B Diff: 2 Type: MC Skill: Applied Objective: 23.7 Illustrate and interpret the short-run and long-run effects of temporary and permanent supply shocks 12) According to aggregate demand and supply analysis, a favourable supply shock caused by a fall in import prices has the effect of ________.

A) increasing aggregate output, lowering unemployment, and raising inflation B) decreasing aggregate output, raising unemployment, and raising inflation C) increasing aggregate output, lowering unemployment, and lowering inflation D) decreasing aggregate output, raising unemployment, and lowering inflation Answer: C Diff: 2 Type: MC Skill: Applied Objective: 23.7 Illustrate and interpret the short-run and long-run effects of temporary and permanent supply shocks

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13) Explain and demonstrate graphically the effects of a negative supply shock. What happens to the economy if no action is taken? What happens if monetary and or fiscal policy is used to reduce unemployment?

Answer: The supply shock shifts the aggregate supply curve back to AS', reducing real output and raising the price level. If no action is taken, the supply curve eventually adjusts back to the original position. The economy adjusts from 1 to 4 back to 1. If policy actions are implemented, aggregate demand increases to AD', and the economy returns to full employment at a higher price level. The path is from 1 to 4 to 3.

Diff: 2 Type: ES Skill: Applied Objective: 23.7 Illustrate and interpret the short-run and long-run effects of temporary and permanent supply shocks

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23.8 Conclusions from Aggregate Demand and Supply Analysis 1) According to aggregate demand and supply analysis, the rising oil prices coupled with the subprime financial crisis in 2007–2009 in the U.S. caused the unemployment rate to ________ and the level of real aggregate output to ________.

A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 2 Type: MC Skill: Recall Objective: 23.8 Summarize the conclusions from aggregate demand and supply analysis 2) The run-up of oil prices in 2007 led to ________.

A) a negative supply shock B) a negative demand shock C) a positive supply shock D) a positive negative shock Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.8 Summarize the conclusions from aggregate demand and supply analysis 3) Which of the following does not cause a shift in the aggregate demand curve, all thing equal?

A) Changes in the real interest rate B) Taxes C) Autonomous net exports D) The self-correcting mechanism Answer: D Diff: 2 Type: MC Skill: Recall Objective: 23.8 Summarize the conclusions from aggregate demand and supply analysis 4) The increase in oil prices in the U.S. that occurred in 2007–2008 led to a ________ in the ________ aggregate supply curve.

A) fall; short run B) fall; long run C) rise; short run D) rise; long run Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.8 Summarize the conclusions from aggregate demand and supply analysis

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5) The Lehman Brothers bankruptcy caused a ________ ________ shock.

A) negative; demand B) negative; supply C) positive; demand D) positive; supply Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.8 Summarize the conclusions from aggregate demand and supply analysis 6) As a result of the coronavirus in Canada, the unemployment rate went from 5.7% in the fourth quarter of 2019 to ________ in the second quarter of 2020, while at the same time the inflation rate went from 2.1% to ________.

A) 13%; 0% B) 8%; 0% C) 8%; 5% D) 13%; 5% Answer: A Diff: 2 Type: MC Skill: Recall Objective: 23.8 Summarize the conclusions from aggregate demand and supply analysis 7) The Covid-19—driven recession of year 2020 A) was triggered by a massive aggregate demand shock that induced a massive aggregate supply shock.

B) was only the result of a massive aggregate demand shock.

C) was triggered by a massive aggregate supply shock that induced a massive aggregate demand shock.

D) was only the result of a massive aggregate supply shock.

Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.8 Summarize the conclusions from aggregate demand and supply analysis 8) As a result of Covid-19 in Canada, the aggregate demand curve shifted to the ________ and the short-run aggregate supply curve shifted to the ________ which, combined with the drop in the price of oil, resulted in ________ A) left; left; an increase in inflation.

B) right; left; an increase in inflation.

C) left; left; a decrease in inflation.

D) left; right; a decrease in inflation.

Answer: C Diff: 2 Type: MC Skill: Recall Objective: 23.8 Summarize the conclusions from aggregate demand and supply analysis

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Economics of Money, Banking, and Fin. Markets, 8Ce (Mishkin) Chapter 24 Monetary Policy Theory 24.1 Response of Monetary Policy to Shocks 1) Policymakers cannot achieve both price stability and economic activity stability when facing ________.

A) supply shocks B) monetary policy shocks C) demand shocks D) all of the above Answer: A Diff: 1 Type: MC Skill: Recall Objective: 24.1 Illustrate and explain the policy choices that monetary policymakers face under the conditions of aggregate demand shocks and supply shocks 2) The coronavirus pandemic began in March 2020 that caused both consumer and business spending to fall ________. A) shifted the aggregate demand curve to the right B) shifted the aggregate demand curve to the left C) shifted the aggregate supply curve to the right D) shifted the aggregate supply curve to the left Answer: B

Diff: 1 Type: MC Skill: Recall Objective: 24.1 Illustrate and explain the policy choices that monetary policymakers face under the conditions of aggregate demand shocks and supply shocks 3) When the economy is hit by a negative demand shock and the central bank does not respond by changing the autonomous component of monetary policy, then, once the adjustment process is over ________.

A) inflation will be lower B) aggregate output will be at its potential C) aggregate output index will be lower D) inflation will not change E) both A and B Answer: E Diff: 2 Type: MC Skill: Recall Objective: 24.1 Illustrate and explain the policy choices that monetary policymakers face under the conditions of aggregate demand shocks and supply shocks

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4) When the economy is hit by a negative demand shock and the central bank pursues policies to increase aggregate demand to its initial level, then, once the adjustment process is over ________.

A) inflation will be lower B) aggregate output index will be unchanged C) output will be lower D) inflation will be unchanged E) both B and D Answer: E Diff: 2 Type: MC Skill: Recall Objective: 24.1 Illustrate and explain the policy choices that monetary policymakers face under the conditions of aggregate demand shocks and supply shocks 5) When the economy is hit by a negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then in the long run ________.

A) inflation will be lower B) aggregate output index will be unchanged C) output will be lower D) inflation will be unchanged E) both B and D Answer: E Diff: 2 Type: MC Skill: Recall Objective: 24.1 Illustrate and explain the policy choices that monetary policymakers face under the conditions of aggregate demand shocks and supply shocks 6) When the economy suffers a negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then ________.

A) aggregate output index drops further after the tightening monetary policy B) short-run aggregate supply will shift back down because output is below potential C) aggregate output is stabilized D) all of the above E) both A and B Answer: E Diff: 2 Type: MC Skill: Recall Objective: 24.1 Illustrate and explain the policy choices that monetary policymakers face under the conditions of aggregate demand shocks and supply shocks

2 .

7) When the economy suffers a negative supply shock, the central bank's autonomous monetary policy to keep inflation at the target inflation rate leads to ________.

A) more stable economic activities B) a large deviation of output from its potential C) divine coincidence D) both B and C Answer: B Diff: 2 Type: MC Skill: Recall Objective: 24.1 Illustrate and explain the policy choices that monetary policymakers face under the conditions of aggregate demand shocks and supply shocks 8) When the economy suffers a negative supply shock and the monetary policymakers try to stabilize economic activity in the short run, then ________.

A) aggregate demand curve shifts rightward B) output will be at its potential C) inflation rate will be higher D) all of the above E) both A and B Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.1 Illustrate and explain the policy choices that monetary policymakers face under the conditions of aggregate demand shocks and supply shocks 9) Which of the following statements is CORRECT? A) If most shocks to the economy are aggregate demand shocks, then policy that stabilizes inflation will also stabilize economic activity, even in the short run.

B) If supply shocks are more common, then a central bank must choose between stabilizing inflation and stabilizing output in the short run.

C) Stabilizing economic activity in response to a supply shock results in a larger deviation of inflation from the inflation target rather than a stabilization of inflation.

D) all of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.1 Illustrate and explain the policy choices that monetary policymakers face under the conditions of aggregate demand shocks and supply shocks

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24.2 How Actively Should Policymakers Try to Stabilize Economic Activity?

1) Nonactivist policymakers believe that ________.

A) wages and prices are very flexible B) the self-correcting mechanism is very rapid C) government action is unnecessary D) all of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach 2) Activist policymakers believe that ________.

A) the self-correcting mechanism through wage and price adjustment is very slow B) wages and prices are sticky C) the government needs to pursue active policy to eliminate high unemployment when it develops D) all of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach 3) If aggregate output is below the natural rate level, activist policymakers would recommend that the government ________.

A) do nothing B) try to eliminate high unemployment by attempting to shift the aggregate supply curve to the right C) try to eliminate high unemployment by attempting to shift the aggregate demand curve to the right D) try to eliminate high unemployment by attempting to shift the aggregate demand curve to the left Answer: C Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach

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4) If aggregate output is below the natural rate level, nonactivist policymakers would recommend that the government ________.

A) do nothing B) try to eliminate high unemployment by attempting to shift the aggregate supply curve to the right C) try to eliminate high unemployment by attempting to shift the aggregate demand curve to the right D) try to eliminate high unemployment by attempting to shift the aggregate demand curve to the left Answer: A Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach 5) Nonactivists policymakers contend that a policy of shifting the aggregate ________ curve will be costly because it generates ________ volatility in both the price level and output. A) supply; less B) supply; more C) demand; less D) demand; more Answer: D

Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach 6) The existence of lags prevents the instantaneous adjustment of the economy to policies aimed at changing aggregate demand, thereby strengthening the case for ________.

A) supply-side policies B) a nonactivist policy C) activist policies D) demand-management policies Answer: B Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach

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7) The data lag is ________.

A) the time it takes for policymakers to obtain data indicating what is happening in the economy B) the time it takes for policymakers to be sure of what the data are signaling about the future course of the economy C) the time it takes to pass legislation to implement a particular economic policy D) the time it takes for policymakers to change policy instruments once they have decided on the new policy E) the time it takes for the policy to actually have an impact on the economy Answer: A Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach 8) The recognition lag is ________.

A) the time it takes for policymakers to obtain data indicating what is happening in the economy B) the time it takes for policymakers to be sure of what the data are signaling about the future course of the economy C) the time it takes to pass legislation to implement a particular policy D) the time it takes for policymakers to change policy instruments once they have decided on the new policy E) the time it takes for the policy to actually have an impact on the economy Answer: B Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach 9) The legislative lag represents ________.

A) the time it takes for policymakers to obtain data indicating what is happening in the economy B) the time it takes for policymakers to be sure of what the data are signaling about the future course of the economy C) the time it takes to pass legislation to implement a particular policy D) the time it takes for policymakers to change policy instruments once they have decided on the new policy E) the time it takes for the policy to actually have an impact on the economy Answer: C Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach

6 .

10) The implementation lag is ________.

A) the time it takes for policymakers to obtain data indicating what is happening in the economy B) the time it takes for policymakers to be sure of what the data are signaling about the future course of the economy C) the time it takes to pass legislation to implement a particular policy D) the time it takes for policymakers to change policy instruments once they have decided on the new policy E) the time it takes for the policy to actually have an impact on the economy Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach 11) The effectiveness lag is ________.

A) the time it takes for policymakers to obtain data indicating what is happening in the economy B) the time it takes for policymakers to be sure of what the data are signaling about the future course of the economy C) the time it takes to pass legislation to implement a particular policy D) the time it takes for policymakers to change policy instruments once they have decided on the new policy E) the time it takes for the policy actually to have an impact on the economy Answer: E Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach 12) The time it takes for policymakers to obtain data indicating what is happening in the economy is known as ________.

A) the data lag B) the recognition lag C) the legislative lag D) the implementation lag E) the effectiveness lag Answer: A Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach

7 .

13) The time it takes for policymakers to be sure of what the data are signaling about the future course of the economy is known as ________.

A) the data lag B) the recognition lag C) the legislative lag D) the implementation lag E) the effectiveness lag Answer: B Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach 14) The time it takes to pass legislation to implement a particular policy is known as ________.

A) the data lag B) the recognition lag C) the legislative lag D) the implementation lag E) the effectiveness lag Answer: C Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach 15) The time it takes for policymakers to change policy instruments once they have decided on the new policy is known as ________.

A) the data lag B) the recognition lag C) the legislative lag D) the implementation lag E) the effectiveness lag Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach

8 .

16) The time it takes for a policy to actually have an impact on the economy is known as ________.

A) the data lag B) the recognition lag C) the legislative lag D) the implementation lag E) the effectiveness lag Answer: E Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach 17) The nonactivists who opposed the recent fiscal stimulus package argue that ________.

A) a fiscal stimulus would take too long to take effect because of long implementation lags B) a fiscal stimulus might kick in after the economy had already recovered C) a fiscal stimulus could lead to more volatile inflation and economic activity D) all of the above E) none of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.2 Identify the lags in the policy process, and summarize why they weaken the case for an activist policy approach

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24.3 Inflation: Always and Everywhere a Monetary Phenomenon 1) The economist who is famous for having said that, "Inflation is always and everywhere a monetary phenomenon" was ________.

A) John Maynard Keynes B) John R Hicks C) Milton Friedman D) Franco Modigliani Answer: C Diff: 2 Type: MC Skill: Recall Objective: 24.3 Explain why monetary policymakers can target any inflation rate in the longrun but cannot target a level of output in the long-run 2) Complete Milton Friedman's famous quote: "Inflation is always and everywhere a ________ phenomenon."

A) monetary B) political C) policy D) budgetary Answer: A Diff: 2 Type: MC Skill: Recall Objective: 24.3 Explain why monetary policymakers can target any inflation rate in the longrun but cannot target a level of output in the long-run 3) At first cut, the simple solution to fighting inflation is ________.

A) reducing the growth rate of the money supply B) limiting the number of terms that politicians can serve in elective office C) returning the economy to barter by prohibiting the use of fiat money D) to impose price controls on businesses that attempt to raise prices Answer: A Diff: 2 Type: MC Skill: Applied Objective: 24.3 Explain why monetary policymakers can target any inflation rate in the longrun but cannot target a level of output in the long-run

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4) "How do we prevent the inflationary fire from igniting again and stop the roller coaster ride in the inflation rate of the last 40 years?" Milton Friedman's famous proposition suggests the simple solution: ________.

A) reduce the number of terms that politicians are allowed to serve B) reduce the growth rate of the money supply C) reduce the marginal tax rate on low-income wage earners D) increase the marginal tax rates on businesses that hike prices in excess of 5 percent per year Answer: B Diff: 2 Type: MC Skill: Applied Objective: 24.3 Explain why monetary policymakers can target any inflation rate in the longrun but cannot target a level of output in the long-run 5) Milton Friedman's proposition concerning the cause of inflation implies a simple solution to the inflation problem: ________.

A) reduce government budget deficits B) limit the ability of fiscal policymakers to bring pressure to bear on the monetary authority C) limit the number of terms that politicians are allowed to serve D) reduce the growth rate of the money supply Answer: D Diff: 2 Type: MC Skill: Applied Objective: 24.3 Explain why monetary policymakers can target any inflation rate in the longrun but cannot target a level of output in the long-run 6) Milton Friedman's proposition that inflation is always and everywhere a monetary phenomenon holds only if ________.

A) government budget deficits do not rise continually B) the unemployment rate does not rise continually C) the inflation rate rises continually D) Canada does not experience more than one negative supply shock per decade Answer: C Diff: 2 Type: MC Skill: Recall Objective: 24.3 Explain why monetary policymakers can target any inflation rate in the longrun but cannot target a level of output in the long-run

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7) The monetary authorities can target any inflation rate in the ________ with ________ monetary policy adjustments. A) short-run; automatic B) short-run autonomous C) long-run; autonomous D) long-run; automatic Answer: C

Diff: 2 Type: MC Skill: Recall Objective: 24.3 Explain why monetary policymakers can target any inflation rate in the longrun but cannot target a level of output in the long-run 8) Potential output is ________.

A) independent of monetary policy B) positively related to monetary policy C) negatively related to monetary policy D) positively related to monetary policy only in recessions Answer: A Diff: 1 Type: MC Skill: Recall Objective: 24.3 Explain why monetary policymakers can target any inflation rate in the longrun but cannot target a level of output in the long-run 24.4 Causes of Inflationary Monetary Policy 1) To say that inflation is a monetary phenomenon seems to beg the question: ________.

A) Why does inflationary monetary policy occur?

B) Why do politicians seek re-election?

C) Why is the Fed independent?

D) Why does the US Treasury print so much money?

Answer: A Diff: 2 Type: MC Skill: Recall Objective: 24.4 Identify the sources of inflation and the role of monetary policy in propagating inflation 2) The combination of a successful wage push by workers and the government's commitment to high employment leads to ________.

A) demand-pull inflation B) supply-side inflation C) supply-shock inflation D) cost-push inflation Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.4 Identify the sources of inflation and the role of monetary policy in propagating inflation 12 .

3) If workers do not believe that policymakers are serious about fighting inflation, they are most likely to push for higher wages, which will ________ aggregate ________ and lead to unemployment or inflation or both, everything else held constant.

A) decrease; demand B) increase; demand C) decrease; supply D) increase; supply Answer: C Diff: 2 Type: MC Skill: Recall Objective: 24.4 Identify the sources of inflation and the role of monetary policy in propagating inflation 4) If workers believe that government policymakers will increase aggregate demand to avoid a politically unpopular increase in unemployment when workers demand higher wages, then workers will not fear higher unemployment and their wage demands will result in ________.

A) demand-pull inflation B) hyperinflation C) deflation D) cost-push inflation Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.4 Identify the sources of inflation and the role of monetary policy in propagating inflation 5) If policymakers set a target for the unemployment rate that is too low because it is less than the natural rate of unemployment, this can set the stage for a higher rate of money growth and ________.

A) cost-push inflation B) demand-pull inflation C) cost-pull inflation D) demand-push inflation Answer: B Diff: 2 Type: MC Skill: Recall Objective: 24.4 Identify the sources of inflation and the role of monetary policy in propagating inflation

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6) Theoretically, one can distinguish a demand-pull inflation from a cost-push inflation by comparing ________.

A) how fast prices rise relative to wages B) the unemployment rate with its natural rate level C) when prices rise relative to wages D) government debt to real GDP Answer: B Diff: 2 Type: MC Skill: Recall Objective: 24.4 Identify the sources of inflation and the role of monetary policy in propagating inflation 7) Demand-pull inflation can result when ________.

A) policymakers set an unemployment target that is too high B) a persistent budget deficit is financed by selling bonds to the public C) a persistent budget deficit is financed by selling bonds to the central bank D) workers get numerous wage increases Answer: C Diff: 2 Type: MC Skill: Recall Objective: 24.4 Identify the sources of inflation and the role of monetary policy in propagating inflation 8) Which of the following is least likely to lead to inflationary monetary policy?

A) Rising unemployment B) Expanding federal budget deficits C) Declining oil prices D) Conflict in the Middle East Answer: C Diff: 2 Type: MC Skill: Applied Objective: 24.4 Identify the sources of inflation and the role of monetary policy in propagating inflation 9) Which of the following is most likely to lead to inflationary monetary policy?

A) Declining oil prices B) Resolution of conflict in the Middle East C) The enactment of a free-trade agreement with Mexico D) Rising unemployment Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.4 Identify the sources of inflation and the role of monetary policy in propagating inflation

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10) Which of the following is most likely to lead to inflationary monetary policy?

A) Declining oil prices B) Resolution of conflict in the Middle East C) The enactment of a free-trade agreement with Mexico D) Rising government budget deficits Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.4 Identify the sources of inflation and the role of monetary policy in propagating inflation 11) Because policies in Canada were too expansionary from 1965 through 1973, Canada suffered ________.

A) demand-pull inflation B) cost-push inflation, as workers sought higher wages in order to keep up with inflation C) both demand-pull and cost-push inflation D) neither demand-pull nor cost-push inflation Answer: A Diff: 2 Type: MC Skill: Applied Objective: 24.4 Identify the sources of inflation and the role of monetary policy in propagating inflation

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12) Explain and show graphically why continuous monetary growth is needed to generate inflation. Describe how the inflation process is generated.

Answer: Only continuous monetary growth can cause continuous increases in aggregate demand of the sort needed to generate inflation. Other factors can increase demand and the price level, but none can increase demand continuously. In the graph, the monetary expansion shifts AD to the right. The increase in output above the natural rate increases wages, shift AS to the left. Monetary expansion shifts AD repeatedly, and wages continue to adjust.

Diff: 2 Type: ES Skill: Recall Objective: 24.4 Identify the sources of inflation and the role of monetary policy in propagating inflation

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13) Why a cost-push inflation is a monetary phenomenon? Use the appropriate graph to support your answer.

Answer: Students must use a graph similar to the one below. Initially the economy is on point 1 with an aggregate output equal to the normal rate output. Supposing that workers succeed in seeking higher wages as they want to increase their real wages. The effect of such an increase will be like a negative supply shock and will shift the short-term aggregate supply curve to the left so that the economy slides to point 1'. If we have an activist government with a high employment target point 1' is associated with increased unemployment and lower output, so the government will implement policies to raise the aggregate demand and shift the aggregate demand curve to AD2 so that we will return to the natural rate level of output at point 2 with a higher price level. Workers may be encouraged to seek even higher wages due to the increased price level and if they succeed and the government continues to accommodate this the economy will move from point 2 to 2', 3, 3', and 4 on the graph. But the continuous shift of the demand curve to the right cannot be sustained by fiscal policy as government spending and tax cuts have limits. This policy can only be sustained to create inflation only with an increasing money supply. Thus, a cost-push inflation is a monetary phenomenon because it cannot occur without the monetary authorities pursuing an accommodating policy of a higher rate of money growth.

Diff: 3 Type: ES Skill: Recall Objective: 24.4 Identify the sources of inflation and the role of monetary policy in propagating inflation

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24.5 Monetary Policy at the Effective Lower Bound 1) The MP curve is drawn on a graph with the ________ on the horizontal axis and the ________ on the vertical axis.

A) inflation rate; aggregate output B) nominal interest rate; inflation rate C) real interest rate; aggregate output D) inflation rate; real interest rate Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions 2) When nominal interest rates are above zero, the MP curve has a ________ slope because when the inflation rate increases the monetary authorities will ________ the real interest rate.

A) negative; raise B) negative; lower C) positive; raise D) positive; lower Answer: C Diff: 2 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions 3) When nominal interest rates are zero, the MP curve has a ________ slope because monetary authorities ________ lower the nominal interest rate and the real interest rate ________ as inflation rates decline.

A) positive; cannot; falls B) negative; cannot; rises C) positive; can; falls D) negative; can; rises Answer: B Diff: 2 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions

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4) If inflation was 1% and the monetary authorities set the nominal interest set at the zero lower bound, the real interest rate would be ________. A) -1% B) 0% C) 1% D) 2% Answer: A

Diff: 2 Type: MC Skill: Applied Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions 5) The AD curve is drawn on a graph with the ________ on the horizontal axis and the ________ on the vertical axis.

A) aggregate output; inflation rate B) aggregate output; real interest rate C) inflation rate; aggregate output D) inflation rate; real interest rate Answer: A Diff: 2 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions 6) When nominal interest rates are above zero, the AD curve has a ________ slope because when the inflation rate increases the monetary authorities will ________ the real interest rate as inflation rises which will ________ investment and aggregate output.

A) negative; raise; decrease B) negative; lower; increase C) positive; raise; increase D) positive; lower; increase Answer: B Diff: 2 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions

19 .

7) When nominal interest rates are zero, the AD curve has a ________ slope because when aggregate output decreases the monetary authorities ________ lower the nominal interest rate. As inflation rises the real interest rate _______which will ________ investment and aggregate output. A) negative; can; increases; decrease B) negative; cannot; decrease; increase C) positive; cannot; increases; decrease D) positive; can; decreases; decrease Answer: C

Diff: 2 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions 8) A sudden shortage of liquidity during a financial crisis will shift the ________ curve to the ________.

A) AS; right B) AS; left C) AD; right D) AD; left Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions 9) Financial frictions affect the ________ curve by ________ the real interest rate for investment causing investment and aggregate output to ________.

A) AD; increasing; decrease B) AD; decreasing; increase C) AS; increasing; decrease D) AS; decreasing; increase Answer: A Diff: 2 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions

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10) To promote an economic expansion and an exit from the deflationary environment that the Japanese had been experiencing for the past fifteen years, the "Abenomics" aims at ________.

A) increasing inflation target B) increasing inflation expectations C) purchasing long-term bonds D) All of the above.

Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions 11) The real interest rate for investments reflects not only the short-term real interest rate set by the central bank, but also the financial frictions. When the policy rate has hit the floor of the effective lower bound, to stimulate the economy at given inflation rates, policymakers can ________.

A) lower the financial frictions B) lower the short-term real interest rate C) raise the policy rate D) lower the policy rate Answer: A Diff: 2 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions 12) Liquidity provision and asset purchase may not be enough to stimulate the economy unless these policy actions are able to ________.

A) lower the real interest rate for investments B) lower the short-term real interest rate C) raise the policy rate above zero D) lower the policy rate Answer: A Diff: 2 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions

21 .

13) The Bank of Canada's quantitative easing is to purchase ________ to affect credit spreads.

A) long-term securities B) short-term securities C) both long-term and short-term securities D) private assets Answer: A Diff: 1 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions 14) With the policy rate set at the effective lower bound, the rise in expected inflation will lead to a ________ in the real interest rate, which will cause investment spending and aggregate output to ________. A) fall; rise B) fall; fall C) rise; rise D) rise; fall Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions 15) Which of the following is not one of the reasons why quantitative easing in and of itself will not necessarily be stimulative?

A) Most of the resulting increase in the monetary base just flows into holdings of excess reserves.

B) Banks just add to their holdings of excess reserves instead of making loans.

C) The asset purchase program involves only the purchase of short-term government securities.

D) The asset purchase program involves only the purchase of long-term government securities.

Answer: D Diff: 2 Type: MC Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions

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16) Explain why the self-correcting mechanism is on longer operational when nominal interest rates are at the effective lower bound.

Answer: The self-correcting mechanism normally works by having wages and prices fall when the aggregate output level falls below its potential level. As this causes inflation to fall and possibly turn negative, real interest rates rise causing investment to fall and aggregate output to continue to fall below potential.

Diff: 2 Type: ES Skill: Applied Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions 17) What three forms does non-conventional monetary policy take?

Answer: Liquidity provision, asset purchases (or quantitative easing) and management of expectations.

Diff: 2 Type: ES Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions 18) What are the objectives of quantitative easing?

Answer: QE is intended to reduce financial frictions by injecting liquidity into financial markets which will lower credit spreads and the spread between long- and short-term interest rates.

Diff: 2 Type: ES Skill: Recall Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions 19) How does a commitment by monetary authorities to maintain low, short-term policy rates affect long-term interest rates?

Answer: Since long-term rates reflect both current short-term and expected future short-term interest rates, maintaining low policy rates will affect long-term rates. This follows directly from the expectations theory of interest rates.

Diff: 2 Type: ES Skill: Applied Objective: 24.5 Explain the unique challenges that monetary policymakers face at the effective lower bound, and illustrate how nonconventional monetary policy can be effective under such conditions

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Economics of Money, Banking, and Fin. Markets, 8Ce (Mishkin) Chapter 25 The Role of Expectations in Monetary Policy 25.1 Lucas Critique of Policy Evaluation 1) Today, most economists ________.

A) accept that expectations formation will change when the behavior of forecasted variables changes B) believe that the Lucas critique has been discredited C) accept the notion that there is no role for discretionary stabilization policy D) believe that having policy credibility is not an important factor to a successful anti-inflation policy Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.1 Summarize the Lucas critique 2) Whether one views the discretionary policies of the 1960s and 1970s as destabilizing or believes the economy would have been less stable without these policies, most economists agree that ________.

A) stabilization policies proved more difficult in practice than many economists had expected B) stabilization policies proved not to be inflationary C) the nondiscretionary policymakers were right in believing that the private economy is inherently stable D) the discretionary policymakers were right in believing that the private economy is inherently stable Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.1 Summarize the Lucas critique 3) The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as ________.

A) the monetarist revolution B) the Lucas critique C) public choice theory D) new Keynesian theory Answer: B Diff: 2 Type: MC Skill: Recall Objective: 25.1 Summarize the Lucas critique

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4) Lucas argues that when policies change, expectations will change thereby ________.

A) changing the relationships in econometric models B) causing the government to abandon its discretionary stance C) forcing the Fed to keep its deliberations secret D) making it easier to predict the effects of policy changes Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.1 Summarize the Lucas critique 5) The rational expectations hypothesis implies that when macroeconomic policy changes, ________.

A) the economy will become highly unstable B) the way expectations are formed will change C) people will be slow to catch on to the change D) people will make systematic mistakes Answer: B Diff: 2 Type: MC Skill: Recall Objective: 25.1 Summarize the Lucas critique 6) The Lucas critique indicates that ________.

A) advocates of discretionary policies' criticisms of rational expectations models are wellfounded B) advocates of discretionary policies' criticisms of rational expectations models are not wellfounded C) expectations are important in determining the outcome of a discretionary policy D) expectations are not important in determining the outcome of a discretionary policy Answer: C Diff: 2 Type: MC Skill: Recall Objective: 25.1 Summarize the Lucas critique 7) The Lucas critique is an attack on the usefulness of ________.

A) conventional econometric models as forecasting tools B) conventional econometric models as indicators of the potential impacts on the economy of various policies C) rational expectations models of macroeconomic activity D) the relationship between the quantity theory of money and aggregate demand Answer: B Diff: 2 Type: MC Skill: Recall Objective: 25.1 Summarize the Lucas critique

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8) The interest rate thought to have the most important impact on aggregate demand is the ________.

A) short-term interest rate B) Treasury bill rate C) interest rate on 90-day CDs D) long-term interest rate Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.1 Summarize the Lucas critique 9) A rise in short-term interest rates that is believed to be only temporary ________.

A) is likely to have a significant effect on long-term interest rates B) will have a bigger impact on long-term interest rates than if the rise in short-term rates had been permanent C) is likely to have only a small impact on long-term interest rates D) cannot possibly affect long-term interest rates Answer: C Diff: 2 Type: MC Skill: Recall Objective: 25.1 Summarize the Lucas critique 10) According to the Lucas critique, if past increases in the short-term interest rate have always been temporary, then ________.

A) the term-structure relationship using past data will then show only a weak effect of changes in the short-term interest rate on the long-term rate B) the term-structure relationship using past data will show no effect of changes in the short-term interest rate on the long-term rate C) one cannot predict the term-structure relationship as it depends on expectations D) the term-structure relationship using past data will nevertheless show a strong effect of changes in the short-term interest rate on the long-term rate because of a change in the way expectations are formed Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.1 Summarize the Lucas critique

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25.2 Policy Conduct: Rules or Discretion 1) A policy in which the money supply is kept growing at a constant rate regardless of the state of the economy is ________.

A) a Taylor rule B) a discretionary policy C) a policy rule advocated by monetarists D) advocated by activists Answer: C Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 2) The Lucas critique highlighted the need for ________.

A) better econometric models B) new policy models that included rational expectations C) fiscal policy D) adaptive expectations Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 3) Operating with discretion in a monetary policy sense implies ________.

A) making no commitment to future actions B) a constant growth rate rule C) introducing a zero-inflation rule D) making decisions without regulatory oversight Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 4) The time inconsistency problem with respect to policy conduct means ________.

A) the tendency to deviate from long-run plans when making short run decisions B) implementing a constant growth rate rule C) that politicians are not elected for long enough time frames D) there is no room for hard and fast monetary rules Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy

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5) The time inconsistency problem means that policy makers are always tempted to pursue ________ policy in the short run.

A) expansionary B) contractionary C) inconsistent D) non-discretionary Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 6) The best way to keep inflation under control is to ________.

A) abandon discretionary policy B) abandon expansionary policy C) invoke activist solutions D) A and B only Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 7) The opposite of a discretionary approach is a ________ approach.

A) rules based B) activist C) non-activist D) Keynesian Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 8) Milton Friedman and his followers are known as ________.

A) monetarists B) activists C) Keynesians D) neo-Keynesians Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy

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9) A rule that is advocated by monetarists is the ________ rule.

A) constant money growth rate B) escalating money growth rate C) fiscal expansionism D) interest rate sterilization Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 10) An example of a rule used in non-discretionary monetary policy is ________.

A) the Taylor rule B) the Taylor principle C) the Keynesian rule D) the interest rate consistency rule Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 11) One example where a rules-based approach would have improved the economy is ________.

A) during the Great Depression B) during the financial crisis in 2007 C) the subprime mortgage markets D) the derivatives market Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 12) The political business cycle can lead to ________.

A) expansionary monetary policy B) expansionary fiscal policy C) corruption D) A and B only Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy

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13) The Lucas critique indicates that ________.

A) Keynesian criticisms of rational expectations models are well-founded B) Keynesian criticisms of rational expectations models are not well-founded C) expectations are important in determining the outcome of an activist policy D) expectations are not important in determining the outcome of an activist policy Answer: C Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 14) One of the drawbacks of rules based monetary policy is ________.

A) it can be too rigid a system and unable to address unforeseen contingencies B) it minimizes the role of central banks and bankers C) these types of programs are difficult to implement in practice D) none of the above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 15) One of the drawbacks of rules based monetary policy is ________.

A) they do not incorporate the judgment of monetary policy makers B) they are too complicated for the public to understand C) these types of programs are difficult to implement in practice D) none of the above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 16) One of the drawbacks of rules based monetary policy is ________.

A) the true model of the economy is unknown, so a single rule may not be appropriate B) they are too complicated for the public to understand C) these types of programs are difficult to implement in practice D) none of the above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy

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17) One of the drawbacks of rules based monetary policy is ________.

A) the current relationship between variables may not hold in the future B) they are too complicated for the public to understand C) these types of programs are difficult to implement in practice D) none of the above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 18) One of the drawbacks of rules based monetary policy is ________.

A) it is subject to the Lucas critique B) they are too complicated for the general public to understand C) these types of programs are difficult to implement in practice D) none of the above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 19) Monetarists argue that the Bank of Canada should pursue ________.

A) an interest-rate targeting strategy B) an exchange-rate targeting strategy C) a discretionary monetary policy D) a constant growth rate rule Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 20) If aggregate output is below the natural rate level, advocates of nondiscretionary policy would recommend that the government ________.

A) do nothing B) try to eliminate the higher unemployment by attempting to shift the aggregate supply curve to the right C) try to eliminate the higher unemployment by attempting to shift the aggregate demand curve to the right D) try to eliminate the higher unemployment by attempting to shift the aggregate demand curve to the left Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy

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21) Advocates of nondiscretionary policy contend that a discretionary policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output. A) supply; less B) supply; more C) demand; less D) demand; more Answer: D

Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 22) Some economists contend that a policy of shifting the aggregate demand curve will be costly because advocatesit produces more price level and output volatility. These economists likely are of ________ policy.

A) supply-side B) discretionary C) demand-management Diff: 2 Type: MC D) nondiscretionary Skill: Recall Answer: D Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy

23) The existence of lags prevents the instantaneous adjustment of the economy to policies that change aggregate demand, thereby strengthening the case for ________ policy.

A) supply-side B) nondiscretionary C) discretionary D) demand-management Answer: B Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy

9 .

24) Which of the following views are consistent with the case for nondiscretionary macroeconomic policy?

A) Even with time lags, discretionary policy moves the economy to full employment before the economy's self-correcting mechanism would.

B) The wage and price adjustment process being extremely slow, a nondiscretionary policy results in a large loss of output.

C) Workers will come to expect expansionary policies whenever the economy moves below full employment.

D) A discretionary, accommodating policy of shifting the aggregate demand curve will produce less volatility in both the price level and output due to the short time it takes to shift aggregate demand.

Answer: C Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 25) If expectations about policy affect how wages are set, then the case for a(n) ________ policy is much stronger.

A) discretionary B) nondiscretionary C) interventionist D) stabilization Answer: B Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 26) Evidence indicating that the wage and price adjustment process is extremely slow would strengthen the case for ________.

A) a nondiscretionary policy B) a constant-money-growth-rate rule C) a discretionary policy D) none of the above Answer: C Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy

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27) Advocates of nondiscretionary policy emphasize the importance of a constant money growth rate rule more than the balanced-budget amendment or restrictions on union power because ________.

A) they regard excessive money growth as the cause of inflation B) they believe that excessive government spending, not excessive monetary growth, is the cause of inflation C) they believe that while unions cause inflation, they are too politically powerful to deal with D) they regard high tax rates as the cause of inflation Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 28) Advocates of nondiscretionary policy contend that a policy of shifting the aggregate demand curve will be costly because it produces more price level and output volatility. Thus, they favor ________.

A) a policy of variable money supply growth B) a supply-side policy C) a demand-management policy D) a constant-money-growth-rate rule Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 29) A credible, no accommodating policy rule has the ________ that workers are ________ likely to ask for higher wages and thus helps to reduce the output loss from controlling inflation.

A) advantage; less B) advantage; more C) disadvantage; less D) disadvantage; more Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 30) Monetarists contend that ________.

A) the self-correcting mechanism works slowly because wages are inflexible B) the aggregate supply curve does not move quickly to restore the economy to the natural rate of unemployment C) active government policy is required to restore the economy to full employment when unemployment is high D) the Bank of Canada should adopt and follow a money growth rule Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 11 .

31) Monetarists ________.

A) see wages as being sufficiently sticky so that the wage and price adjustment process is reasonably slow B) are skeptical of the need for active government policies to restore the economy to full employment C) argue for active government policy to restore the economy to full employment when unemployment is high D) A and B only Answer: B Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 32) Monetarists believe in all the following EXCEPT that ________.

A) active government policies are required to restore the economy to full employment B) the Bank of Canada should adopt and follow a money growth rule C) the self-correcting mechanism works quickly because wages are sufficiently flexible D) the aggregate supply curve shifts quickly to restore the economy to the natural rate of unemployment Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 33) Arguments for adopting a policy rule include ________.

A) the time-inconsistency problem can lead to poor economic outcomes B) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run C) policy makers and politicians cannot be trusted D) all of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy

12 .

34) Arguments for adopting a policy rule include ________.

A) discretion avoids the straitjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect B) discretion enables policy makers to change policy settings when an economy undergoes structural changes C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run D) all of the above Answer: C Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 35) Arguments for discretionary policies include ________.

A) policy rules can be too rigid because they cannot foresee every contingency B) the time-inconsistency problem can lead to poor economic outcomes C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run D) all of the above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 36) Arguments for discretionary policies include ________.

A) policy rules can be too rigid because they cannot foresee every contingency B) policy rules do not easily incorporate the use of judgment C) discretion avoids the straitjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect D) discretion enables policy makers to change policy settings when an economy undergoes structural changes E) all of the above Answer: E Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 37) ________ imposes a conceptual structure and inherent discipline on policy makers, but without eliminating all flexibility.

A) Constrained discretion B) A policy rule C) A discretionary policy D) The Taylor rule Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy 13 .

38) Describe discretionary and nondiscretionary policy in the case of a negative aggregate supply shock to the economy. Use a graph to support your answer. Answer: When the economy moves from point 1 to 1' after a supply shock then policymakers have two choices: The nondiscretionary policy of doing nothing and letting the aggregate supply curve to move back to the original position, or the discretionary policy and try to shift the aggregate demand curve to move the economy to point 2. Case for a discretionary policy: if the wages and prices adjust extremely slow a nondiscretionary policy is considered by an advocate for discretionary as costly because the slow movement of the economy back to full employment results in a large loss of output. Case for a nondiscretionary policy: advocates for nondiscretionary policy view the wage and price adjustment process as more rapid than advocates for discretionary do and consider nondiscretionary policy less costly because output is soon back at the natural rate level. They suggest that a discretionary accommodating policy of shifting the aggregate demand curve to AD2 is costly because it produces more volatility in both the price level and output.

Diff: 2 Type: ES Skill: Recall Objective: 25.2 Compare and contrast the use of policy rules versus discretionary policy

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25.3 The Role of Credibility and a Nominal Anchor 1) A credible nominal anchor ________.

A) can help overcome the time-inconsistency problem by providing an expected constraint on discretionary policy B) can help to anchor inflation expectations, which leads to smaller fluctuations in inflation C) is required for a policy rule D) all of the above E) A and B only Answer: E Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 2) Suppose that there is a positive aggregate demand shock, and the central bank commits to an inflation rate target. If the commitment is credible, then ________.

A) the public's expected inflation will remain unchanged B) the short-run aggregate supply curve will not shift C) over time inflation will fall back down to the inflation target D) all of the above E) A and B only Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 3) Suppose that there is a positive aggregate demand shock, and the central bank commits to an inflation rate target. But if the commitment is not credible, then ________.

A) the public's expected inflation will remain unchanged B) the short-run aggregate supply curve will rise C) over time inflation will fall back down to the inflation target D) all of the above E) A and B only Answer: B Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank

15 .

4) Suppose that there is a negative aggregate demand shock, and the central bank commits to an inflation rate target. If the commitment is credible, then ________.

A) the public's expected inflation will remain unchanged B) the short-run aggregate supply curve will rise C) over time inflation will fall D) all of the above E) A and C only Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 5) Suppose that there is a negative aggregate demand shock, and the central bank commits to an inflation rate target. But if the commitment is not credible, then ________.

A) the public's expected inflation will remain unchanged B) the short-run aggregate supply curve will rise C) economic contraction will be worse D) all of the above E) B and C only Answer: E Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 6) Suppose that there is a negative aggregate supply shock, and the central bank commits to an inflation rate target.

A) If the commitment is credible, the public's expected inflation will remain unchanged.

B) Credible policy produces better outcomes on both inflation and output in the short run.

C) Policies that are not credible produce worse economic contraction.

D) All of the above.

E) A and C only.

Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 7) The Canadian government can play an important role in establishing the credibility of antiinflation policy by ________.

A) demonstrating fiscal responsibility B) monitoring the Fed C) conducting fiscal policy D) all of the above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 16 .

8) If aggregate output is below the natural rate level, advocates of discretionary policy would recommend that the government ________.

A) do nothing B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left Answer: C Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 9) When expectations of inflation are formed rationally, an anti-inflationary policy will be more successful if it is ________.

A) credible B) a surprise C) unanticipated D) announced Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 10) It may be necessary to cut the deficit as part of a credible anti-inflationary policy because the public knows that large deficits ________.

A) are inflationary in the long run B) create inefficiencies in the economy C) put pressure on the Bank of Canada to expand the money supply to keep interest rates from rising D) put pressure on the Bank of Canada to contract the money supply to prevent employment from rising beyond a critical level Answer: C Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank

17 .

11) By ________ its deficit, the government's credibility of implementing an anti-inflationary policy ________.

A) not changing; remains the same B) reducing; increases C) reducing; decreases D) not changing; increases Answer: B Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 12) By ________ its deficit, the government makes an anti-inflationary policy ________ credible.

A) increasing; more B) reducing; more C) reducing; less D) not changing; more Answer: B Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 13) An example of a nominal anchor ________.

A) is the inflation rate B) is the real interest rate C) are government expenditures D) is the marginal tax rate Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 14) The benefits of a credible nominal anchor include ________.

A) acting like a behaviour rule B) preventing the real business cycle from occurring C) encouraging an activist policy D) preventing discretion-based actions Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank

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15) The benefits of a credible nominal anchor include ________.

A) anchors inflation expectations B) preventing the real business cycle from occurring C) encouraging activist policy D) preventing discretion-based actions Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 16) With a positive aggregate demand shock, monetary policy credibility can ________.

A) stabilize inflation B) set inflation equal to zero C) determine the effective interest rate D) prevent financial malfeasance Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 17) If a positive aggregate demand shock occurs and monetary policy is not credible then ________.

A) inflation will increase B) the equilibrium interest rate will fall C) there will be a corresponding autonomous decrease in aggregate supply D) none of the above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 18) A positive aggregate demand shock will only impact ________.

A) the equilibrium output B) the equilibrium inflation rate C) the short run aggregate supply curve D) none of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank

19 .

19) An example of a positive aggregate demand shock is ________.

A) carbon cap-and-trade program B) productivity improving technological innovation C) an increase in the price of oil D) the shale gas revolution Answer: B Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 20) The difference in outcomes occurring with a credible nominal anchor and without one, given a positive aggregate demand shock is that ________.

A) with the credible policy there is no shift in the aggregate supply curve B) there is no difference, but credibility provides a sense of security C) without a credible policy, inflation will continue to spiral upwards D) with a credible policy, the aggregate supply curve quickly shifts back to its original position Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 21) With a negative aggregate demand shock, monetary policy credibility can ________.

A) stabilize output B) push inflation to zero C) determine the effective interest rate D) prevent financial malfeasance Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 22) If a negative aggregate demand shock occurs and monetary policy is not credible then ________.

A) economic activity will decrease B) the equilibrium interest rate will rise C) there will be a corresponding autonomous increase in inflation D) none of the above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank

20 .

23) A negative aggregate demand shock will only impact ________.

A) the equilibrium interest rate B) the equilibrium inflation rate C) the short run aggregate supply curve D) none of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 24) An example of a negative aggregate demand shock is ________.

A) a global carbon cap-and-trade program B) a global financial crisis C) a decrease in the price of oil D) a thermonuclear war Answer: B Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 25) The difference in outcomes occurring with a credible nominal anchor and without one, given a negative aggregate demand shock is that ________.

A) with the credible policy there is no shift in the aggregate supply curve B) there is no difference, but credibility provides a sense of security C) without credible policy, inflation will continue to spiral upwards D) with a credible policy, the aggregate supply curve quickly shifts back to its original position Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 26) Which of the following components is not included in the equation for the short-run aggregate supply curve?

A) The nominal interest rate B) The inflation rate C) Expected inflation D) The output gap Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank

21 .

27) With a negative aggregate supply shock, monetary policy credibility can ________.

A) produce a better outcome B) push inflation down towards zero C) determine the effective interest rate D) prevent financial malfeasance Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 28) If a negative aggregate supply shock occurs and monetary policy is not credible then ________.

A) inflation will higher and output lower than with credible policy B) the equilibrium interest rate will fall C) there will be a corresponding autonomous decrease in aggregate supply D) none of the above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 29) A negative aggregate supply shock will impact ________.

A) the equilibrium output B) the equilibrium inflation rate C) the short run aggregate supply curve D) all of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 30) An example of a negative supply shock is ________.

A) carbon cap-and-trade program B) a rapid increase in energy costs C) a fall in the price of oil D) the shale gas revolution Answer: B Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank

22 .

31) The difference in outcomes occurring with a credible nominal anchor and without one, given a negative aggregate supply shock is that ________.

A) the overall economic outlook is better B) there is no difference, but credibility provides national security C) without credible policy, inflation will continue to spiral upwards D) with credible policy, the aggregate supply curve shifts back quickly Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 32) The three big oil price shocks occurred in ________. A) 1973, 1979, 2007 B) 1972, 1979, 2007 C) 1973, 1978, 2007 D) 1973, 1979, 2006 Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 33) After the first two oil price shocks ________.

A) the Canadian inflation rate increased sharply B) the Bank of Canada reversed its monetary policy stance C) there was no discernable impact on aggregate output D) the Bank of Canada implemented a nominal credible anchor policy Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 34) The oil shock of 2007 ________.

A) had little impact on the inflation rate in Canada B) led to a sharp increase in the inflation rate C) did not impact Canadian output D) was beneficial to the Canadian economy because Canada is a net exporter of oil Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank

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35) The reason Canada fared differently between the first two oil shocks and the third is because ________.

A) a nominal anchor was in place during the third oil shock in 2007 B) by 2007 Canada became a net exporter of oil, so Canadians benefitted from higher oil prices C) in 2007, the global financial crisis overshadowed any oil price shocks D) none of the above Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 36) The global economic crisis that arose in October 2008 was the result of ________.

A) higher oil prices B) the collapse of the subprime mortgage market C) the European debt crisis D) fiscal and monetary issues stemming from the US debt ceiling Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 37) The oil crisis in the 1970s led to an unemployment rate of over ________ percent. A) 13 B) 12 C) 10 D) 14 Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 38) The ________ is the credibility of the central bank, the more rapid will be the ________ in inflation and the ________ will be the loss of output to achieve the inflation objective.

A) greater; decline; lower B) greater; increase; lower C) greater; decline; greater D) greater; increase; greater Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank

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39) Empirical evidence on the importance of credibility in dealing with inflation includes experience from countries such as ________.

A) Bolivia B) Argentina C) Zimbabwe D) Brazil Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 40) The Bank of Canada has not always had a reputation for garnering credibility.

These include countervailing monetary policies in ________. A) early 1970s B) early 1960s C) the course of the Coyne affair D) during the global financial crisis Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 41) In the face of inflation shocks in the 1970s, the Bank of Canada ________.

A) increased the growth rate of the monetary aggregates B) decreased the growth rate of monetary aggregates C) began to accept the Lucas critique D) instituted contractionary monetary policy Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 42) In the face of inflation shocks in the 1970s, the Bank of Canada ________.

A) increased the growth rate of the monetary aggregates B) decreased the growth rate of monetary aggregates C) lowered its inflation target D) raised its inflation targets Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank

25 .

43) Between 1981 and 1984, Canada experienced ________.

A) a reduction in inflation B) a gradual increase in inflation C) a sharp increase in inflation D) lower than average interest rates Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 44) In the first half of 1985, Bolivia's inflation rate was approximately ________.

A) 200,000 percent B) 20000 percent C) 2000 percent D) 200 percent Answer: B Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 45) In August 1985, the Bolivian government announced ________. A) it would reduce public sector wages B) the New Economic Policy C) a credible nominal anchor D) a replacement for the head of its central bank Answer: B

Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 46) Which of the following formed part of the Bolivian government's plan to reduce inflation?

A) Daily balancing of the budget B) Contractionary monetary policy C) Creation of a new currency D) Nationalization of 10 percent of private industrial activity Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank

26 .

47) The New Economic Policy implemented by the Bolivian government to reduce inflation, resulted in an output loss of ________ percent of GDP. A) 1 percent B) 5 percent C) 10 percent D) nearly 18 percent Answer: B

Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 48) Prior to 1980, Canada's inflation rate ________.

A) was growing at a slow and stable rate B) was never considered to be difficult to control C) reached double digits D) was tied to the U.S. inflation rate Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 49) Gerald Bouey, the Governor of the Bank of Canada at the time, helped in establishing the Bank's credibility by ________.

A) generating double digit inflation B) creating two severe recessions in the 1980s C) reorganizing the Bank of Canada's upper management team D) developing new and better measures of the monetary aggregates Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank 50) The 1981–1982 recession in Canada yielded an unemployment rate of ________.

A) just less than 10 percent B) 10 percent C) just over 10 percent D) 20 percent Answer: A Diff: 2 Type: MC Skill: Recall Objective: 25.3 Summarize and illustrate the benefits of a credible central bank

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25.4 Approaches to Establishing Central Bank Credibility 1) Approaches to establishing central bank credibility include ________.

A) its continued success at keeping inflation under control B) establishing central bank independence C) the appointment of a more conservative central banker D) all of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility 2) Approaches to establishing central bank credibility include ________.

A) its continued success at keeping inflation under control B) inflation targeting C) exchange rate targeting D) all of the above Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility 3) Approaches to establishing central bank credibility include ________.

A) inflation targeting B) exchange rate targeting C) establishing central bank independence D) the appointment of a more conservative central banker E) all of the above Answer: E Diff: 2 Type: MC Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility 4) The notion of hiring central bankers who are "conservative" and have a strong aversion to inflation was introduced by ________.

A) John Kenneth Galbraith B) Ben Bernanke C) Gerald Bouey D) Kenneth Rogoff Answer: D Diff: 2 Type: MC Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility

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5) An advantage of Nominal GDP targeting includes all the following EXCEPT: ________.

A) It focuses on controlling inflation.

B) It focuses on stabilizing real GDP. C) It focuses on stabilizing nominal GDP. D) It encourages more expansionary monetary policy if real GDP growth should fall below its potential.

Answer: C Diff: 2 Type: MC Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility 6) Which of the following is a criticism of Nominal GDP targeting?

A) It focuses on controlling inflation.

B) It focuses on stabilizing real GDP. C) It is complicated for the public to understand.

D) It encourages more expansionary monetary policy if real GDP growth should fall below its potential.

Answer: C Diff: 2 Type: MC Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility 7) Which of the following is a criticism of Nominal GDP targeting?

A) It focuses on controlling inflation.

B) It focuses on stabilizing real GDP. C) It requires accurate estimates of potential GDP growth.

D) It encourages more expansionary monetary policy if real GDP growth should fall below its potential.

Answer: C Diff: 2 Type: MC Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility 8) Provide several ways that the central bank could establish credibility.

Answer: Some ways in which the central bank could establish credibility include the following: continued success of keeping inflation under control, inflation targeting, public announcements of medium-term numerical targets for inflation, giving the central bank more independence from the political process, appoint "conservative" central bankers who have a strong aversion to inflation.

Diff: 2 Type: ES Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility

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9) Describe the two main benefits of a credible nominal anchor.

Answer: First, a credible nominal anchor acts like a behaviour rule and reduces the issues associated with the time-inconsistency problem. Second, a credible commitment to a nominal anchor will help anchor inflation expectations which leads to smaller fluctuations in inflation which helps with price stability.

Diff: 2 Type: ES Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility 10) Explain how the impacts of a positive aggregate demand shock can be mitigated by monetary policy credibility.

Answer: Monetary policy credibility has the benefit of stabilizing inflation in the short run when faced with a positive demand shock as the public's expectation of inflation will remain unchanged.

Diff: 2 Type: ES Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility 11) Explain the difference in how the Canadian economy responding during the three oil shocks and the role monetary policy credibility played.

Answer: Three oil shocks occurred in 1973, 1979 and 2007. After the first two episodes, monetary policy was weak because the Bank of Canada was unable to keep inflation under control and inflation increased to over 10 percent. During the oil crisis in 2007, the Bank of Canada had established monetary policy credibility and inflation never rose about 4 percent.

Economists attribute the lower inflation rate to the credibility of the Bank of Canada in keeping inflation within the target range.

Diff: 2 Type: ES Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility 12) Explain why the Bank of Canada had a credibility problem during the 1970s.

Answer: In the early 1970s, the Bank of Canada accommodated inflationary shocks by raising the rate of growth of monetary aggregates, thereby forming expectations of rising inflation.

When in 1975 the Bank of Canada adopted a gradual anti-inflation policy, the public had no reason to believe in such a policy. This reduced the credibility of the Bank of Canada in the eyes of the public.

Diff: 2 Type: ES Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility

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13) Describe how the Bolivian government managed its hyperinflation by introducing credibility.

Answer: In the first half of 1985, the Bolivian economy faced inflation of 20000 percent. In August 1985, the Bolivian president announced his anti-inflation program, the New Economic Plan. To rein in money growth and establish credibility, the new government reduced the budget deficit by shutting down state owned enterprises, eliminated subsidies, freezing public sector salaries and collecting a new wealth tax. The budget was balanced on a day-by day-basis. The finance minister would not authorize spending more than the amount of tax revenue that had been collected the day before. The Bolivian inflation was stopped within one month and output loss was less than 5 percent of GDP. Diff: 2 Type: ES Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility 14) How did Canada win the battle against inflation?

Answer: The Bank of Canada battled against double digit inflation and stayed the course over two major recessions in the 1980s. By the end of 1983, inflation had fallen to less than 5 percent.

In 1988, the Bank of Canada and federal government announced jointly a series of inflation targets.

Diff: 2 Type: ES Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility 15) Provide some alternate approaches to establishing credibility.

Answer: To achieve credibility, the central bank may announce inflation targeting or exchange rate targeting that allows a country to peg its exchange rate to an anchor country that has a strong nominal anchor. Another method is to appoint central bankers who have a strong version to inflation.

Diff: 2 Type: ES Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility 16) Describe how a nominal anchor can help a central bank achieve credibility.

Answer: An important way to constrain discretion is to commit to a nominal anchor that ties down the price level or inflation to achieve price stability. If the commitment to a nominal anchor has credibility, i.e., it's believed by the public, it can act as a behaviour rule and will anchor expectations reducing output fluctuations.

Diff: 2 Type: ES Skill: Recall Objective: 25.4 Identify ways in which central banks can establish and maintain credibility

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Economics of Money, Banking, and Fin. Markets, 8Ce (Mishkin) Chapter 26 Transmission Mechanisms of Monetary Policy 26.1 Transmission Mechanisms of Monetary Policy 1) Economic theory suggests that ________ interest rates are ________ important than ________ interest rates in explaining investment behaviour.

A) nominal; more; real B) real; less; nominal C) real; more; nominal D) market; more; real Answer: C Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 2) According to the traditional interest-rate channel, expansionary monetary policy lowers the real interest rate, thereby raising expenditures ________.

A) on business investment decisions B) by all levels of governments C) on consumer nondurables D) on net exports Answer: A Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 3) The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is known as ________. A) the traditional interest-rate channel B) Tobin's' q theory C) the wealth effect D) the cash flow channel Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy

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4) If the aggregate price level adjusts slowly over time, then an expansionary monetary policy lowers ________.

A) only the short-term nominal interest rate B) only the short-term real interest rate C) both the short-term nominal and real interest rates D) the short-term nominal, the short-term real, and the long-term real interest rates Answer: D Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 5) If monetary policy can influence ________ prices and conditions in ________ markets, then it can affect spending through channels other than the traditional interest-rate channel.

A) asset; labor B) asset; credit C) commodity; labor D) commodity; credit Answer: B Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 6) An expansionary monetary policy lowers the real interest rate, causing the domestic currency to ________, thereby ________ net exports.

A) appreciate; raising B) appreciate; lowering C) depreciate; raising D) depreciate; lowering Answer: C Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 7) An expansionary monetary policy increases net exports by ________ interest rates and ________ the value of the dollar.

A) lowering nominal; decreasing B) lowering real; decreasing C) raising nominal; increasing D) raising real; increasing Answer: B Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 2 .

8) A contractionary monetary policy raises the real interest rate, causing the domestic currency to ________, thereby ________ net exports.

A) appreciate; raising B) appreciate; lowering C) depreciate; raising D) depreciate; lowering Answer: B Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 9) A contractionary monetary policy decreases net exports by ________ interest rates and ________ the value of the dollar.

A) lowering real; decreasing B) lowering real; increasing C) raising nominal; increasing D) raising real; increasing Answer: D Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 10) Tobin's q is defined as the market value of firms ________ the replacement cost of capital.

A) times B) minus C) plus D) divided by Answer: D Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 11) Tobin's q theory suggests that monetary policy may affect investment spending through its impact on ________.

A) stock prices B) interest rates C) bond prices D) cash flow Answer: A Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 3 .

12) During the Great Depression, Tobin's q ________.

A) rose dramatically, as did real interest rates B) fell to unprecedentedly low levels C) stayed fairly constant, in contrast to most other economic measures D) rose only slightly, in spite of Hoover's attempts to prop it up Answer: B Diff: 2 Type: MC Skill: Applied Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 13) According to Tobin's q theory, ________ policy can affect ________ spending through its effect on the prices of common stock.

A) fiscal; consumption B) fiscal; investment C) monetary; consumption D) monetary; investment Answer: D Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 14) According to Tobin's q theory, if q is ________, new plant and equipment capital is ________ relative to the market value of business firms, so companies can buy a lot of new investment goods with only a ________ issue of stock.

A) high; expensive; large B) high; cheap; large C) high; cheap; small D) low; cheap; large E) low; cheap; small Answer: C Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy

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15) According to Tobin's q theory, when equity prices are low the market price of existing capital is ________ relative to new capital, so expenditure on fixed investment is ________.

A) cheap; low B) expensive; low C) cheap; high D) expensive; high Answer: A Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 16) According to Tobin's q theory, when equity prices are high the market price of existing capital is ________ relative to new capital, so expenditure on fixed investment is ________.

A) cheap; low B) expensive; low C) cheap; high D) expensive; high Answer: D Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 17) Franco Modigliani has found that an expansionary monetary policy can cause stock market prices to ________ and consumption to ________.

A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: A Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 18) The ________ proposes that two types of monetary transmission channels arise because of problems in credit markets A) interest rate channel B) asset price channel C) credit view D) Tobin q theory Answer: A Diff: 1 Type: MC Skill: Applied Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 5 .

19) A rise in stock prices ________ the net worth of firms and so leads to ________ investment spending because of the reduction in moral hazard.

A) raises; higher B) raises; lower C) reduces; higher D) reduces; lower Answer: A Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 20) Because of the presence of asymmetric information problems in credit markets, an expansionary monetary policy causes a ________ in net worth, which ________ the adverse selection problem, thereby ________ increased lending to finance investment spending.

A) decline; increases; encouraging B) rise; increases; discouraging C) rise; reduces; encouraging D) decline; reduces; discouraging Answer: C Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 21) 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 ________.

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 Answer: B Diff: 3 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy

6 .

22) An expansionary monetary policy raises firms' cash flows by ________ interest rates.

A) lowering real B) lowering nominal C) raising real D) raising nominal Answer: B Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 23) If a contractionary monetary policy lowers the price level by more than expected, it raises the real value of consumer debt. This reduces consumer expenditure through ________.

A) the bank lending channel B) Tobin's q C) the traditional interest-rate channel D) the household liquidity effect Answer: D Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 24) An expansionary monetary policy may cause asset prices to rise, thereby reducing the likelihood of financial distress and causing consumer durable and housing expenditures to rise.

This monetary transmission mechanism is referred to as ________.

A) the household liquidity effect B) the wealth effect C) Tobin's q theory D) the cash flow effect Answer: A Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy

7 .

25) According to the household liquidity effect, an expansionary monetary policy causes a ________ in the value of households' financial assets, causing consumer durable expenditure to ________.

A) decline; rise B) rise; rise C) rise; fall D) decline; fall Answer: B Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 26) According to the household liquidity effect, higher stock prices lead to increased consumption expenditures because consumers ________.

A) feel more secure about their financial position B) want to sell stocks and spend the proceeds before stock prices fall C) believe that their wages will increase due to increased profitability of firms D) can now afford more expensive imports Answer: A Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 27) The subprime financial crisis caused a recession because of the ________ in adverse selection and moral hazard problems and the ________ in housing prices.

A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy

8 .

28) The transmission mechanisms of monetary policy include traditional interest-rate channels that operate ________.

A) only through businesses' decisions about investment spending B) only through consumers' decisions about spending on services and non-durable goods C) only through consumers' decisions about spending on housing and durable goods D) through investment spending decisions made by consumers and businesses Answer: D Diff: 2 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 29) Which economist supports the idea that there is strong evidence for substantial interest-rate effects on consumer and investment that operate through the real cost borrowing?

A) Ben Bernanke B) Mark Gertler C) John Taylor D) Irving Fisher Answer: C Diff: 1 Type: MC Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 30) Explain the traditional interest-rate channel for expansionary monetary policy. Explain how a tight monetary policy affects the economy through this channel.

Answer: In the traditional channel, a monetary expansion reduces real interest rates, lowering the cost of capital and increasing investment spending. The increase in investment increases aggregate demand. A monetary contraction has the opposite effect, raising real interest rates, lowering investment and aggregate spending.

Diff: 2 Type: ES Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy 31) Explain how expansionary and contractionary monetary policies affect aggregate demand through the exchange rate channel.

Answer: An expansionary monetary policy reduces real interest rates, causing depreciation of the domestic currency. This depreciation increases net exports and aggregate spending. A monetary contraction increases real interest rates, causing appreciation of the domestic currency, reducing net exports and aggregate spending.

Diff: 2 Type: ES Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy

9 .

32) Discuss three channels by which monetary policy affects stock prices and aggregate spending. Answer: The answer should include three of the following: In Tobin's q theory, a monetary expansion increases stock prices, increasing the value of the firm relative to the cost of new capital. This stimulates investment in new capital goods, which in turn increases aggregate spending. A monetary expansion increases stock prices, increasing wealth and stimulating consumption and aggregate spending. Expansionary monetary policy increases equity prices. This improves firms' balance sheets, reducing adverse selection and moral hazard and increasing lending for investment, which increases aggregate spending. In the household liquidity effect, the increase in equity prices due to a monetary expansion improves consumer balance sheets, reducing the probability of financial distress, and increasing consumer spending on durable goods and housing.

Diff: 3 Type: ES Skill: Recall Objective: 26.1 List and summarize the transmission mechanisms through which monetary policy can affect the real economy

10 .

26.2 Lessons for Monetary Policy 1) 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) A and B only.

Answer: D Diff: 3 Type: MC Skill: Recall Objective: 26.2 Summarize and apply the four lessons outlined in this chapter for the conduct of monetary policy 2) 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) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy.

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) A and B only.

Answer: B Diff: 3 Type: MC Skill: Recall Objective: 26.2 Summarize and apply the four lessons outlined in this chapter for the conduct of monetary policy

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3) 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) Monetary policy can be highly effective in reviving a weak economy so long as short-term interest rates are not too close to zero.

B) 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.

C) Other asset prices beside those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.

D) A and B only.

Answer: C Diff: 3 Type: MC Skill: Recall Objective: 26.2 Summarize and apply the four lessons outlined in this chapter for the conduct of monetary policy 4) 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) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy.

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) Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are not important elements in various monetary policy transmission mechanisms.

Answer: B Diff: 3 Type: MC Skill: Recall Objective: 26.2 Summarize and apply the four lessons outlined in this chapter for the conduct of monetary policy

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5) Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. Which of the following is not one of these lessons?

A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy.

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

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

D) Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.

Answer: A Diff: 3 Type: MC Skill: Recall Objective: 26.2 Summarize and apply the four lessons outlined in this chapter for the conduct of monetary policy 6) In the late 1990s and early 2000s, the Japanese economy experienced ________.

A) easy monetary policy as indicated by falling nominal interest rates B) easy monetary policy as indicated by short-term interest rates near zero C) tight monetary policy as indicated by falling asset prices D) tight monetary policy as indicated by short-term interest rates near zero Answer: C Diff: 2 Type: MC Skill: Applied Objective: 26.2 Summarize and apply the four lessons outlined in this chapter for the conduct of monetary policy 7) Recent Japanese experience has been characterized by tight monetary policy, as indicated by ________.

A) falling interest rates B) short-term interest rates near zero C) falling asset prices D) low real interest rates Answer: C Diff: 2 Type: MC Skill: Applied Objective: 26.2 Summarize and apply the four lessons outlined in this chapter for the conduct of monetary policy

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8) In a period of deflation, when there is a declining price level, ________ nominal interest rates do not necessarily indicate that the cost of borrowing is ________ or that monetary policy is easy. A) low; low B) low; high C) high; low D) high; high Answer: A

Diff: 2 Type: MC Skill: Recall Objective: 26.2 Summarize and apply the four lessons outlined in this chapter for the conduct of monetary policy 9) In a period of deflation, when there is a declining price level, low nominal interest rates do not necessarily indicate that the cost of borrowing is ________ or that monetary policy is ________.

A) low; tight B) low; easy C) high; tight D) high; easy Answer: B Diff: 2 Type: MC Skill: Recall Objective: 26.2 Summarize and apply the four lessons outlined in this chapter for the conduct of monetary policy

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