Macroeconomics 28
10) When i is the annual interest rate, the formula for calculating the present value of a bond with a face value of R dollars, receivable in one year is A) PV = R/(1+i) B) PV = (1+i)/R C) PV = i(R+i) D) PV = R/i E) PV = R (1+i)
A
102) The long- run neutrality of money implies that A) in response to any change in the money supply, the economy's adjustment process will bring Y back to Y, which is unaffected by the change in the money supply. B) changes to the money supply can never have any effect on real GDP. C) the economy's level of potential output will adjust to accommodate any change in the money supply. D) changes to the money supply have no effect on either the price level or real GDP. E) in response to any change in the money supply, the demand for money will adjust to cancel out its effects.
A
27) If real GDP falls, other things being equal, we can expect A) a decrease in transactions demand for money. B) an increase in transactions demand for money. C) an increase in the speculative demand for money. D) an increase in precautionary demand for money. E) an increase in the total demand for money.
A
39) According to the "liquidity preference" theory of the rate of interest, if the supply of money increases, then, ceteris paribus, bond prices will A) rise as the rate of interest falls. B) rise as the rate of interest rises. C) stay the same. D) fall as the rate of interest falls. E) fall as the rate of interest rises.
A
45) When there is an excess supply of money, monetary equilibrium is restored through A) the price of bonds increasing. B) the price of bonds falling. C) individuals attempting to sell bonds. D) interest rates rising. E) the price level falling.
A
46) Monetary equilibrium occurs when the A) existing supply of money is willingly held by households and firms in the economy at the current rate of interest. B) supply and demand for all goods in the economy are equal at the current rate of interest. C) the money supply is growing at a constant rate. D) growth in the money supply is zero. E) nominal rate of interest equals the real rate of interest.
A
54) How does monetary equilibrium re- establish itself when there is an excess supply of money balances? A) the price of bonds increases B) the price of bonds falls C) the interest rate rises D) individuals attempt to sell bonds E) none of the above
A
58) The linkage between changes in monetary equilibrium and changes in aggregate demand is called the A) monetary transmission mechanism. B) transactions mechanism. C) liquidity preference function. D) simple multiplier. E) equilibrium mechanism.
A
74) If the Bank of Canada were to increase the money supply, other things being equal, we would expect the aggregate expenditure curve to shift A) upward and the aggregate demand curve to shift to the right. B) downward and the aggregate demand curve to shift to the right. C) downward and the aggregate demand curve to shift to the left. D) upward and the aggregate demand curve to shift to the left. E) downward but the aggregate demand curve will remain unchanged.
A
80) Consider the monetary transmission mechanism in an open economy. Other things being equal, a decrease in the domestic money supply leads to A) an appreciation of the domestic currency, thereby inhibiting net exports and reducing aggregate demand. B) an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand. C) a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. D) a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. E) an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
A
82) Changes in the money supply in an open economy, as compared to a closed economy, A) are likely to have a greater effect on AD because of the secondary effect that exchange rates have on exports. B) are the same in either situation. C) are likely to have a smaller effect on AD because the secondary effect of exchange rates will offset the changes created by monetary disturbances. D) affect investment to a greater degree because foreign investors can create new investment in an open economy. E) cannot be determined with the available information.
A
85) The monetary transmission mechanism provides a partial explanation for the downward slope of the AD curve. For a given vertical MS curve, the explanation for the negative relationship between the price level and aggregate demand is as follows: A) a rise in the price level shifts the MD curve to the right, the interest rate rises and desired investment expenditure falls. B) a rise in the price level shifts the MD curve to the left, the interest rate falls, and desired investment expenditure rises. C) a rise in the price level shifts the MD curve to the left, the interest rate rises and desired investment expenditure falls. D) a rise in the price level shifts the MD curve to the right, the interest rate rises and desired investment expenditure rises. E) a rise in the price level shifts the MD curve to the right, the interest rate falls and desired investment expenditure falls.
A
88) Other things being equal, the steeper is the investment demand function, the A) less responsive is desired investment to a change in the interest rate. B) less responsive is the demand for money to a change in the interest rate. C) more responsive is desired investment to a change in the interest rate. D) more responsive is the demand for money to a change in the interest rate. E) less responsive is the interest rate to a change in the money supply.
A
91) The effectiveness of monetary policy in bringing about changes in real GDP is enhanced when the A) investment demand curve is relatively flat and the money demand function is relatively steep. B) investment demand curve is relatively steep and the money demand function is relatively flat. C) investment demand curve and money demand function are both relatively flat. D) investment demand curve and money demand function are both relatively steep. E) none of the above -- monetary policy is always equally effective.
A
95) A relatively steep investment demand curve and a relatively flat money demand curve A) imply that large increases in the money supply have little effect on aggregate expenditure. B) are believed by many monetarists to be realistic descriptions of the economy. C) increase the effectiveness of expansionary monetary policy. D) make the money supply a particularly powerful policy instrument. E) make it impossible for the Bank of Canada to change the money supply.
A
FIGURE 28-1 34) Refer to Figure 28- 1. A rightward shift of the money demand curve can be caused by A) an increase in the price level. B) a decrease in the price level. C) an increase in the rate of interest. D) a decrease in real GDP. E) a decrease in the rate of interest.
A
101) Which of the following statements best describes the difference between the Classical and modern views regarding the role of money in the economy? A) Unlike modern economists, Classical economists believed that the neutrality of money existed only in the long run. B) Both Classical and modern economists accept the neutrality of money in the long run, but modern economists question neutrality in the short run. C) Classical economists argued that relative prices are determined by the supply of money, while modern economists believe that the money supply will never affect relative prices. D) Both schools of thought accept the neutrality of money within the economy. E) Both Classical and modern economists accept the neutrality of money in the short run, but modern economists question neutrality in the long run.
B
104) Suppose changes in the money supply only affected the price level and never affected real GDP. If this were the case, it could be viewed as evidence A) supporting both the Classical and modern views of the neutrality of money. B) that the Classical view of the neutrality of money is correct. C) that the modern view of the neutrality of money is correct. D) that both the Classical and modern views of the neutrality of money are incorrect. E) that has no bearing on the theories of either Classical or modern economists.
B
17) In order to calculate the present value of the sum of future payments due from a bond, we use the interest rate to ________ those future payments. A) adjust B) discount C) maximize D) correct E) inflate
B
20) Suppose the market interest rate is stable at 4 percent and we see a decline in bond prices (and thus a rise in bond yields). One explanation for this is that A) bond issuers are facing an excess demand for their bonds. B) bond purchasers perceive an increase in riskiness and thus a lower expected present value from those bonds. C) there is no causal relationship between market interest rates and bond prices. D) bond purchasers perceive a reduction in riskiness and thus a higher expected present value from those bonds. E) none of the above.
B
22) The opportunity cost of holding money rather than bonds is A) zero -- there is no opportunity cost of holding money. B) the rate of interest earned on bonds. C) forgone consumption. D) forgone liquidity. E) the price level.
B
25) The "precautionary demand" for money arises from the A) need to make predictable purchases of goods and services. B) uncertainty about when some expenditures will be necessary. C) fear that interest rates will rise. D) fear that interest rates will fall. E) desire to avoid paying interest on credit purchases.
B
26) Other things being equal, the transactions demand for money tends to increase when A) interest rates rise. B) national income rises. C) interest rates stop rising. D) the price level falls. E) national income falls.
B
29) A firm that holds cash to avoid penalties associated with the late payment of bills is demonstrating which type of demand for money? A) present value demand B) precautionary demand C) speculative demand D) risk- return demand E) transactions demand
B
35) Refer to Figure 28- 1. A leftward shift in the money demand curve can be caused by by A) an increase in the price level. B) a decrease in real GDP. C) a decrease in the rate of interest. D) an increase in real GDP. E) an increase in the rate of interest.
B
4) What is the present value of a bond that pays $121.00 one year from today if the interest rate is 10 percent per year? A) $100.00 B) $110.00 C) $121.00 D) $133.10 E) $221.00
B
40) If the general price level were to increase, other things being equal, the money demand function would A) not be affected. B) shift to the right. C) shift to the left. D) become steeper but not shift. E) shift, but the direction of the shift cannot be predicted.
B
41) If the annual market interest rate is 20 percent, the annual opportunity cost of having $50 cash in your pocket is A) $0. B) $10. C) $50. D) $2. E) $1000.
B
43) Suppose that at a given interest rate and money supply, all firms and households simultaneously try to reduce their money balances. They do this by trying to ________, which causes an excess ________, which causes a(n) ________, and finally a(n) ________ in the interest rate. A) buy bonds; supply of bonds; decrease in the price of bonds; increase B) buy bonds; demand for bonds; increase in the price of bonds; decrease C) sell bonds; demand for bonds; increase in the price of bonds; decrease D) sell bonds; supply of bonds; increase in the price of bonds; decrease E) sell bonds; supply of bonds; decrease in the price of bonds; increase
B
50) Refer to Figure 28- 2. If the interest rate is i2, the subsequent adjustment in the money market is as follows: A) excess supply of money leads to the sale of bonds, which in turn causes the interest rate to fall. B) excess supply of money leads to the purchase of bonds, which in turn causes the interest rate to fall to io. C) excess demand for money leads to a sale of bonds, which in turn causes the interest rate to rise. D) the interest rate will remain at i2, because the money market is in equilibrium at this interest rate. E) Ms curve will shift to the left as to maintain the interest rate at i2.
B
57) Refer to Figure 28- 4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. What is the long- run effect of this change? A) lower real GDP B) a higher price level C) a higher price level and higher real GDP D) no change in price level or real GDP E) higher real GDP
B
64) The monetary transmission mechanism is activated when a rise in the price level causes A) an increased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate. B) an increased demand for money balances, leading people to sell bonds, which in turn raises the interest rate. C) an increased demand for money balances, leading people to sell bonds, which in turn decreases the interest rate. D) a decreased demand for money balances, leading people to sell bonds, which in turn raises the interest rate. E) a decreased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate.
B
65) The monetary transmission mechanism describes the process by which changes in A) interest rate affect the demand for money. B) monetary equilibrium influence real GDP through changes in desired investment. C) monetary equilibrium influence the interest rate. D) business investment influence real GDP. E) personal consumption affect real GDP.
B
73) A decrease in the money supply is most likely to A) lower interest rates, investment, and aggregate expenditures. B) raise interest rates, lower investment, and lower aggregate expenditures. C) raise interest rates, investment, and aggregate expenditures. D) lower interest rates, raise investment, and raise aggregate expenditures. E) raise interest rates and investment, and lower aggregate expenditures.
B
79) Consider the monetary transmission mechanism in an open economy. Other things being equal, an increase in the domestic money supply leads to A) an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand. B) a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. C) an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. D) a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. E) an appreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand.
B
8) If the annual interest rate is 8 percent, an asset that promises to pay $160 after each of the next two years has a present value of A) $ 178.32. B) $ 285.32. C) $ 296.30. D) $ 300.00. E) $ 320.00.
B
83) Other things being equal, a decrease in the money supply will lead to ________ in real interest rates and, in the short run, ________ in real GDP because ________. A) a decrease; a decrease; of the decrease in domestic investment. B) an increase; a decrease; of the decline in domestic investment. C) a decrease; an increase; of the increase in domestic investment. D) an increase; an increase; more money is available for investing in bonds from abroad E) a decrease; a decrease, of the decrease in net exports.
B
84) If the economy is experiencing an undesired inflationary gap, the Bank of Canada could A) decrease the demand for money, lowering interest rates, which would shift the AD curve outward. B) decrease the supply of money, raising interest rates, which would shift the AD curve inward. C) increase the supply of money, lowering interest rates, which would shift the AD curve outward. D) increase the supply of money, lowering interest rates, which would shift the AD curve inward. E) shift the investment demand curve to the right by lowering interest rates, which would shift the AD curve outward.
B
86) Other things being equal, the steeper the AS curve for the economy , the A) more sensitive the aggregate expenditure function to changes in the interest rate. B) larger the impact on the price level from any given increase in the money supply. C) smaller the impact on the price level from any given increase in the money supply. D) larger the impact on real output from any given increase in the money supply. E) less sensitive the aggregate expenditure function to changes in the interest rate.
B
87) Other things being equal, the flatter the AS curve for the economy , the A) smaller the impact on real output from any given increase in the money supply. B) smaller the impact on the price level from any given increase in the money supply. C) more sensitive the aggregate expenditure function to changes in the interest rate. D) larger the impact on the price level from any given increase in the money supply. E) less sensitive the aggregate expenditure function to changes in the interest rate.
B
89) Other things being equal, the flatter is the investment demand function, the A) more responsive is the demand for money to a change in interest rates. B) more responsive is desired investment to a change in interest rates. C) less responsive is desired investment to a change in interest rates. D) less responsive is the interest rate to a change in the money supply. E) less responsive is the demand for money to a change in interest rates.
B
99) According to the views of the Classical economists, if the money supply doubles, A) relative prices will double. B) money prices will double. C) money prices will be halved. D) there will be no effect on money prices. E) real income will double.
B
FIGURE 28-2 48) Refer to Figure 28- 2. Starting at equilibrium E0, an increase in real GDP will lead to a A) shift of the Ms curve to the left and an increase in the interest rate. B) shift of the MD curve to the right and an increase in the interest rate. C) downward movement along the MD curve and a lower interest rate. D) shift of the MD curve to the left and a fall in the interest rate. E) shift of the Ms curve to the right and a fall in the interest rate.
B
14) When considering the present value of any financial asset that makes a stream of payments in the future, we know that if the market interest rate falls, A) the present value of the asset is unaffected. B) the present value of the asset will rise. C) the future value of the asset will rise. D) the current value of the asset will fall. E) the present value of the asset will fall.
B 15) Consider a Government of Canada bond with a face value of $1000, but a present value of only $925. If this bond is offered for sale at $960, then A) the excess demand for the bond at $960 will drive the price up to the face value of the bond. B) the equilibrium market price of this bond has been achieved. C) individuals will purchase the bond at the offer price which will drive the market rate of interest up. D) the lack of demand for this bond will drive the price down until it reaches its equilibrium market price of $925. E) individuals will purchase the bond at the offer price which will drive the market rate of interest down. Answer: D
1) Other things being equal, bond prices A) vary directly with interest rates. B) vary proportionally with interest rates. C) vary inversely with interest rates. D) are unaffected by changes in the demand for money. E) are unaffected by interest- rate changes.
C
18) When the market price of a bond falls, ceteris paribus, then A) the term to maturity of the bond increases. B) the yield on that bond also falls. C) the yield on that bond rises. D) the term to maturity of the bond decreases. E) the market interest rate rises.
C
28) Suppose an economic analyst suggests that investors should now hold cash instead of stocks or bonds. The analyst is probably encouraging an increase in money balances for which reason? A) present value demand B) transaction demand C) speculative demand D) precautionary demand E) all of the above
C
31) Speculative demand for money arises from the desire by individuals and firms to hold cash balances A) for speculative equity purchases. B) in anticipation of investing in capital purchases for the firm. C) in anticipation of changes in interest rates and bond prices. D) to maintain adequate cash flow in case of inflation. E) to meet unforeseen business expenses.
C
32) In the basic AD/AS macro model, it is assumed that, for any given interest rate, the demand for money depends on the A) level of government spending. B) aggregate demand for goods and services. C) level of real GDP and the price level. D) rate of growth of real GDP. E) level of taxes.
C
38) Assume there are just two assets, money and bonds. We can expect that an individual with a given level of wealth will A) hold less money when bond prices rise. B) not hold money as long as bonds pay a positive rate of interest. C) hold more money when the current interest rate is very low. D) hold less money when the current interest rate is very low. E) hold lots of money even at very high interest rates.
C
5) If Robert expects interest rates to fall in the near future, he will probably be willing to A) put his money in a savings account rather than buy bonds. B) sell bonds now, and hold less money. C) buy bonds now, and hold less money. D) maintain only the current holding of bonds. E) buy bonds now, but only if their price falls.
C
52) When the price level increases, ceteris paribus, it causes households and firms to try to A) reduce money balances, which drives interest rates up. B) reduce money balances, which drives interest rates down. C) increase money balances, which drives interest rates up. D) reduce money balances, which drives national income up. E) increase money balances, which drives interest rates down.
C
53) If there are just two assets, bonds and money, then an equilibirum between the supply and demand for money implies A) an indeterminant equilibrium in the bond market. B) an excess demand for bonds. C) equilibrium in the bond market. D) an excess supply of bonds. E) nothing about conditions of demand for the other financial asset.
C
59) Other things being equal, a reduction in the money supply will lead to a A) rise in the rate of interest and no change in investment expanditure. B) rise in the rate of interest and in increase in investment expenditure. C) rise in the rate of interest and a decrease in investment expenditure. D) fall in the rate of interest and an increase in investment expenditure. E) fall in the rate of interest and a decrease in investment expenditure.
C
6) When Janet expects interest rates to rise in the near future, she will probably be willing to A) buy bonds now, and hold less money. B) put her money in a savings account rather than buy bonds. C) sell bonds now, and hold more money. D) buy bonds now, but only if their price falls. E) maintain only the current holding of bonds.
C
60) The economy's investment demand function describes the A) positive relationship between desired investment, the rate of interest, and aggregate expenditure. B) negative relationship between the demand for money and the interest rate. C) negative relationship between the interest rate and desired investment. D) negative relationship between desired investment and aggregate expenditure. E) positive relationship between desired investment and the rate of interest.
C
62) Refer to Figure 28- 3. This figure illustrates A) the entire monetary transmission mechanism. B) the ultimate effect of a change in the money supply on real GDP. C) the first two steps of the monetary transmission mechanism. D) the effect of a change in the money supply on money demand. E) only the first step of the monetary transmission mechanism.
C
67) Consider the relationship between the price level, the money market, and the position of the economy's AE curve. If the price level falls exogenously, this will lead to A) a movement to the right along the AE function. B) people being able to buy more with their increased wealth, which will shift the AE function downward and decrease the equilibrium level of income. C) an excess supply of money resulting in a fall in the rate of interest, which shifts the AE upward and increases the equilibrium level of income. D) a movement to the left along the AE function. E) an excess demand for money resulting in a rise in the rate of interest, which shifts the AE function downward and decreases the equilibrium level of income.
C
71) Consider monetary equilibrium. A decrease in the price level, with no change in the supply of money, will A) decrease the demand for money and leave aggregate demand unchanged. B) decrease the demand for money and decrease aggregate demand. C) decrease the demand for money and increase aggregate demand. D) increase the demand for money and increase aggregate expenditure. E) increase the demand for money and decrease aggregate expenditure.
C
72) Consider a disturbance to monetary equilibrium which changes the interest rate. This change will affect aggregate demand through A) a shift of both the investment demand function and the aggregate expenditure curve. B) movements along the investment demand function and the aggregate expenditure curve. C) a movement along the investment demand function and a shift of the aggregate expenditure curve. D) a movement along the aggregate expenditure curve. E) a shift of the investment demand function and a movement along the aggregate expenditure curve.
C
75) If the Bank of Canada were to reduce the money supply, other things being equal, we would expect the aggregate expenditure curve to shift A) downward and the aggregate demand curve to shift to the right. B) downward but the aggregate demand curve will remain unchanged. C) downward and the aggregate demand curve to shift to the left. D) upward and the aggregate demand curve to shift to the left. E) upward and the aggregate demand curve to shift to the right.
C
77) Which of the following explanations for the negative slope of the AD curve is correct? A fall in the price level, with an unchanged money supply, causes the transactions demand for money to A) increase, shifting the MD curve downward, lowering the interest rate and decreasing desired investment, causing the AE curve to shift downward. B) increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift downward. C) decrease, shifting the MD curve downward, lowering the interest rate and increasing desired investment, causing the AE curve to shift upward. D) decrease, shifting the MD curve upward, raising the interest rate and increasing desired investment, causing the AE curve to shift upward. E) increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift upward.
C
81) Which of the following correctly describes the way in which a change in the money supply affects aggregate demand? A) movements along the ID curve and the aggregate demand curve B) a movement along the aggregate demand curve. C) a movement along the ID curve and a shift of the aggregate demand curve D) a shift of the ID curve and a movement along the aggregate demand curve E) a shift of both the ID curve and the aggregate demand curve
C
90) If the Bank of Canada were to increase the money supply, we would expect a large increase in aggregate demand if the money demand function A) remains the same and the investment demand function is steep. B) and the investment demand function are relatively flat. C) is relatively steep and the investment demand function is relatively flat. D) is relatively flat and the investment demand function is relatively steep. E) and the investment demand function are relatively steep.
C
93) Monetary policy can have the largest impact on desired aggregate expenditures when the A) investment demand curve is relatively steep and the money demand function is relatively flat. B) investment demand curve and money demand function are both relatively steep. C) investment demand curve is relatively flat and the money demand function is relatively steep. D) investment demand curve and money demand function are both relatively flat. E) none of the above -- monetary policy is always equally effective.
C
94) Monetary policy will be least effective in changing aggregate demand when the A) investment demand curve and money demand function are both relatively steep. B) investment demand curve is relatively flat and the money demand function is relatively steep. C) investment demand curve is relatively steep and the money demand function is relatively flat. D) investment demand curve and money demand function are both relatively flat. E) none of the above -- monetary policy is always equally effective.
C
FIGURE 28-3 61) Refer to Figure 28- 3. The increase in the money supply from MS0 to MS1 shifts the monetary equilibrium from E0 to E1. The result is A) sustained monetary disequilibrium. B) a shift of the investment demand curve to the right. C) a decrease in the interest rate and an increase in desired investment. D) an increase in the interest rate and a decrease in desired investment. E) a shift of the investment demand curve to the left.
C
100) Classical economists' belief in the "neutrality of money" led them to argue that A) absolute prices were determined in the real part of the economy. B) a change in the quantity of money would not affect money prices or relative prices. C) the allocation of resources was determined by the quantity of money and not by the forces of supply and demand. D) a change in the quantity of money would change the price level but would not change relative prices. E) relative prices have no role in the real allocation of resources.
D
2) The present value of an asset is A) the most someone would be willing to pay upon maturity of the asset. B) the amount someone would pay in the future to have the asset today. C) the amount someone would pay in the future for the current stream of payments from the asset. D) the most someone would be willing to pay today for the asset. E) equivalent to the face value of the asset.
D
24) The "transactions demand" for money arises from the fact that A) households wish to have all their wealth in the form of money. B) there is uncertainty in the receipts of income. C) households want to keep cash on had to buy bonds if bond prices drop. D) households decide to hold money in order to make purchases of goods and services.. E) there is uncertainty about the movement of interest rates.
D
37) If there are just two assets, bonds and money, then an excess demand for money implies A) nothing about conditions of demand for the other financial asset. B) equilibrium in the bond market. C) an excess demand for bonds. D) an excess supply of bonds. E) an indeterminant equilibrium in the bond market.
D
42) Suppose that at a given interest rate and money supply, all firms and households simultaneously try to add to their money balances. They do this by trying to ________, which causes an excess ________, which causes a(n) ________, and finally a(n) ________ in the interest rate. A) buy bonds; demand for bonds; increase in the price of bonds; decrease B) sell bonds; supply of bonds; increase in the price of bonds; decrease C) buy bonds; supply of bonds; decrease in the price of bonds; increase D) sell bonds; supply of bonds; decrease in the price of bonds; increase E) sell bonds; demand for bonds; increase in the price of bonds; decrease
D
47) If the economy is currently in monetary equilibrium, an increase in the money supply will A) cause an excess demand for money and a decrease in the rate of interest. B) cause a reduction in the demand for money, leading to a higher rate of interest. C) cause an increase in the demand for money, leading to a lower rate of interest. D) lead to a movement down the money demand curve to a lower rate of interest. E) not change the equilibrium conditions.
D
51) Refer to Figure 28- 2. If the interest rate is i1, the subsequent adjustment in the money market is as follows: A) excess supply of money leads to the purchase of bonds, which in turn causes the interest rate to fall. B) the Ms curve will shift to the left so as to maintain the interest rate at i2. C) the interest rate will remain at i1 because the money market is in equilibrium at this interest rate. D) excess demand for money leads to a sale of bonds, which in turn causes the interest rate to rise. E) excess demand for money leads to a purchase of bonds, which in turn causes the interest rate to rise.
D
63) Refer to Figure 28- 3. The increase in desired investment expenditure, as shown by the movement from point A to point B, occurs because of A) an improvement in business confidence. B) a tax- rate induced change in desired investment. C) a fiscal policy designed to encourage investment. D) an increase in the money supply. E) a change in sales, which increases inventory investment.
D
66) Which one of the following statements best describes the monetary transmission mechanism? A) A decrease in the money supply leads to a lower interest rate, higher investment, an upward shift in the AE curve and a higher GDP. B) An increase in government spending causes the AE curve to shift upwards, leading to a higher GDP. C) A decrease in imports causes the AE curve to shift upwards, leading to a higher interest rate. D) An increase in the money supply leads to a lower interest rate, higher investment, an upward shift in the AE curve and a higher GDP. E) An increase in personal consumption leads to an upward shift in the AE curve and thereby increases real GDP.
D
7) If the annual market rate of interest is 5 percent, an asset that promises to pay $100 after each of the next two years has a present value of A) $ 90.70. B) $ 95.24. C) $ 181.40. D) $ 185.94. E) $ 200.00.
D
70) Consider monetary equilibrium. A rise in the price level, with no change in the supply of money, will A) increase the demand for money and increase aggregate expenditure. B) decrease the demand for money and increase aggregate demand. C) decrease the demand for money and decrease aggregate demand. D) increase the demand for money and decrease aggregate expenditure. E) decrease aggregate demand but not affect the demand for money.
D
78) The monetary transmission mechanism in an OPEN economy is more complicated than it is in a closed economy because the effects of domestic monetary contraction or expansion are A) weakened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world. B) strengthened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world. C) strengthened because domestic interest rates must be equal to those in the rest of the world. D) strengthened because changes in the domestic money supply cause changes in the exchange rate, which then reinforce the changes in desired investment. E) weakened because changes in the domestic money supply cause changes in the exchange rate which then offset the changes in desired investment.
D
9) If the annual interest rate is 10 percent, $5.00 received today has the same present value as A) $4.00 received one year from now. B) $4.50 received one year from now. C) $5.00 received one year from now. D) $5.50 received one year from now. E) $6.00 received one year form now.
D
92) Monetary policy is ineffective in bringing about changes in aggregate demand when the A) investment demand curve and money demand function are both relatively steep. B) investment demand curve and money demand function are both relatively flat. C) investment demand curve is relatively flat and the money demand function is relatively steep. D) investment demand curve is relatively steep and the money demand function is relatively flat. E) none of the above -- monetary policy is always equally effective.
D
98) Which of the following best represents the view of the Classical economists regarding money? A) The monetary sector influences consumers' preferences and relative prices. B) Relative prices are determined by the money supply. C) The distribution of income is affected by the money supply. D) The economy is composed of the real sector and the monetary sector, and the latter does not affect the former. E) The allocation of resources is affected by the money supply.
D
103) The hypothesis in economics known as hysteresis is that A) the economy's adjustment process operates in response to an expansion of the money supply, but not a contraction. B) the role of money in the long run is neutral. C) the monetary transmission mechanism does not apply in an open- economy setting. D) changes in the money supply have a stronger influence on investment demand than do changes in fiscal policy. E) the path of real GDP in an economy can influence that economy's level of potential output.
E
11) In a competitive financial market, the equilibrium price of an asset will equal the A) future value of the asset multiplied by the interest rate. B) sum of present value of the asset multiplied by the interest rate. C) future value of the asset. D) issue price of the asset. E) present value of the asset.
E
12) Consider a bond that promises to make coupon payments of $100 each year for three years (beginning in one year's time) and then repay the face value of $2000. If the market interest rate is 6 percent, what is the present value of this bond? A) $2114.49 B) $267.30 C) $1763.22 D) $283.02 E) $1946.56
E
13) Consider a bond that promises to make coupon payments of $100 each year for three years (beginning in one year's time) and then repay the face value of $2000. If the market interest rate is 4 percent, what is the present value of this bond? A) $1966.39 B) $1941.57 C) $288.45 D) $1866.67 E) $2055.28
E
16) Consider a Hydro Quebec bond with a face value of $1000, but a present value of $1175. If this bond is offered for sale at $1025, then A) individuals will purchase the bond at the offer price which will drive down the price further. B) the equilibrium market price of this bond has been achieved. C) Hydro Quebec will be forced to change the face value of the bond. D) excess supply of this bond will drive the price down until it reaches its face value. E) excess demand for this bond will drive the price up until it reaches its equilibrium market price of $1175.
E
19) Suppose the market interest rate rises from 3 percent to 4 percent. This will lead to ________ in bond prices and ________ in bond yields. A) a fall; a fall B) a rise; a fall C) no change; no change D) a rise; a rise E) a fall; a rise
E
21) The term "demand for money" usually refers to the A) cash and deposits actually held by firms. B) average person's desire to hold cash. C) sum of all desired assets, including cash, bonds, and real property. D) sum of all desired holdings of cash. E) aggregate demand for cash and chequable deposits in the economy.
E
23) If a person is holding money for the purchase of goods and services, this demand for money is known as A) real balance demand. B) speculative demand. C) nominal balance demand. D) precautionary demand. E) transactions demand.
E
3) The present value of a bond is determined by the A) face value and the date of maturity. B) rate of inflation. C) market rate of interest only. D) marginal rate of income tax. E) market rate of interest, the date of maturity, and the face value.
E
30) In general, people hold cash balances for all of the following reasons EXCEPT: A) to make purchases. B) to guard against the uncertainty of the timing of receipts and payments. C) as a store of wealth. D) to meet unforeseen emergencies. E) to maximize their returns on interest- earning assets.
E
33) The demand for money (MD) function defines the relationship between A) the quantity of money demanded and the price level. B) interest rates and bond prices. C) inflation and bond prices. D) interest rates and financial assets. E) the quantity of money demanded and the rate of interest.
E
36) An increase in the quantity of money demanded could be caused by A) a decrease in the interest rate. B) the expectation of default on government- issued bonds. C) an increase in the price level. D) an increase in the real income to households. E) all of the above
E
44) When there is an excess demand for money balances, monetary equilibrium is established by a process that involves A) the price of bonds falling. B) people trying to sell bonds. C) interest rates rising. D) movement up the money demand function. E) all of the above
E
49) Refer to Figure 28- 2. Starting at equilibrium E0, an increase in the supply of money will result in the A) shift of the Ms curve to the left and an increase in the interest rate. B) shift of the Ms curve to the right and a fall in the interest rate. C) downward movement along the MD curve and a lower interest rate. D) shift of the MD curve to the left and a fall in the interest rate. E) both B and C are correct.
E
56) Refer to Figure 28- 4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. What is the adjustment toward the new long- run equilibrium? A) The AS curve shifts to AS1 which causes the AD curve to shift to AD1, resulting in a new equilibrium at E2. B) The AD and AS curves shift to AD1 and AS1 simultaneously. The increased price level pushes them back to AD0 and AS0 and equilibrium is restored at E0. C) The AD curve shifts to AD1. The inflationary gap causes prices to rise, AS shifts to AS1 and equilibrium is restored at E3. D) The AD curve shifts to AD1. The increased money supply causes an increase in potential output and a new long- run equilibrium at E1. E) The AD curve shifts to AD1. The inflationary gap causes wages to rise, AS shifts to AS1 and equilibrium is restored at E2.
E
68) An increase in the money supply sets the monetary transmission mechanism in motion which results in A) a rightward shift in the AD curve. B) a rise in the level of desired investment. C) an upward shift in the AE curve. D) a fall in the rate of interest. E) all of the above
E
69) A decrease in the money supply sets the monetary transmission mechanism in motion which results in A) a rise in the rate of interest. B) a fall in the level of desired investment. C) a leftward shift in the AD curve. D) a downward shift in the AE curve. E) all of the above
E
76) If real GDP is greater than potential GDP, the output gap could be eliminated by A) an upward shift in the AS curve. B) a decrease in government purchases. C) a reduction in the money supply. D) a leftward shift in the AD curve. E) all of the above
E
96) Which of the following is partly responsible for the negative slope of the aggregate demand (AD) curve? A) open- market operations of the Bank of Canada B) the speculative demand for money C) the precautionary demand for money D) the multiplier effect E) the monetary transmission mechanism
E
97) The view of the Classical economists regarding the "neutrality of money" was that A) the allocation of resources is independent of the distribution of income. B) the distribution of income is independent of the allocation of resources. C) money is neutral in its effect on absolute prices in the economy. D) the real part of the economy cannot affect the level of money prices. E) the quantity of money has no effect on any real variables in the economy.
E
FIGURE 28-4 55) Refer to Figure 28- 4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. The initial effect is A) no change in the short- run equilibrium or level of real GDP. B) a shift of the AD curve to AD1, and then a shift back to AD0 to restore equilibrium at E0. C) a simultaneous shift of AD to AD1 and AS to AS1, resulting in a new equilibrium at E2. D) a shift of the AS curve to AS1 and a decrease in real GDP to Y2. E) a shift of the AD curve to AD1 and an increase in real GDP to Y1.
E
