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According to the theory of liquidity preference,what does an increase in the price level cause the interest rate and investment to do?


A) It causes both the interest rate and investment to rise.
B) It causes both the interest rate and investment to fall.
C) It causes the interest rate to rise and investment to fall.
D) It causes the interest rate to fall and investment to rise.

E) All of the above
F) C) and D)

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The government buys a bridge.The owner of the company that builds the bridge pays her workers.The workers increase their spending.Firms that the workers buy goods from increase their output.Which of the following does this type of effect on spending illustrate?


A) the multiplier effect
B) the crowding-out effect
C) the marginal propensity to consume effect
D) the catch-up effect

E) B) and C)
F) None of the above

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Over what period of time is the liquidity-preference theory most relevant,and what does it suppose?


A) short run; it supposes that the price level adjusts to bring money supply and money demand into balance
B) short run; it supposes that the interest rate adjusts to bring money supply and money demand into balance
C) long run; it supposes that the price level adjusts to bring money supply and money demand into balance
D) long run; it supposes that the interest rate adjusts to bring money supply and money demand into balance

E) A) and B)
F) B) and C)

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Which of the following best defines the multiplier effect?


A) the multiplied impact on the money supply of a given increase in government purchases
B) the multiplied impact on tax revenues of a given increase in government purchases
C) the multiplied impact on investment of a given increase in interest rates
D) the multiplied impact on aggregate demand of a given increase in government purchases

E) A) and D)
F) A) and B)

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Which of the following is the most liquid asset?


A) capital goods
B) stocks and bonds with a low risk
C) stocks and bonds with a high risk
D) funds in a chequing account

E) B) and C)
F) A) and B)

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Which of the following defines the government purchases multiplier?


A) MPC
B) 1 - MPC
C) 1/MPC
D) 1/(1 - MPC)

E) A) and B)
F) A) and C)

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If there is crowding out,which of the following might decrease as government expenditures increase?


A) the overall change in real GDP
B) the demand for money curve
C) interest rates
D) the demand for capital goods

E) All of the above
F) A) and D)

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When the government reduces taxes,all other things being equal,which of the following decrease?


A) consumption
B) take-home pay
C) household saving
D) government surplus

E) A) and C)
F) B) and D)

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Which of the following is consistent with the supply-side theories?


A) When there is a recession, the Bank of Canada should decrease the money supply.
B) A shift in aggregate supply leads to a permanent increase in the natural rate of output.
C) The government should periodically increase the minimum wage and unemployment insurance benefits.
D) Aggregate demand does not shift in the short run.

E) All of the above
F) C) and D)

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Figure 15-1 Figure 15-1 -Refer to the Figure 15-1.Which of the following will happen if the current interest rate is 2 percent? A) There will be excess money supply. B) People will sell more bonds, which drives interest rates up. C) As the money market moves to equilibrium, people will buy more goods. D) People will sell more bonds, which drives the interest rates down. -Refer to the Figure 15-1.Which of the following will happen if the current interest rate is 2 percent?


A) There will be excess money supply.
B) People will sell more bonds, which drives interest rates up.
C) As the money market moves to equilibrium, people will buy more goods.
D) People will sell more bonds, which drives the interest rates down.

E) B) and D)
F) B) and C)

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Explain why the interest rate is the opportunity cost of holding currency.What is the benefit of holding currency?

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The nominal interest rate on currency is...

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In this question,we try to find out whether using the bank rate as a monetary policy tool is consistent with the liquidity-preference theory.Theoretically,when the Bank of Canada changes the bank rate and implicitly the money supply,the market interest rate would change to become equal to the bank rate AND to equate the new money supply with the money demand.But is this double role of the market interest rate possible? Let us give an example and see what happens.Assume the money demand curve is MD=150 - 15r,and the money supply curve is MS = 100 - 10R,where r is the market interest rate and R is the bank rate announced by the Bank of Canada. a)Show that,for a given value of bank rate R,the equilibrium market rate is different from R.What does this example show? b)Given the money demand equation MD=150 - 15r,find a money supply equation such that,for any value of R,the equilibrium market interest rate r is equal to R. c)For the money supply equation MS = 100 - 10R and a given bank rate R,show how the market could balance at the market interest rate r = R (show what the Bank of Canada should do to balance the money market). d)What have we learned from this exercise?

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a) The equilibrium interest rate is the ...

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According to liquidity-preference theory,when would the money-supply curve shift right?


A) if the money-demand curve shifted right
B) only if the Bank of Canada chose to increase the money supply
C) if the interest rate increased
D) if the price level fell or the interest rate decreased

E) B) and C)
F) A) and D)

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Figure 15-2 Figure 15-2 -Refer to the Figure 15-2.Which of the following can happen in a closed economy? A) Unemployment falls as the economy moves from a to b. B) Fiscal policy is ineffective to move the economy from b to a. C) If the economy is left alone, then as the economy moves from b to long-run equilibrium, the price level will increase. D) An increase in money supply increases both output and prices. -Refer to the Figure 15-2.Which of the following can happen in a closed economy?


A) Unemployment falls as the economy moves from a to b.
B) Fiscal policy is ineffective to move the economy from b to a.
C) If the economy is left alone, then as the economy moves from b to long-run equilibrium, the price level will increase.
D) An increase in money supply increases both output and prices.

E) A) and B)
F) All of the above

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An increase in the price level shifts the money-demand curve to the left,making interest rates rise.

A) True
B) False

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Figure 15-1 Figure 15-1 -Refer to the Figure 15-1.At an interest rate of 4 percent,how much is the excess money demand or supply? A) There is an excess money demand equal to the distance between a and b. B) There is an excess money demand equal to the distance between b and c. C) There is an excess money supply equal to the distance between b and a. D) There is an excess money supply equal to the distance between c and b. -Refer to the Figure 15-1.At an interest rate of 4 percent,how much is the excess money demand or supply?


A) There is an excess money demand equal to the distance between a and b.
B) There is an excess money demand equal to the distance between b and c.
C) There is an excess money supply equal to the distance between b and a.
D) There is an excess money supply equal to the distance between c and b.

E) B) and D)
F) B) and C)

Correct Answer

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According to liquidity-preference theory,how does a decrease in the price level affect the interest rate and output demanded,respectively?


A) The interest rate increases, and output demanded increases.
B) The interest rate increases, and output demanded decreases.
C) The interest rate decreases, and output demanded increases.
D) The interest rate decreases, and output demanded decreases.

E) A) and B)
F) All of the above

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The economy is in long-run equilibrium.Suppose that automatic teller machines become cheaper and more convenient to use,and as a result the demand for money falls.Other things being equal,what would we expect will happen to the price level and real GDP in the short and long run?


A) In the short run, the price level and real GDP would rise, but in the long run they would both be unaffected.
B) In the short run, the price level and real GDP would rise, but in the long run the price level would rise and real GDP would be unaffected.
C) In the short run, the price level and real GDP would fall, but in the long run they would both be unaffected.
D) In the short run, the price level and real GDP would fall, but in the long run the price level would fall and real GDP would be unaffected.

E) B) and C)
F) All of the above

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In recent years,the Bank of Canada has conducted policy by setting a target for which of the following?


A) bank reserves
B) the monetary growth rate
C) the exchange rate
D) the bank rate

E) All of the above
F) A) and C)

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Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

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If the interest rate is above equilibriu...

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