Econ 1202.2
Practice #7

MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question. 

1) 

Suppose the market interest rate rises from 3 percent to 4 percent. This will lead to ________ in bond prices and ________ in bond yields. 

1) 

_______ 

A) 

a fall; a fall 

B) 

a rise; a rise 

C) 

no change; no change 

D) 

a fall; a rise 

E) 

a rise; a fall 

2) 

If real GDP falls, other things being equal, we can expect 

2) 

_______ 

A) 

an increase in the total demand for money. 

B) 

a decrease in transactions demand for money. 

C) 

an increase in the speculative demand for money. 

D) 

an increase in transactions demand for money. 

E) 

an increase in precautionary demand for money. 

3) 

Speculative demand for money arises from the desire by individuals and firms to hold cash balances 

3) 

_______ 

A) 

in anticipation of investing in capital purchases for the firm. 

B) 

for speculative equity purchases. 

C) 

in anticipation of changes in interest rates and bond prices. 

D) 

to meet unforeseen business expenses. 

E) 

to maintain adequate cash flow in case of inflation. 

FIGURE 1

4) 

Refer to Figure 1. A rightward shift of the money demand curve can be caused by 

4) 

_______ 

A) 

a decrease in the rate of interest. 

B) 

a decrease in the price level. 

C) 

a decrease in real GDP. 

D) 

an increase in the rate of interest. 

E) 

an increase in the price level. 

5) 

Assume there are just two assets, money and bonds. We can expect that an individual with a given level of wealth will  

5) 

_______ 

A) 

hold less money when the current interest rate is very low. 

B) 

not hold money as long as bonds pay a positive rate of interest. 

C) 

hold lots of money even at very high interest rates. 

D) 

hold more money when the current interest rate is very low. 

E) 

hold less money when bond prices rise. 

6) 

If the economy is currently in monetary equilibrium, an increase in the money supply will 

6) 

_______ 

A) 

cause an excess demand for money and a decrease in the rate of interest. 

B) 

lead to a movement down the money demand curve to a lower rate of interest. 

C) 

cause a reduction in the demand for money, leading to a higher rate of interest. 

D) 

not change the equilibrium conditions. 

E) 

cause an increase in the demand for money, leading to a lower rate of interest. 

FIGURE 2

7) 

Refer to Figure 2. Starting at equilibrium E0, an increase in real GDP will lead to a 

7) 

_______ 

A) 

shift of the MD curve to the left and a fall in the interest rate. 

B) 

shift of the MD curve to the right and an increase in the interest rate. 

C) 

shift of the Ms curve to the left and an increase in the interest rate. 

D) 

shift of the Ms curve to the right and a fall in the interest rate. 

E) 

downward movement along the MD curve and a lower interest rate. 

8) 

When the price level increases, ceteris paribus, it causes households and firms to try to 

8) 

_______ 

A) 

reduce money balances, which drives interest rates down. 

B) 

increase money balances, which drives interest rates down. 

C) 

reduce money balances, which drives national income up. 

D) 

increase money balances, which drives interest rates up. 

E) 

reduce money balances, which drives interest rates up. 

9) 

Other things being equal, a reduction in the money supply will lead to a 

9) 

_______ 

A) 

rise in the rate of interest and in increase in investment expenditure. 

B) 

fall in the rate of interest and a decrease in investment expenditure. 

C) 

rise in the rate of interest and no change in  investment expanditure. 

D) 

rise in the rate of interest and a decrease in investment expenditure. 

E) 

fall in the rate of interest and an increase in investment expenditure. 

10) 

If the Bank of Canada were to increase the money supply,  other things being equal, we would expect the aggregate expenditure curve to shift 

10) 

______ 

A) 

downward and the aggregate demand curve to shift to the right. 

B) 

downward and the aggregate demand curve to shift to the left. 

C) 

upward and the aggregate demand curve to shift to the left. 

D) 

upward and the aggregate demand curve to shift to the right. 

E) 

downward but the aggregate demand curve will remain unchanged. 

11) 

The monetary transmission mechanism describes the process by which changes in 

11) 

______ 

A) 

business investment influence real GDP. 

B) 

interest rate affect the demand for money. 

C) 

personal consumption affect real GDP. 

D) 

monetary equilibrium influence real GDP through changes in desired investment. 

E) 

monetary equilibrium influence the interest rate. 

12) 

Consider monetary equilibrium. A rise in the price level, with no change in the supply of money, will 

12) 

______ 

A) 

increase the demand for money and decrease aggregate expenditure. 

B) 

decrease the demand for money and increase aggregate demand. 

C) 

decrease aggregate demand but not affect the demand for money. 

D) 

decrease the demand for money and decrease aggregate demand. 

E) 

increase the demand for money and increase aggregate expenditure. 

13) 

Loans from the Bank of Canada are 

13) 

______ 

A) 

long-term loans made to the Canadian provincial governments. 

B) 

made to large corporations. 

C) 

made to commercial banks at the prime rate and are short-term in nature. 

D) 

made to commercial banks at the bank rate. 

E) 

the Bank's major policy instrument. 

14) 

The interest rate that commercial banks charge each other for the shortest period of borrowing or lending is called the 

14) 

______ 

A) 

term interest rate. 

B) 

overnight interest rate. 

C) 

preferred lending rate. 

D) 

prime rate. 

E) 

bank rate. 

15) 

Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term interest rates in the market fall as a result. When this occurs, the commercial banks respond to 

15) 

______ 

A) 

a decrease in the demand for loans by buying government securities from the Bank of Canada in exchange for cash, and calling in existing loans. 

B) 

an increase in the demand for loans by buying government securities from the Bank of Canada, against which they can extend new loans. 

C) 

an increase in the demand for loans by borrowing cash from the Bank of Canada with which they can extend new loans. 

D) 

an increase in the demand for loans by selling government securities to the Bank of Canada in exchange for cash, with which they can extend new loans. 

E) 

a decrease in the demand for loans by selling government securities to the Bank of Canada and calling in existing loans. 

16) 

The Bank of Canada's purchases and sales of government securities, when they occur, are referred to as 

16) 

______ 

A) 

reserve requirements. 

B) 

the setting of the bank rate. 

C) 

margin requirements. 

D) 

increases and decreases in government expenditure. 

E) 

open-market operations. 

17) 

An expansionary monetary policy would ________ and would eventually increase the money supply. 

17) 

______ 

A) 

reduce short-term interest rates  

B) 

increase short-term interest rates  

C) 

involve selling foreign-currency reserves in the foreign-exchange market  

D) 

involve selling government bonds on the open market 

E) 

none of the above 

18) 

The best description of the cause-and-effect chain of a contractionary monetary policy in the short run is that it will  

18) 

______ 

A) 

raise the interest rate, decrease investment spending, and decrease real GDP. 

B) 

raise the interest rate, increase investment spending, and decrease real GDP. 

C) 

raise the interest rate, decrease investment spending, and increase real GDP. 

D) 

lower the interest rate, lower investment spending, and decrease real GDP. 

E) 

lower the interest rate, increase investment spending, and increase real GDP. 

19) 

To remove an inflationary gap, the Bank of Canada would probably seek to  

19) 

______ 

A) 

increase its target for the overnight rate. 

B) 

increase the bank rate. 

C) 

decrease the bank rate. 

D) 

decrease its target for the overnight rate. 

E) 

both A and B are correct. 

20) 

If desired investment spending is relatively sensitive to changes in interest rates, then monetary policy could be very useful because it would  

20) 

______ 

A) 

be very effective in reducing expenditure during inflationary periods and ineffective in expanding expenditure during recessionary periods. 

B) 

be very ineffective in reducing expenditure during inflationary periods and very ineffective in expanding expenditure during recessionary periods. 

C) 

be very effective in reducing expenditure during inflationary periods and very effective in expanding expenditure during recessionary periods. 

D) 

be somewhat effective in reducing expenditure during inflationary periods and very ineffective in expanding expenditure during recessionary periods. 

E) 

be very ineffective in reducing expenditure during inflationary periods and very effective in expanding expenditure during recessionary periods. 

1) 

Answer to MC practice #7

D 

2) 

B 

3) 

C 

4) 

E 

5) 

D 

6) 

B 

7) 

B 

8) 

D 

9) 

D 

10) 

D 

11) 

D 

12) 

A 

13) 

D 

14) 

B 

15) 

D 

16) 

E 

17) 

A 

18) 

A 

19) 

E 

20) 

C