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Macro Exam 2.pdf

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Department
Economics (Arts)
Course
ECON 209
Professor
Paul Dickinson
Semester
Winter

Description
1. All of the following would tend to make actual deposit creation less than the theoretical maximum EXCEPT: a. A desire of banks to delay making loans in expectation of higher interest rates. b. A desire of households to maintain a certain fraction of their money holdings in the form of currency. c. A desire of households to stash money in safety-deposit boxes. d. A desire of banks to maximize profits. e. All of the above would theoretically reduce the amount of deposit creation. 2. Assume there is a banking system where all the banks are required to keep a reserve of 10 percent againsttheir deposit liabilities. Further, assume the banks keep no excess reserves. Bank A receives a new deposit of $100,000. The largest new loan this bank could make is a.,000. b.0,000. c.0,000. d.00,000. e.00,000. Case 26-2 The Bank of Canada sells $10 million worth of government securities to an investment dealer with a cheque drawn on the dealer's account with a chartered bank. The desired reserve ratio of all banks is 10 percent. Assume all chartered banks are operating with no excess reserves and there is no cash drain. 3. In the situation described in Case 26-2, if the Chartered Bank decreases its loans as a result of its fall of reserves with the Bank of Canada, the second generation bank will a. increase its loans by $9.0 million. b. increase its loans by $8.1 million. c. decrease its loans by $9.0 million. d. decrease its loans by $8.1 million. e.t change its loan position because the change in reserves will not affect it. 4. In the situation described in Case 26-2, the total amount of desired reserves in the banking system would a. increase by $100 million. b. increase by $10 million. c. decrease by $10 million. d. decrease by $91 million. e. decrease by $100 million. Case 26-3 Suppose the Bank of Canada sells $10 million worth of government securities to an investment dealer with a cheque drawn on the dealer's account with a chartered bank. The desired reserve ratio of all banks is 10 percent but there is now a cash drain of an additional 10 percent. If we assume that the banks are still operating with no excess reserves, answer the following three questions 5. In the situation described in Case 26-3, all the Chartered banks in the banking system would a. increase loans by $50 million. b. increase loans by $40 million. c. decrease its loans by $8 million. d. decrease its loans by $40 million. e. decrease its loans by $50 million. Case 26-1 The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. The dealer deposits this cheque at a Canadian Chartered Bank. The desired reserve ratio of all banks is 25 percent. Assume all chartered banks are operating with no excess reserves and there is no cash drain. 6. In the situation described in Case 26-1, the maximum creation of new deposits by the banking system, including the dealer's original deposit in the Chartered Bank, is a.5llion. b.2.5llion. c.0llion. d.5llion. e.llion. 7. Changes in the real demand for money are brought about by a. changes in interest rates. b. the variation in the price level. c. fluctuations in the prices of financial assets. d. variations in real GDP. e. none of the above. 8. An increase in the real demand for money could NOT be caused by: a. a rise in both the price level and the nominal money supply by the same percentage. b. an increase in the real income to households. c. a decrease in the interest rate. d. the introduction of more Near monies into the economy. e. a decrease in the price level. 9. According to the liquidity preference theory of the rate of interest, if the supply of money increases, then, ceteris paribus, bond prices will a. fall as the rate of interest rises. b. rise as the rate of interest rises. c. fall as the rate of interest falls. d. rise as the rate of interest falls. 10. If the economy is currently in monetary equilibrium, an increase in the money supply will a. not change the equilibrium conditions. b. cause a reduction in the demand for money, leading to a higher rate of interest. c. cause an excess demand for money and a decrease in the rate of interest. d. cause an increase in the demand for money, leading to a lower rate of interest. e. lead to a movement down the money demand curve to a lower rate of interest. 11. A rise in the price level, given no change in the supply of money, will a. increase the demand for money and increase aggregate expenditure. b. increase the demand for money and decrease aggregate expenditure. c. decrease the demand for money and increase aggregate demand. d. decrease the demand for money and decrease aggregate demand. 12. A decrease in the price level, given no change in the supply of money, will a. increase the demand for money and increase aggregate expenditure. b. increase the demand for money and decrease aggregate expenditure. c. decrease the demand for money and increase aggregate demand. d. decrease the demand for money and decrease aggregate demand. e. decrease the demand for money and leave aggregate demand unchanged. 13. A change in interest rates will affect aggregate demand through which of the following changes? a. a shift of the investment demand function and a movement along the aggregate expenditure curve. b. a movement along the investment demand function and a shift of the aggregate expenditure curve. c. a shift of both the investment demand function and the aggregate expenditure curve. d. movements along the investment demand function and the aggregate expenditure curve. e. a movement along the aggregate expenditure curve. 14. A decrease in the money supply is most likely to a. raise interest rates, investment, and aggregate expenditures. b.ise interest rates, lower investment, and lower aggregate expenditures. c.wer interest rates, raise investment, and raise aggregate expenditures. d. lower interest rates, investment, and aggregate expenditures. e. raise interest rates and investment, and lower aggregate expenditures. 15. The impact of monetary policy on aggregate expenditures will be smaller the a. greater the elasticity of the liquidity preference and investment demand functions. b. less the elasticity of the liquidity preference and investment demand functions. c. greater the elasticity of the liquidity preference schedule and the less the elasticity of the investment demand function. d. less the elasticity of the liquidity preference schedule and the greater the elasticity of the investment demand function. 16. In determining the negative slope of the AD curve, a rise in the price level causes the transactions demand for money to a. decrease, shifting the liquidity preference curve downward, lowering the interest rate and increasing desired investment, causing the aggregate expenditure curve to shift upward. b. decrease, shifting the liquidity preference curve upward, raising the interest rate and increasing desired investment, causing the aggregate expenditure curve to shift upward. c. increase, shifting the liquidity preference curve upward, raising the interest rate and reducing desired investment, causing the aggregate expenditure curve to shift upward. d. increase, shifting the liquidity preference curve downward, lowering the interest rate and reducing desired investment, causing the aggregate expenditure curve to shift downward. e. increase, shifting the liquidity preference curve upward, raising the interest rate and reducing desired investment, causing the aggregate expenditure curve to shift downward. 17. Refer to Figure 27-2. Starting from the equilibrium at E , 0n increase in the 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 Ms curve to the right and a fall in the interest rate. c. downward movement along the LP curve and a lower interest rate. d. shift of the LP curve to the left and a fall in the interest rate. e.ifte LP curve to the right and an increase in the interest rate. 18. Referring to Figure 27-2, The process of adjustment in the money market, when the interest rate is at i is best described as the 1 a. excess demand for money leads to a sale of bonds, which in turn causes the interest rate to rise. b. Ms curve will shift to the left as to maintain the interest rate ati . 2 c.terest rate will remain at i2, because the money market is in equilibrium at this rate. d.cess supply of money leads to the purchase of bonds, which in turn causes the interest rate to fall to i .o e. none of the above. 19. Refer to Figure 27-4. Suppose that the economy is in equilibrium at Eo and that the supply of money is held constant. In the long run, the economy will move to a. E2 because of an increase in consumer expenditure. b. E2 because of an fall in the interest rates. c. E1 because of a fall in the external value of our dollar. d. E1 because of an increase in wages. e. none of the above. 20. Suppose an individual in the community sells $1000 worth of government securities to the Bank of Canada and puts the money under his mattress. As a result of this transaction the a. deposits will increase by a multiple of $1000 depending on the reserve ratio. b. loans will increase by a multiple of $1000 depending on the value of the reserve ratio. c. nation's money supply will increase by $1000. d. nation's money supply will stay constant. e. nation's money supply will decrease by $1000. 21. The purchase of government bonds by the Bank of Canada is predicted to a. increase the loans granted by the chartered banks. b. increase the interest rate. c. be an effective anti-inflationary policy. d. decrease the price of bonds. e. decrease the reserves of chartered banks. 22. The Bank of Canada would tend to increase the money supply by a. raising the bank rate. b. selling foreign currency reserves in the international market. c. selling government bonds on the open market. d. transferring government accounts from the Bank of Canada to the chartered banks. e. all of the above. 23. If the Bank of Canada buys $100 of government bonds from the nonbank private sector, the desired reserve ratio is 10 percent, and the chartered banks have no excess reserves, this open-market sale will enable the chartered banks to a. increase reserves by $90, deposits by $100, and make no change on loans. b. increase reserves by $100, loans by $900, and deposits by $1,000. c. reduce reserves by $90, loans by $90, and deposits by $100. d. reduce reserves by $100, loans by $900, and deposits by $1,000. e. reduce reserves by $100, loans by $1,000, and deposits by $1,000. 24. The best description of the cause-and-effect chain of a tight monetary policy is that a. a decrease in the money supply will lower the interest rate, increase investment spending, and increase real GDP. b. a decrease in the money supply will raise the interest rate, decrease investment spending, and decrease real GDP. c. an increase in the money supply will lower the interest rate, lower investment spending, and decrease real GDP. d. an increase in the money supply will raise the interest rate, decrease investment spending, and increase real GDP. e. an increase in the money supply will raise the interest rate, increase investment spending, and decrease real GDP. 25. The best description the cause-and-effect chain of an expansionary monetary policy is that a. an increase in the money supply will lower the interest rate, raise investment spending, and increase real GDP. b. an increase in the money supply will raise the interest rate, decrease investment spending, and increase real GDP. c. an increase in the money supply will raise the interest rate, increase investment spending, and increase real GDP. d. a decrease in the money supply will lower the interest rate, increase investment spending, and increase real GDP. e. a decrease in the money supply will raise the interest rate, decrease investment spending, and decrease real GDP. 26. When there is a recessionary gap, an appropriate monetary policy could include a. increasing the bank rate. b. increasing the prime rate. c. increasing reserve requirements. d. switching government accounts from the Bank of Canada to the chartered banks. e. the sale of government securities to the public. 27. If investment spending is sensitive to changes in interest rates, then expansionary monetary policy will potentially a. decrease aggregate supply since interest rates will rise but will not affect aggregate demand. b. decrease aggregate supply but increase aggregate demand. c. increase aggregate supply but decrease aggregate demand. d. increase aggregate supply since interest rates will rise but will not affect aggregate demand. e. increase aggregate supply and increase aggregate demand. 28. A stable money supply rule will contribute to a.flation. b. monetary shocks if the demand for money fluctuates. c. stable growth of national income. d. stability of the price level. e. the Bank of Canada's ability to "fine tune" the economy. 29. Most economists believe all of the following statements EXCEPT: a. An ideal monetary policy would allow the money supply to grow at the same rate of growth as nominal national income. b. is not possible to slow the rate of inflation without slowing the growth of the money supply. c. Monetary policy does not have real effects in the long run. d. The growth rate of the money supply should be one intermediate target in the conduct of monetary policy. 30. If the unemployment rate is above the NAIRU, all of the following are true EXCEPT: a. There will be downward pressure on wages. b.e SRAS curve will shift upward. c. There will be an output gap. d. Real national income will be below potential real national income. e. There will be a recessionary gap. 31. When the monetary authorities respond to a single supply shock with monetary validation, we can expect an increase in a. the money supply but a decrease in costs and prices. b. costs but a decrease in real national income. c. the size of the output gap. d. costs, the price level, and the money supply. e. none of the above. 32. Single adverse supply shocks, if there is no monetary validation, will a. eventually be self-correcting as wages slowly fall. b. never be self-correcting without government policy to expand the money supply. c. be self-correcting only if the aggregate demand curve shifts. d. result in a permanent output gap. e. have no short-run or long-run effects. 33. There can be strong pressure on Bank of Canada to validate an adverse supply shock. The motive behind this pressure is a. to reduce unemployment below the NAIRU. b. that Bank of Canada must be seen to be pursuing a restrictive monetary policy, in order to stop any expectational inflation. c. that wages often fall only very slowly, so the adjustment back to full employment can take a very long time. d. that there is the danger of initiating a wage-price spiral. e. to keep a "healthy" amount of inflation in the economy. 34. If the economy is faced with continued supply shocks, such as annual wage increases for union workers, and there is no monetary
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