EC140 FINAL EXAM PRACTICE MULTIPLE CHOICE QUESTIONS
(Answers in separate file in this folder.)
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) The function of money in an economy is to serve as 1) _______
A) a store of value.
B) a unit of account.
C) a medium of exchange.
D) all of the above.
E) none of the above.
2) Doug is saving money in order to purchase a new snowboard next winter. This represents using 2) _______
A) a medium of deferred payment.
B) a store of value.
C) a medium of exchange.
D) a unit of account.
E) all of the above
3) The largest component of the liabilities of the Bank of Canada is 3) _______
A) Canadian dollars in circulation.
B) loans to private individuals.
C) Government of Canada deposits.
D) Government of Canada securities.
E) deposits of commercial banks and other financial institutions.
4) Which of the following entries would appear on the assets side of a commercial bankʹs balance 4) _______
A) chequable deposits
B) savings deposits
C) shareholdersʹ equity
D) Government of Canada securities
E) Government of Canada deposits
5) If all the commercial banks in the banking system collectively have $300 million in cash reserves 5) _______
and are satisfying their target reserve ratio of 20 percent, what is the amount of deposits they
B) $60 million
C) $1500 million
D) $2000 million
E) $600 million
6) Suppose Bank ABC has a target reserve ratio of 10 percent. If Bank ABC receives a new deposit 6) _______
of $100 000 it will immediately find itself with
A) excess cash reserves of $90 000.
B) excess cash reserves equal to 10 percent of its deposits.
C) excess cash reserves of $10 000.
D) excess cash reserves of $100 000.
E) no excess cash reserves. 2
Consider the following situation in the Canadian banking system:
· 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 Bank XYZ, a commercial bank.
· The target reserve ratio for all banks is 25 percent.
· All commercial banks operate with no excess reserves.
· There is no cash drain.
▯▯▯▯▯ ▯▯ TABLE 27-2
7) Refer to Table 27-2. Bank XYZ is immediately in a position to expand its loans by 7) _______
A) $3.75 million.
B) $1.25 million.
C) $5 million.
D) $15 million.
E) $20 million.
8) Refer to Table 27-2. The maximum creation of new deposits by the banking system, including 8) _______
the dealerʹs original deposit at Bank XYZ, is
A) $25 million.
B) $22.5 million.
C) $20 million.
D) $15 million.
E) $5 million.
9) Refer to Table 27-2. Suppose, in addition, that the public decides to hold 15 percent of their 9) _______
deposits in cash. As a result of the new deposit, the money supply would eventually
A) increase by $12.50 million.
B) increase by $ 3.75 million.
C) decrease by $20.00 million.
D) decrease by $12.50 million.
E) not change.
10) If the target reserve ratio in the banking system is 10 percent, there is no cash drain, and there 10) ______
are no excess reserves, a new deposit of $1 will lead to an eventual expansion of the money
A) $0.01 B) $0.10 C) $1.00 D) $10.00 E) $100.00
11) M2 is defined as M1 plus 11) ______
A) all savings deposits.
B) savings deposits at the chartered banks and non-bank financial institutions.
C) savings deposits at the chartered banks.
D) term deposits, money market funds and personal savings accounts.
E) term deposits and money market funds at all financial institutions.
12) Other things being equal, bond prices 12) ______
A) are unaffected by changes in the demand for money.
B) vary inversely with interest rates.
C) are unaffected by interest-rate changes.
D) vary proportionally with interest rates.
E) vary directly with interest rates. 3
13) If the annual interest rate is 8 percent, an asset that promises to pay $160 after each of the next 13) ______
two years has a present value of
A) $ 178.32. B) $ 285.32. C) $ 296.30. D) $ 300.00. E) $ 320.00.
14) The ʺtransactions demandʺ for money arises from the fact that 14) ______
A) households wish to have all their wealth in the form of money.
B) households decide to hold money in order to make purchases of goods and services..
C) households want to keep cash on had to buy bonds if bond prices drop.
D) there is uncertainty in the receipts of income.
E) there is uncertainty about the movement of interest rates.
15) In the basic AD/AS macro model, it is assumed that, for any given interest rate, the demand for 15) ______
money depends on the
A) level of real GDP and the price level.
B) aggregate demand for goods and services.
C) rate of growth of real GDP.
D) level of taxes.
E) level of government spending.
16) According to the ʺliquidity preferenceʺ theory of the rate of interest, if the supply of money 16) ______
increases, then, ceteris paribus, bond prices will
A) rise as the rate of interest rises.
B) fall as the rate of interest rises.
C) fall as the rate of interest falls.
D) rise as the rate of interest falls.
E) stay the same.
17) If the annual market interest rate is 20 percent, the annual opportunity cost of having $50 cash in 17) ______
your pocket is
A) $1000. B) $2. C) $10. D) $50. E) $0.
18) If the general price level were to increase, other things being equal, the money demand function 18) ______
A) become steeper but not shift.
B) not be affected.
C) shift, but the direction of the shift cannot be predicted.
D) shift to the right.
E) shift to the left.
19) A decrease in the money supply is most likely to 19) ______
A) lower interest rates, raise investment, and raise aggregate expenditures.
B) raise interest rates, lower investment, and lower aggregate expenditures.
C) raise interest rates, investment, and aggregate expenditures.
D) raise interest rates and investment, and lower aggregate expenditures.
E) lower interest rates, investment, and aggregate expenditures.
20) Refer to Figure 28-3. The increase in the money supply from M S0 to M S1 shifts the monetary 20) ______
equilibrium from E to E The result is
A) sustained monetary disequilibrium.
B) a shift of the investment demand curve to the left.
C) a decrease in the interest rate and an increase in desired investment.
D) a shift of the investment demand curve to the right.
E) an increase in the interest rate and a decrease in desired investment.
21) Refer to Figure 28-3. This figure illustrates 21) ______
A) only the first step of the monetary transmission mechanism.
B) the entire monetary transmission mechanism.
C) the first two steps of the monetary transmission mechanism.
D) the ultimate effect of a change in the money supply on real GDP.
E) the effect of a change in the money supply on money demand.
22) If real GDP is greater than potential GDP, the output gap could be eliminated by 22) ______
A) a leftward shift in the AD curve.
B) a decrease in government purchases.
C) an upward shift in the AS curve.
D) a reduction in the money supply.
E) all of the above
23) If the economy is experiencing an undesired inflationary gap, the Bank of Canada could 23) ______
A) decrease the demand for money, lowering interest rates, which would shift the AD curve
B) shift the investment demand curve to the right by lowering interest rates, which would
shift the AD curve outward.
C) increase the supply of money, lowering interest rates, which would shift the AD curve
D) increase the supply of money, lowering interest rates, which would shift the AD curve
E) decrease the supply of money, raising interest rates, which would shift the AD curve
24) Monetary policy is ineffective in bringing about changes in aggregate demand when the 24) ______
A) investment demand curve and money demand function are both 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
D) investment demand curve is relatively steep and the money demand function is relatively
E) none of the above -- monetary policy is always equally effective.
25) To reduce short-term market interest rates, the Bank of Canada could 25) ______
A) decrease the money supply directly.
B) reduce its target for the overnight rate.
C) adjust the rate paid on Treasury bills.
D) reduce the commercial banksʹ reserve requirements.
E) decrease the commercial banksʹ reserves.
26) The interest rate that the Bank of Canada charges commercial banks for loans is called the 26) ______
A) preferred lending rate.
B) bank rate.
C) prime rate.
D) overnight interest rate.
E) term interest rate.
27) If the Bank of Canada chooses to expand the money supply directly, it could 27) ______
A) buy government securities on the open market.
B) sell government securities on the open market.
C) sell some of its foreign currency assets.
D) reduce its deposits at commercial banks.
E) change the price level.
28) Suppose the Canadian economy had a recessionary gap. To increase the level of desired 28) ______
aggregate expenditure, the Bank of Canada could
A) increase its spending.
B) reduce its target for the overnight interest rate.
C) reduce the reserve requirements of the commercial banks.
D) sell securities in the open market.
E) raise the bank rate.
29) An expansionary monetary policy would ________ and would eventually increase the money 29) ______
A) involve selling foreign-currency reserves in the foreign-exchange market
B) reduce short-term interest rates
C) increase short-term interest rates
D) involve selling government bonds on the open market
E) none of the above
30) Suppose Canadian real GDP is equal to potential GDP. A significant and sustained appreciation 30) ______
of the Canadian dollar would likely lead the Bank to engage in a contractionary monetary policy
if the Bankʹs policy experts traced the cause of the appreciation to
A) an increase in the desire of non-residents to purchase more Canadian goods and services.
B) a recession in Canada.
C) an increase in the desire of non-residents to purchase Canadian assets.
D) a decrease in the overnight lending rate.
E) a reduction in Canadaʹs core inflation rate.
31) Because of the volatility of food and energy prices, the Bank of Canada pays more attention in 31) ______
the short run to changes in ________ than to changes in ________.
A) total CPI inflation; inflation of the GDP deflator
B) core inflation; total CPI inflation
C) the nominal exchange rate; the real exchange rate
D) total CPI inflation; core inflation
E) inflation of the GDP deflator; total CPI inflation
32) The difference between the governmentʹs debt and its deficit is that the debt is the 32) ______
A) amount the government pays in interest payments whereas the deficit has not yet incurred
B) accumulation of p