Econ 295 Final Pt. 2 Flashcards by brandt muncey-buckley

In the long run, changes in average material living standards are best shown by A) growth in real GDP.
B) population growth.
C) growth in real per capita GDP.
D) improvements in fiscal policy.
E) improvements in monetary policy.

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The compounding of economic growth rates means that
A) a large increase in investment today has little effect on national income over the long run. B) small changes in sustained growth rates can have a significant impact on national income over several decades.
C) consumers should not save, given the low real returns that compounding produces.
D) a 10% annual rate of return will double an investment in less than 6 years.
E) a 2% annual growth rate of GDP will double national income in 27 years.

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If per capita GDP in a richer country grows at a faster annual rate than in a poorer country,
A) the gap between their standards of living will widen over time.
B) the gap between their standards of living will close over time.
C) the gap between their standards of living will close over time as long as the rate of population growth is higher in the poorer country.
D) whether the gap in living standards widens or closes over time depends on the absolute size of the relative growth rates.
E) the difference in their living standards will not change over time.

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If GDP in a richer country grows at the same annual rate as in a poorer country, the A) gap between their standards of living will widen over time.
B) gap between their standards of living will close over time.
C) gap between their standards of living will close over time as long as the rate of population growth is lower in the poorer country.
D) gap between their standards of living will close over time as long as the rate of population growth is lower in the richer country.
E) difference in their living standards will not change over time.

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A common measure of a country’s level of productivity is A) the average efficiency of capital.
B) the capital-output ratio.
C) output per capita.
D) output per unit of labour input.
E) per capita GDP.

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In the short run, changes in real GDP are primarily determined by changes in factor-utilization rates which, in turn, are due to changes in
A) aggregate demand only.
B) aggregate demand because increases in demand will lead to increases in output.
C) aggregate supply only.
D) aggregate supply because when firms increase prices they are then willing to produce more.
E) both aggregate demand and aggregate supply.

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A common measure of a country’s rate of economic growth is A) the marginal efficiency of capital.
B) the capital-output ratio.
C) the level of output per capita.
D) the change in output per capita.
E) the level of real gross domestic product.

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Over the long term, by far the most potent force for raising average material living standards is
A) economic growth.
B) reducing inefficiencies.
C) redistributing income.
D) increasing the money supply.
E) appropriate fiscal policies.

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If real income grows at approximately 2% per year, the number of years it will take for real income to double is approximately
A) 5.
B) 12.
C) 24.
D) 36.
E) 72.

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If real income grows at approximately 4% per year, the number of years it will take for real income to double is approximately
A) 5.
B) 12.
C) 18.
D) 36.
E) 72.

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Of the variables listed below, the best measure of a nation’s average material standard of living is
A) nominal GDP.
B) percent change in nominal GDP.
C) per capita real GDP.
D) per capita nominal GDP.
E) real GDP.

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An increase in potential GDP would most likely be caused by a (an) A) decrease in factor-utilization rates.
B) increase in factor productivity.
C) increase in interest rates.
D) decrease in saving in the short run. E) increase in the unemployment rate.

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The theory of economic growth concentrates on the ________ over the long run, not on ________.
A) growth of investment in capital goods; short-run fluctuations of investment
B) growth of real GDP; growth of potential GDP
C) factor utilization rates; growth of the supplies of factors
D) factor utilization rates; growth of real GDP
E) growth of potential output; fluctuations of output around potential

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Which of the following is the best example of the acquisition of human capital?
A) A worker takes a training course that increases his/her productivity.
B) A worker receives new machinery enabling him/her to do the amount of work that was formerly done by two workers.
C) A worker communicates more quickly and accurately with suppliers because of upgrades to communications software.
D) A government-sponsored program increases the amount of investment available per worker.
E) A computer chip manufacturer introduces a faster processor for micro-computing.

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four major determinants of economic growth include all of the following EXCEPT A) technological improvement.
B) growth in physical capital.
C) growth in human capital.
D) growth in financial capital.
E) growth in the labour force.

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The study of the short run in macroeconomics focuses
A) equally on potential GDP and actual GDP.
B) primarily on changes to potential GDP.
C) primarily on changes to potential GDP with less emphasis on changes in actual GDP. D) primarily on changes to actual GDP with no interest in the output gap.
E) primarily on changes to the output gap with less emphasis on changes to potential GDP

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If a country transfers resources from the production of consumption goods to the production of capital goods, the result will be to
A) raise future consumption.
B) raise current living standards.
C) decrease the long-run growth rate. D) lower future living standards.
E) raise current consumption.

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One of the benefits of long-run economic growth is A) growth in nominal GDP greater than real GDP.
B) decreased productive capacity.
C) a greater ability to reduce inequality.
D) increased future interest rates.
E) decreased current saving and increased current consumption.

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The costs of long-run economic growth include:
1) declining future average living standards;
2) that current consumption must be sacrificed to increase investment in capital goods;
3) current increases in investment may only generate greater consumption in the distant future. A) 1 and 2
B) 2 and 3
C) 1 only
D) 2 only
E) 3 only

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For a given level of technology, a more rapid rate of economic growth can probably be achieved only if a country’s citizens are prepared to
A) redistribute income.
B) sacrifice some present consumption.
C) increase their demand for goods and services.
D) increase exports.
E) decrease interest rates.

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The costs of economic growth include
A) declining future living standards.
B) current saving must be sacrificed to increase investment in capital goods.
C) improvements in technology.
D) the effects on workers whose skills are made obsolete by technical change.
E) reduced interest rates.

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Long-run economic growth can help alleviate the problems of poverty by
A) creating new low-paying jobs for the unemployed.
B) generating more resources that can be used to reduce income inequality.
C) reallocating income away from low-value production to increase the incentives for high-value production.
D) requiring increased saving on the part of most of the population.
E) increasing future consumption for the middle class.

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The level of aggregate output is determined in the short run by ________ but in the long run by the level of ________.
A) the output gap; factor productivity
B) the AD curve; interest rates
C) the AS curve; potential output
D) the AD and AS curves; Y*
E) the AD and AS curves; factor utilization

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Long-term economic growth
A) is achieved only by changes in factor-utilization rates.
B) alleviates all poverty.
C) can improve average material living standards.
D) is the result of expansionary fiscal policy.
E) leads to equal income distribution.

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Over a long period of time, perhaps many years, changes in real GDP come primarily from A) upward shifts of the AS curve. B) upward shifts of the AE curve. C) rightward shifts of the AD curve. D) continuous increases in potential GDP. E) leftward shifts of the AD curve.

Consuming fewer goods today in order to invest resources in capital goods can be considered the ________ of economic growth. A) opportunity cost B) social cost C) investment cost D) external cost E) total cost

Alleviation of poverty is more achievable in a growing economy mainly because A) individuals are more likely to object to the redistribution of income when they earn more. B) everyone, including the poor, benefits equally from growth. C) poor individuals are relatively easier to be identified in a growing economy. D) nobody has to be made worse off when the increment to income caused by growth is redistributed. E) wage rates for low-income people are naturally rising.

An important social cost of economic growth is A) the increasing inequality of income that usually accompanies sustained growth. B) the sacrifice of current consumption required for a higher level of future consumption. C) the associated inflation. D) the associated frictional unemployment. E) the destruction of jobs due to labour skills of certain workers becoming obsolete.

Economic growth is often associated with structural change in the economy, and this change can present difficult policy challenges to governments. Which of the following government policies would be most useful at addressing the social costs of economic growth? A) expansionary monetary policy B) the imposition of trade restrictions to protect Canadian jobs C) subsidies directed at Canadian manufacturing firms D) worker re-training and education programs E) reducing income taxes

Which of the equations is a correct expression for national saving in the long run when real GDP equals potential output? A) NS = Y\* - C - G B) NS = Y\* - C + T - G C) NS = Y\* - T - C D) NS = T - G E) NS = T - G - C

Consider the long-run theory of investment, saving and growth. In the long-run version of our macro model (with real GDP equal to Y\*), the equilibrium interest rate is determined where A) aggregate demand equals aggregate expenditure. B) desired national saving equals desired investment. C) the nominal price level equals the real price level. D) desired consumption equals desired investment. E) desired saving equals desired consumption.

If government policies are to be successful in enhancing a country's long-run growth rate, they likely work through generating A) higher levels of current consumption. B) greater private investment in physical and human capital. C) an increase in current consumption and a reduction in saving. D) a leftward shift in the AS curve. E) fiscal policies that shift the AD curve to the right.

Consider the long-run theory of investment, saving, and growth. For a given level of private saving, an increase in government purchases will likely ________ the economy's long-run growth rate. A) slow down B) accelerate C) not affect D) increase E) Not enough information to know

For a given level of national income, an increase in private consumption or government purchases will cause national saving to A) increase. B) grow at a constant rate. C) remain unchanged from its initial level. D) exceed investment. E) decrease.

An increase in the government budget surplus, everything else constant, will cause a(n) A) decrease in national saving. B) increase in national saving. C) decrease in the growth rate. D) equal increase in private consumption. E) equal decrease in private investment.

Consider a closed economy in the long run. A country with a low national saving rate (as a fraction of real GDP) is likely to have A) a high growth rate because aggregate expenditure will be high out of any given income. B) either a high or low growth rate depending on the investment schedule. C) an AS curve moving continually to the right. D) trouble achieving potential real national income in the short run. E) a low growth rate because sustained high investment is not possible with low saving.

Consider the market for financial capital for a closed economy in the long run. Other things being equal, a country with a high national saving rate will tend to have A) a high growth rate because aggregate expenditure will be high out of any given income. B) a high growth rate because sustained high investment is possible with high saving. C) an AS curve moving continually to the left. D) trouble achieving potential real national income in the short run. E) either a high or low growth rate depending on the investment demand schedule.

Which of the following statements concerning national saving is true? A) A country's saving rate is unrelated to its growth rate. B) An increase in the rate of saving will lead to a reduction in consumption and therefore to both a short-run and a long-run decrease in national income. C) An increase in the rate of saving will cause an immediate increase in national income, but may cause a drop in national income in the long-run. D) An increase in the rate of saving will always be offset by a reduction in private investment. E) An increase in the rate of saving will lead to a short-run reduction in national income, but to higher economic growth in the long run.

For a given level of national income, a decrease in government tax revenues will cause A) a decrease in national saving. B) an increase in national saving. C) an increase in the growth rate. D) no effect on national saving. E) a decrease in consumption.

For a given level of private saving, a decrease in the government's budget deficit ________ the long-run rate of economic growth. A) will reduce B) will leave unchanged C) will increase D) will diminish E) none of the above

Consider the long-run theory of investment, saving, and growth. For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to A) increase and the flow of national saving to decrease. B) increase and the flow of investment to increase. C) increase and the flow of investment to decrease. D) decrease and the flow of national saving to increase. E) decrease and the flow of national saving to decrease.

For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to A) increase and the flow of national saving to fall. B) increase and the flow of investment to increase. C) increase and the flow of investment to decrease. D) decrease and the flow of investment to decrease. E) decrease and the flow of investment to increase.

Consider the market for financial capital in the long run. The national saving curve is upward sloping because an increase in the real interest rate A) leads households to increase their current consumption. B) leads to an increase in investment demand. C) decreases the supply of public saving. D) leads households to reduce their current consumption. E) decreases the supply of private saving.

Consider the market for financial capital in the long run. The investment demand curve is downward sloping because A) an increase in the real interest rate leads to an increase in investment demand. B) all components of desired investment are negatively related to the real interest rate. C) all components of desired investment are positively related to the real interest rate. D) a decrease in the real interest rate reflects a higher opportunity cost to firms of using financial capital. E) an increase in the real interest rate reflects a lower opportunity cost to firms of using financial capital.

In the long run, an increase in the demand for investment pushes ________ the real interest rate, encourages ________ saving by households, and leads to a ________ future growth rate of potential output. A) down; less; lower B) up; less; lower C) down; less; higher D) up; more; higher E) up; more; lower

Data from most industrialized countries show that countries with high investment rates (as a percentage of GDP) tend to be countries A) with the highest levels of per capita GDP. B) with the highest levels of GDP. C) with high rates of economic growth. D) with the lowest rate of national saving. E) with a negative relationship between investment and the rate of economic growth.

Consider the Neoclassical growth model. The effect of an increase in population (or the labour force) in an economy, with everything else held constant, is A) an increase in per capita national income. B) an increasingly aging population. C) a decrease in per capita output. D) a decrease in the capital-output ratio. E) an inward shift of the production possibilities boundary.

The main properties of a Neoclassical aggregate production function are ________ when all factors are increased proportionally and ________ when any one factor is increased on its own. A) increasing returns to scale; diminishing marginal returns B) constant returns to scale; diminishing marginal returns C) constant returns to scale; constant marginal returns D) decreasing returns to scale; diminishing marginal returns E) increasing returns to scale; increasing marginal returns

The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor will eventually A) increase the average product of the factor. B) decrease the average product of the factor. C) lead to an increase in the marginal output of the factor. D) lead to a decrease in total output by the factor. E) lead to an increase in the material standard of living.

The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor eventually cause the A) average product of the factor to increase. B) marginal product of the factor to fall. C) marginal product of the factor to increase at an increasing rate. D) marginal product of the factor to increase but at a decreasing rate. E) material standard of living to increase.

A central assumption of the Neoclassical growth model is that A) long-run growth arises from correcting market failures. B) long-run growth arises only from technological innovation. C) there are diminishing marginal returns to a single factor. D) there are constant marginal returns to investment. E) there are increasing marginal returns to capital investment.

In the Neoclassical growth model, whenever diminishing returns applies, increases in the population, other things being equal, are accompanied by A) decreasing GDP and falling living standards. B) decreasing GDP and increasing living standards. C) increasing GDP and falling living standards. D) increasing GDP and constant living standards. E) increasing GDP and increasing living standards.

In the Neoclassical growth model, decreases in the population, other things being equal, would eventually result in A) decreasing GDP and falling living standards. B) decreasing GDP and increasing living standards. C) increasing GDP and falling living standards. D) increasing GDP and increasing living standards. E) increasing savings and increasing living standards.

In the Neoclassical growth model, increases in the stock of physical capital, other things being equal, will lead to A) decreasing GDP and falling living standards. B) decreasing GDP and increasing living standards. C) increasing GDP and falling living standards. D) increasing GDP and increasing living standards. E) increasing GDP and decreased national wealth.

In the Neoclassical growth model, if capital and labour grow at the same rate, we will observe A) rising GDP but falling living standards. B) rising GDP but no change in living standards. C) rising GDP and increasing living standards. D) increasing living standards but only for workers using labour-intensive production. E) increasing living standards but only for workers using capital-intensive production.

According to the Neoclassical growth model, it is most likely that GDP would increase, but that average material living standards would fall, as a result of A) a fast-growing capital stock. B) a better educated labour force. C) an increase in the working population. D) a growing capacity to develop and incorporate new innovations. E) an increase in the availability of natural resources.

In Neoclassical growth theory, an increase in the labour force ________ total output and ________ total output per person. A) increases; increases B) increases; leaves constant C) increases; reduces D) leaves constant; leaves constant E) leaves constant; reduces

In Neoclassical growth theory, average material living standards in an economy could fall when A) additional units of capital are added to the other factors. B) additional units of labour are added to the other factors. C) there is equal percentage growth in capital and labour inputs. D) technology improves. E) there is a decline in the population.

In Neoclassical growth theory, increasing the amount of capital employed in production ________ the average standard of living as long as the marginal product of capital exceeds zero. A) unambiguously raises B) unambiguously reduces C) has no effect on D) at first raises but eventually reduces E) at first reduces but eventually raises

The Neoclassical theory of economic growth led economics to be referred to as the "dismal science." The explanation for this reference lies in the theory's emphasis on A) growing inequality of income. B) increasing government intervention in the economy. C) increasing damage to the environment. D) the immoral behaviour of firms. E) diminishing returns in production.

The Neoclassical growth model assumes that with a given state of technology, A) increases in the use of a single factor bring increasing returns. B) increases in the use of a single factor result in constant returns. C) increases in GDP are possible only if all factors are increased at an equal rate. D) growth in GDP happens only if the labour force grows more quickly than the amount of physical capital. E) the standard of living will decrease if the labour force grows more quickly than the amount of physical capital.

In the Neoclassical growth model, the law of diminishing marginal returns implies that capital accumulation leads to ever A) larger decreases in GDP and large decreases in living standards. B) larger increases in GDP but smaller decreases in living standards. C) smaller increases in GDP and living standards. D) larger levels of unemployment but small increases in the standard of living. E) larger levels of unemployment but larger increases in the standard of living.

A person who returns to school to improve her computer skills is an example of an increase in A) the labour force. B) human capital. C) physical capital. D) technological capital. E) financial capital.

According to the Neoclassical growth model, which of the following scenarios explains improvements in long-run material living standards? A) an increase in population B) a decrease in unemployment rates C) an increase in the stock of physical capital D) an equal increase in both population and the stock of capital E) an equal increase in both population and output

According to the Neoclassical growth model, which of the following scenarios (other things being equal) explains progressively smaller increases in per capita GDP? A) an increase in population B) a decrease in unemployment rates C) an increase in the capital stock D) an equal increase in both population and the stock of capital E) an equal increase in population and output

Real GDP is not a good measure of average material living standards because A) it is biased by the changes in the inflation rate. B) it excludes the role of imported goods. C) it does not take into account the size of the population. D) it is sensitive to the base year chosen in its calculation. E) the price level may be changing, which affects what people can afford to buy.

Balanced growth of labour and capital in the Neoclassical growth model A) leads to rising material living standards. B) will not increase the level of per capita GDP. C) will result in a constant level of GDP. D) is a natural outcome of long-run equilibrium. E) explains current rising per capita incomes in many countries.

According to the Neoclassical growth theory, sustained rising material living standards can only be explained by A) growth in human capital. B) growth in physical capital. C) growth in the labour force. D) balanced growth of labour and capital. E) exogenous technological change.

Embodied technical change" is said to occur when A) older capital equipment is replaced with different, more productive, capital. B) the capital-labour ratio is increasing. C) innovations in the organization of production take place which do not involve changes in the form of capital used. D) techniques of managerial control are improved. E) the labour force acquires new skills that can be used across a wide range of industries.

Consider the Neoclassical growth model. Sustained economic growth in the long run could best be fostered by A) expansionary fiscal policy. B) decreasing excise taxes on consumer goods. C) technological improvements embodied in physical or human capital. D) elimination of an output gap. E) expansionary monetary policy.

Neoclassical growth theory is based on the assumption of ________ marginal returns to a single factor and ________ returns to scale exhibited by the aggregate production function. A) decreasing; constant B) decreasing; decreasing C) constant; decreasing D) increasing; increasing E) increasing; constant

An aggregate production function exhibits constant returns to scale when a 1% increase in labour input A) produces a 1% increase in output. B) along with a 1% increase in capital produces the same amount of output. C) along with a 1% increase in capital produces one percent more output. D) along with a 1% decrease in capital produces the same amount of output. E) induces a 1% increase in capital input.

An aggregate production function exhibits increasing returns to capital when A) no change in capital produces a one percent increase in output. B) a 1% decrease in capital produces an increase in the marginal product of capital. C) a 1% increase in capital produces no change in output. D) each additional unit of capital increases the number of jobs by more than 1%. E) each additional unit of capital has a higher marginal product than the previous unit.

Consider an aggregate production function Y = F(K, L) that displays diminishing marginal returns to labour. If the amount of capital is held constant and the amount of labour used in production is increasing, then A) each additional unit of labour will add less to total output than the previous unit of labour. B) each additional unit of labour will add more to total output than the previous unit of labour. C) total output increases in proportion to the increases in labour. D) there are increasing returns to scale. E) there are constant returns to scale.

Modern or "new" theories of long-run economic growth are based on the assumptions that technological change is mainly ________ to an economy and that investment yields ________ marginal returns. A) exogenous; diminishing B) exogenous; constant C) exogenous; increasing D) endogenous; decreasing E) endogenous, increasing

The "new" theories of economic growth emphasize that the pace of technological change is ________ to economic signals, and that it is ________ to the economic system. A) responsive; exogenous B) responsive; endogenous C) unresponsive; exogenous D) unresponsive; endogenous E) unresponsive; unrelated

The "new" theories of economic growth emphasize that technological change ________ to price and profit signals. A) and product development are both directly related B) is directly related and product development is inversely related C) is unaffected by but product development is directly related D) is directly related and population growth is inversely related E) and product development are both unrelated

According to the "new" theories of economic growth, increasing marginal returns to capital investment is A) possible, but only in the early stages of innovation before imitators rush in to drive prices down. B) possible after initial fixed costs of innovation have been borne. C) possible only if the capital is government-owned infrastructure. D) impossible, and is thus a weak source of growth. E) impossible because diminishing returns are unavoidable.

New theories of economic growth based on the idea that growth is endogenous A) assume that the rate of growth of the economy is equal to the rate of population growth. B) assume that the growth rate of technology is exogenous. C) incorporate factors such as central-bank behaviour. D) ignore the role of technology. E) stress the role of knowledge and learning in the economy's rate of growth.

With respect to long-run economic growth, one rationale for the idea that there may be increasing marginal returns to investment is that A) as further investment takes place the economy moves down to the right along the marginal product schedule. B) as further investment takes place the economy moves upward to the left along the marginal product schedule. C) the investment costs to "followers" are lower than those for "pioneers." D) initial investment shifts the the investment demand schedule to the left, making further investment less costly. E) initial investment shifts the the aggregate demand schedule to the left, making further investment less costly.

According to some modern theories of long-run economic growth, successive increments of investment have ________ returns since some fixed costs are ________ for subsequent firms. A) constant; identical B) increasing; lower C) increasing; higher D) decreasing; higher E) decreasing; lower

In new theories of "endogenous growth," increasing marginal returns to investment can occur because A) investment costs for followers can be higher than for pioneers. B) knowledge provides the input that allows investment to be profitable. C) many investments require large fixed costs, the benefits of which are not available to subsequent firms. D) little risk is associated with the process of innovation for technological followers. E) early investors create an infrastructure favorable to followers.

Compared to Neoclassical growth theory, newer "endogenous growth" theories are more ________ regarding the prospect of continuous increases in the standard of living, due in part to its emphasis on the \_\_\_\_\_\_\_\_. A) pessimistic; endogeneity of technological change B) pessimistic; accelerating depletion of natural resources C) pessimistic; increasing birth rates as a result of higher real income per capita D) optimistic; accelerating depletion of natural resources E) optimistic; endogeneity of technological change

Given the rapid growth of world population in recent decades, the present needs and aspirations of the world's population can likely only be met through A) enormous increases in financial capital. B) increasing knowledge and technological improvements. C) reductions in the world's capital stock, as a means of controlling the exhaustion of natural resources. D) coordination of fiscal and monetary policies. E) relatively small increases in the saving rates of the developing economies.

Modern growth theories are more optimistic than Neoclassical growth theories because the former emphasize the unlimited potential of A) modern capital. B) knowledge-driven technological change. C) more educated government policy making. D) modern labour. E) economic theory.

Which of the following statements is true of new growth theory, and not true of Neoclassical growth theory? A) It cannot explain improved living standards over the long term. B) It can explain improved living standards over the long term. C) Economic growth does not have an impact on resource exhaustion. D) Economic growth depends only on population growth. E) Economic growth is the result of innovation.

Investment in innovation is often considered to have increasing marginal returns because A) new products increase firms' profits. B) R&D costs are negligible relative to firms' total costs. C) innovation is mostly through "leaning by doing." D) of market development costs and the "public good" nature of knowledge. E) after the initial investment is made, subsequent investors face more difficult and expensive production problems.

Consider the competing products made by Apple (iPhone) and Samsung, for example. The innovation generated by these firms as a result of their intense rivalry is an example of A) covert collusion. B) constant returns to scale. C) exogenous technological change. D) endogenous technological change. E) decreasing marginal returns.

In new theories of economic growth, "learning by doing" contributes to endogenous technological change because A) knowledge can be considered a private good. B) knowledge can be considered a public good. C) information at all stages of the design and production processes is fed upstream and contributes to further innovation. D) "learning by doing" increases the marginal product of physical capital. E) new technical knowledge can be transferred at zero cost.

Resource exhaustion is not considered to be among the main factors that limit economic growth because A) the population growth rate is decreasing over time and projected to be negative in the future. B) different types of inputs are used in production over time. C) resources can be obtained from other planets as technology advances. D) technological advances change the nature of production over time and also make more resources available for extraction. E) there are limitless supplies of resources, at high enough prices.

In 1950, when the world's population was 2.5 billion, it was unimaginable that the world could ever produce enough food to feed the present world population of 7 billion. Such a belief was likely based on the following erroneous assumptions: A) food production increases geometrically and population increases arithmetically. B) the potential GDP of all countries is constant, and food production would comprise a declining share of GDP. C) the state of technology is constant and the stock of resources is fixed. D) global political and economic cooperation would be a necessary condition to feed such a growing population.

Suppose that most of the world's population would like to achieve a standard of living equal to that of the average Canadian family. Such a rise in global living standards is A) not possible given the world's current resources and the current state of technology. B) possible with better political and economic cooperation around the world. C) possible given the world's current resources and current state of technology. D) not possible under any circumstances. E) possible with no adverse effects on pollution and environmental degradation.

Economic growth allows increasing numbers of people around the world to enjoy higher incomes and to escape (material) poverty. Which of the following statements best describes the current limits to this growth? A) Rising consumption due to higher incomes puts increasing pressure on the world's natural ecosystems and its ability to cope with further pollution and environmental degradation. B) The supply of financial capital is insufficient to maintain this level of economic growth. C) The inability of developing countries to increase their human capital will prevent further economic growth. D) Increasing prices of natural resources will limit further economic growth. E) Innovation and technological change with respect to resource development have been exhausted.

The function of money in an economy is to serve as 1) a unit of account; 2) a store of value; 3) a medium of exchange. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1, 2, and 3 E) 3 only

Money is commonly defined as A) a generally accepted medium of exchange. B) gold. C) foreign-exchange reserves. D) paper currency. E) the Canadian dollar.

In order to be considered "money," paper currency must be A) convertible into a precious metal. B) impossible to counterfeit. C) issued by a chartered bank. D) issued by a government agency. E) generally acceptable as a medium of exchange.

Doug compares the unit price of chocolate bars in order to get the "best buy." This represents using money as A) a medium of exchange. B) a store of value. C) a unit of account. D) a unit of deferred payment. E) a money substitute.

The major advantage of using money rather than barter is that A) in the barter system there is no way to express values of commodities. B) money is the only convenient way to store one's wealth. C) money has more value than real goods. D) money stays where you put it, whereas a cow often has to be fenced in. E) the use of money significantly reduces transactions costs.

The biggest disadvantage of a barter system compared to one that uses money is that A) it is difficult to find goods to trade in a barter system that satisfy the needs of society. B) a standardized unit of account cannot exist in a barter system. C) commodities are difficult to transport and therefore inefficient for exchange. D) each trade requires a double coincidence of wants. E) commodities are difficult to use as a store of value.

If a majority of Canadian households and businesses refused to accept Canadian dollars in exchange for goods and services, the value of the Canadian dollar would A) fall. B) rise since less would be in circulation. C) stay constant since the value does not depend on its acceptability by people. D) stay constant since its value is determined only by the Bank of Canada. E) stay constant since its value is determined only by the Government of Canada.

I n order for money to be successfully used as a medium of exchange, it must 1) be readily acceptable; 2) be easily divisible; 3) have a high value-weight ratio. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1, 2, and 3

The use of money in an economy does which of the following? A) creates the necessity for a double coincidence of wants B) solves the problem of inflation C) creates a problem of trading a portion of indivisible commodities such as a ship D) promote specialization and the division of labour E) promotes the use of barter

When metal coins, such as gold and silver, were used as money, a technique which helped to prevent the reduction of their value through clipping was A) basing. B) re-minting. C) milling. D) debasement. E) sweating.

Historically, when gold and silver coins were used as money, their debasement resulted in A) deflation B) an increase in the supply of money. C) an increase in the amount of gold bullion. D) an increase in the desire to store wealth by holding coins. E) a decrease in the money supply

Gresham's law predicts that A) good money drives out bad money. B) debased money will circulate with undebased money. C) undebased money will be driven from circulation. D) debased money will be driven from circulation. E) money is neutral in the long run.

Which of the following is consistent with the predictions of Gresham's law? A) An increase in the money supply will be followed by inflation. B) The increased circulation of U.S. coins in Canada during periods when the Canadian dollar is worth significantly less than the U.S. dollar. C) Debasement of a metallic money will be followed by inflation. D) Increases in the money supply led to the hyperinflation of the 1920s in Germany. E) The disappearance of U.S. coins circulating in Canada during periods when the Canadian dollar is worth less than the U.S. dollar.

Suppose you come into possession of two "silver" dollars, one minted in the 1950s which contains a lot of silver, the other minted in the 1990s which contains no silver at all. The legal exchange rate between the coins is fixed at one for one. According to Gresham's law, the 1950s silver dollar A) is considered "bad" money. B) will drive out of circulation the 1990s silver dollar. C) is more likely to be used as a medium of exchange. D) is less likely to be used as a medium of exchange. E) is less likely to be used as a store of value because it will appear old fashioned.

Which of the following was the most important initial step in the evolution of paper currency? A) the acceptance of bank notes B) the acceptance of goldsmiths' receipts C) the acceptance of metallic coins D) the issuance of currency by governments E) the use of the Gold Standard

Suppose an economy has two types of money — gold and silver coins — that are both legal tender but have different non-monetary values. Gresham's law has come into effect when A) people refuse to use the coins of lesser value. B) the value of the coins is in the same ratio as their non-monetary values. C) the lower-valued coin is taken out of circulation. D) the higher-valued coin is taken out of circulation. E) people use the higher-valued coins for exchange and the lower-valued for savings.

The major problem of a currency that is fractionally backed and convertible into a precious metal is that of A) clipping, which debases the metal coins. B) counterfeiting. C) maintaining its convertability into the metal. D) paper money being less durable than gold. E) perennial shortages of paper currency.

Most Canadians accept Canadian dollars in payment for goods and services in Canada because they have confidence that the dollar A) will be accepted in the future. B) is fully convertible into gold. C) is accepted by foreigners as more stable than their own currency. D) is fully convertible into American dollars at a set exchange rate. E) is fully backed by the British pound sterling.

If most individuals accept paper currency in transactions, and paper currency is convertible into gold, then banks can safely issue A) no more paper currency than the value of the gold they hold. B) more paper currency than the value of the gold they hold. C) as much paper currency as they please. D) paper currency equal to a fraction of the gold they hold. E) paper currency equal to the bank's commercial debt divided by their gold reserves.

The currency that is in circulation in Canada today is A) fully backed by gold held at the central bank. B) backed by the U.S. dollar. C) backed by the euro. D) fractionally backed by gold. E) not officially backed by anything.

Which of the following illustrates the use of fiat money? A) exchanging Canadian dollars for a T-shirt B) exchanging money-market funds for gold C) exchanging money-market funds for insurance D) keeping gold as a hedge against inflation E) bartering goods for services

Debit cards that are issued by commercial banks can be characterized as A) an example of near money. B) an electronic version of a cheque. C) deposit money. D) fiat money. E) a store of value.

In recent years, the use of debit cards issued by commercial banks has skyrocketed. When you pay for a purchase at a store using a debit card, you are A) authorizing the transfer of cash from your bank account to the merchant's bank account. B) creating an electronic debt to the merchant. C) authorizing an electronic transfer of a money substitute from you to the merchant. D) authorizing an electronic transfer of deposit money from you to the merchant. E) authorizing the transfer of bank notes from you to the merchant.

Which of the following statements about deposit money is true? A) The quantity of fiat money in the Canadian economy far exceeds the quantity of deposit money. B) Deposit money can legally be created solely by the Bank of Canada. C) Deposit money is the paper money or coinage that is decreed by the government to be accepted as legal tender. D) Deposit money is recorded as an asset on the balance sheet of a commercial bank. E) The quantity of deposit money in the Canadian economy far exceeds the quantity of fiat money in circulation.

The largest element of the Canadian money supply today is A) coins. B) paper money. C) bank deposits. D) gold. E) the debt of the federal government.

The functions of the Bank of Canada include A) acting as the lender of last resort for the largest private corporations. B) acting as banker for the commercial banks. C) regulating both the money market and stock market. D) setting the exchange rate for the Canadian dollar on world markets. E) providing deposit insurance at Canadian commercial banks.

Basic functions of the Bank of Canada include 1) acting as lender of last resort to private non-financial corporations; 2) acting as banker for the chartered banks. 3) regulating the money supply. A) 1 only B) 2 only C) 3 only D) 2 and 3 E) 1, 2, and 3

The largest component of the assets of the Bank of Canada is A) Government of Canada securities. B) Government of Canada deposits. C) notes and coins in circulation. D) loans to commercial banks. E) loans to private individuals.

The largest component of the liabilities of the Bank of Canada is A) Government of Canada securities. B) Government of Canada deposits. C) Canadian dollars in circulation. D) deposits of commercial banks and other financial institutions. E) loans to private individuals.

In the event of a sudden loss in confidence in the ability of the commercial banks to redeem deposits, the Bank of Canada would probably A) take over the operation of any banks in severe difficulties. B) lend reserves to the commercial banks. C) offer to sell government bonds to the chartered banks. D) suspend operation of the banking system until the panic subsided. E) impose severe financial penalties on the commercial banks by charging them interest at higher than the Bank rate.

Suppose the rare event occurs that a major Canadian commercial bank is on the verge of insolvency and collapse due to volatile world credit markets. The likely initial response is A) a bankruptcy filing overseen by the Superintendent of Financial Institutions. B) the adoption of all of the bank's liabilities by the Bank of Canada as the "lender of last resort." C) the sale of the bank's assets to the remaining commercial banks. D) the provision of funds by the World Bank as the "lender of last resort." E) the provision of funds by the Bank of Canada as the "lender of last resort."

Which of the following statements best describes the relationship between the Bank of Canada and the Government of Canada? A) The Bank of Canada has the same status as the Department of Finance and is directly responsible to Parliament for its day-to-day operations of monetary policy. B) The Bank of Canada is a wholly owned entity of the government but is given independence in the day-to-day operations of monetary policy. C) The Bank of Canada is a central-banking institution that is completely independent of the government and is fully autonomous in its conduct of monetary policy. D) The Bank of Canada is a privately owned banking institution that is overseen by a Board of Directors with a mandate to act in the best interests of the citizens of Canada. E) The governor of the Bank of Canada and the minister of finance have joint responsibility for both fiscal and monetary policy.

Which of the following entries would appear on the liabilities side of the Bank of Canada's balance sheet? A) deposit money held in accounts at Canada's commercial banks B) Government of Canada securities C) foreign currency reserves D) paper notes in circulation E) Canadian corporate securities

Commercial banks in Canada are prohibited by law from A) accepting demand deposits. B) issuing paper currency. C) lending money to households and firms. D) accepting term deposits. E) settling inter-bank debts through a clearinghouse.

The financial crisis that occurred in 2007 and 2008 highlighted one of the crucial functions of commercial banks and other financial institutions in developed economies. A crucial function that ceased to work smoothly during this time, and contributed to the global recession that began in 2008, was A) the acceptance of deposits from firms and households. B) the joint regulation of financial markets. C) the provision of credit to firms and households. D) cheque clearing and collection. E) the clearing of electronic transfers.

An example of "interbank activities" in the Canadian banking system is A) banks pooling their money together to fund the operations of the Bank of Canada. B) banks lending money to each other in order to meet daily cash requirements. C) the joint regulation of financial markets. D) the joint regulation of the money supply. E) lender of last resort to the banking system.

The Canada Deposit Insurance Corporation (CDIC) was set up to protect A) member financial institutions in case of non-payment of loans from borrowers. B) member financial institutions in case of non payment of loans from the government. C) depositors with Canadian dollar accounts in member institutions for up to a maximum of $100 000 per eligible deposit. D) depositors with Canadian dollar accounts in any Canadian financial institution for up to a maximum of $100 000 per institution. E) depositors of any currency in any Canadian financial institution for up to a maximum of $100 000 per institution.

Which of the following entries would appear on the liabilities side of the Bank of Canada's balance sheet? A) Government of Canada securities B) deposits of commercial banks C) advances to commercial banks D) savings deposits E) shareholders' equity

Which of the following entries would appear on the assets side of a commercial bank's balance sheet? A) Government of Canada securities B) chequable deposits C) Government of Canada deposits D) savings deposits E) shareholders' equity

Which of the following entries would appear on the liabilities side of a commercial bank's balance sheet? A) mortgage loans B) Government of Canada securities C) cash reserves D) foreign currency reserves E) demand deposits

A bank run is unlikely to occur in Canada today because A) if necessary, the central bank can provide all the reserves that are necessary to avoid this situation. B) the commercial banks are required by law to maintain 100% of their deposits in cash. C) there is relatively little demand for cash at present. D) banking is done mostly electronically. E) the commercial banks hold enough government securities that are convertible into cash.

What is a bank run? A) A situation where a commercial bank is holding zero reserves. B) A panic situation where many depositors rush simultaneously to withdraw their deposit money in the form of cash. C) A situation where all commercial banks in the system are simultaneously short of reserves. D) The collapse of a non-commercial bank as a result of non-payment of loans. E) The collapse of a commercial banks as a result of the devaluation of their assets.

Why is the possibility of a bank run extremely small in Canada today? A) The Bank of Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals. B) The Department of Finance guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals. C) The Canadian Deposit Insurance Corporation provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic. D) The Office of the Superintendent of Financial Institutions provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic. E) Industry Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals.

Canadian commercial banks maintain their reserves in the form of A) cash in their bank vaults and deposits at the Bank of Canada. B) cash in their bank vaults. C) gold in their bank vaults. D) deposits at other commercial banks that are immediately accessible. E) cash and foreign currency at the Bank of Canada.

commercial bank's actual reserve ratio is the A) fraction of its deposit liabilities that it actually holds as reserves, either as cash or as deposits with the Bank of Canada. B) fraction of its deposit liabilities that it actually holds as gold, other precious metal or cash in its own vaults. C) fraction of its deposit liabilities that are backed by gold. D) ratio of Canadian dollars to foreign currencies that it holds on its books. E) ratio of chequable deposits to term deposits that it holds on its books.

Excess reserves" for a commercial bank refer to A) any surplus in the bank's supply of gold. B) any surplus of chequable deposits. C) any reserves (cash or deposits with the Bank of Canada) that the bank holds over and above its desired reserves. D) reserves (cash or deposits with the Bank of Canada) that the Bank of Canada requires the bank to hold. E) excess demand for money from that bank.

A commercial bank's target reserve ratio is the A) fraction of its deposit liabilities that it wishes to holds as reserves, either as cash or as deposits with the Bank of Canada. B) fraction of its deposit liabilities that it actually holds as cash in its own vaults. C) fraction of its deposit liabilities that are backed by gold. D) ratio of Canadian dollars to foreign currencies that the bank holds on its books. E) ratio of chequable deposits to term deposits that the bank holds on its books.

Which of the following statements about reserve ratios at Canadian commercial banks is true? Commercial banks in Canada A) are required by the Bank Act to hold required reserves. B) have a reserve ratio of zero. C) have a reserve ratio of 100%. D) have a positive reserve ratio. E) never have excess reserves.

Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank). This fraction is known as A) the required reserve. B) the excess reserve ratio. C) the fractional reserve. D) the reserve ratio. E) the target reserve.

The Canadian banking system is a A) gold-reserve system. B) fractional-reserve system. C) target-reserve system. D) asset-backed reserve system. E) treasury-bill reserve system.

Suppose a commercial bank has a level of target reserves of $500 million and actual reserves of $575 million. This bank's ________ is/are $75 million. A) profits B) fractional reserves C) excess reserves D) reserve ratio

Suppose a commercial bank has a target reserve ratio of 1%, but has an actual reserve ratio of 0.8%. This bank will likely A) expand its portfolio of loans. B) contract its portfolio of loans. C) maintain its new, higher reserve ratio because it is more profitable. D) buy government securities from the Bank of Canada. E) allow fewer cash withdrawals by the bank's customers.

Suppose Bank ABC has a target reserve ratio of 10%. If Bank ABC receives a new deposit of $100 000 it will immediately find itself with A) no excess cash reserves. B) excess cash reserves of $10 000. C) excess cash reserves of $90 000. D) excess cash reserves of $100 000. E) excess cash reserves equal to 10% of its deposits.

A central bank can "create" money by A) selling some of its foreign-currency reserves for domestic currency. B) selling government Treasury bills to the commercial banks. C) increasing the rate of inflation. D) issuing its own Central Bank bonds. E) purchasing government securities on the open market.

Which of the following examples constitutes a new deposit to the Canadian commercial banking system? A) an individual transfers money from ShipShape Credit Union to Scotiabank B) an individual immigrates to Canada and deposits money from abroad C) an individual puts cash in a safety-deposit box D) the Bank of Canada sells government securities to an individual or a firm E) the Bank of Canada buys foreign currency from abroad

A new deposit to the banking system can result when A) an individual stashes cash in a mattress. B) a new immigrant to Canada sends cash to his or her home country. C) the Bank of Canada sells a government security to a firm which then maintains the asset in a bank. D) the Bank of Canada buys a government security from a firm, which keeps the proceeds from the sale in a company vault. E) the Bank of Canada buys a government security from a firm, which then deposits the proceeds from the sale in its account at a commercial bank.

Which of the following examples constitutes a new deposit to the Canadian commercial banking system? A) an individual transfers money from Ship Shape Credit Union to Scotiabank B) an individual immigrates to Canada and maintains his existing deposits in a foreign bank C) an individual puts cash in a safety-deposit box D) the Bank of Canada buys government securities from a Canadian commercial bank E) the Bank of Canada buys foreign currency from abroad

Consider the creation of deposit money in the banking system. One implication of an increase in the cash drain to the public is that the A) banking system cannot create any additional money following a new deposit. B) amount of new money that can be created from a new source of reserves is increased. C) desired ratio is reduced. D) desired reserve ratio is increased. E) banking system's ability to create new money following a new deposit is reduced.

A desire by ________ has no effect on the ability of the banking system to create bank deposits, for a given amount of reserves in the banking system. A) banks to delay making loans in expectation of higher future interest rates B) households to increase the fraction of their money held in the form of currency C) households to hold more money in safety-deposit boxes D) the government to increase its level of spending E) firms to reduce their desired level of borrowing from banks

The expansion of deposits resulting from an injection of new cash to the banking system can be calculated as follows. The change in deposits is equal to A) the change in loans divided by the sum of the target reserve ratio. B) the change in reserves divided by the cash-deposit ratio. C) the change in reserves divided by the target reserve ratio. D) the change in reserves divided by the sum of the target reserve ratio and the cash-deposit ratio. E) the change in reserves divided by the sum of excess reserves and cash drain.

Suppose that the cash drain in the banking system increases during holiday periods. As a result, A) the capacity of the banking system to create deposit money is dampened during holiday periods. B) the capacity of the banking system to create deposit money is increased during holiday periods. C) commercial banks decrease their target reserve ratios. D) changes in reserves will result in no change in deposits during holiday periods. E) the money supply will automatically increase.

When discussing the banking system, a cash drain of 5% means that A) 5% of an initial new deposit to the banking system is paid in banking fees and is therefore not available for the creation of new deposit money. B) depositors wish to hold 5% of the value of their deposits in cash. C) 5% of an initial new deposit to the banking system is payable as a financial services tax. D) 95% of an initial new deposit is maintained as cash reserves by the commercial bank. E) depositors wish to hold 95% of the value of their deposits in cash.

Suppose a student deposits into a downtown bank a $200 cheque that she received from her parents in the suburbs. This transaction alone would A) decrease the money supply. B) not change the money supply. C) increase the money supply by an indeterminate amount. D) increase the money supply by $1000 if the target reserve ratio was 20%. E) decrease the money supply by $1000 if the target reserve ratio was 20%.

The money supply in Canada is measured using M1, M2, M2+, and M3. The reason there are so many measures of the money supply is that A) the Bank of Canada wants to confuse the general public. B) different kinds of bank accounts represent different functions of money, and so the various measures are used to reflect these different functions. C) the money supply is too large to have only one measurement. D) only the newer and broader measurements are correct but the older measurements are still used so that historical comparisons are possible. E) it is a convenient way for provincial and federal governments to hide their budgetary surpluses.

Until recently, and for many years, the common definition of the money supply used by the Bank of Canada was M1, which included currency in circulation plus A) chequable deposits at the chartered banks. B) chequable deposits and savings accounts at the chartered banks. C) savings accounts and demand loans. D) term deposits and money market funds. E) chequable deposits at all financial institutions.

The main distinction between M2 and M2+ is that M2+ also includes A) deposits at trust companies, caisse populaires and foreign-currency accounts. B) coins in circulation. C) money market mutual funds held by the Bank of Canada. D) paper currency. E) deposits at financial institutions other than the chartered banks.

The concept of "near money" refers to A) money substitutes such as credit cards. B) cheques on demand deposits. C) financial assets whose capital values are too unstable for them to be classified as money. D) assets that fulfill the temporary store-of-value function but not the medium-of-exchange function. E) assets that fulfill the medium-of-exchange function but not the store of value function.

Credit cards are considered to be "money substitutes" instead of money because A) they are not acceptable to pay for purchases. B) they cannot serve as a temporary medium of exchange. C) the only function of money they can perform is to serve as a store of value. D) money must eventually be used to pay for the transaction. E) credit card accounts are not chequable.

When you pay for your $74 purchase at the grocery store with a debit card, you are A) transferring $74 of currency from your bank account to the grocery store's bank account. B) withdrawing $74 from your bank account with which you pay for your groceries. C) transferring your claim on $74 worth of gold to the grocery store. D) electronically transferring $74 of deposit money from your bank account to the grocery store's bank account. E) essentially promising the grocery store that your bank will pay them $74 at the end of the month when debts are settled.

The M2 and M2+ definitions of the money supply concentrate on the ________ function of money. A) store of value B) unit of account C) medium-of-exchange D) accounting E) deposit-creation

The M2++ and M3 definitions of the money supply include financial assets A) that serve the store-of-value function and are convertible into a medium of exchange. B) such as deposits at credit unions and caisses populaires. C) such as deposits at non-bank financial institutions. D) such as a credit card. E) such as a government Treasury bill.

Developments in the financial industry in recent years have resulted in a multitude of types of deposits. For the purposes of studying the money supply, the most important distinction is between chequing and savings deposits which are ________ and term deposits and other financial assets which are \_\_\_\_\_\_\_\_. A) a store of value; not a store a value B) a unit of account; not a unit of account C) a component of the money supply; not a component of the money supply D) media of exchange; not media of exchange E) money substitutes; near money

Other things being equal, bond prices A) are unaffected by changes in the demand for money. B) are unaffected by interest-rate changes. C) vary directly with interest rates. D) vary inversely with interest rates. E) vary proportionally with interest rates.

The present value of an asset is A) the most someone would be willing to pay upon maturity of the asset. B) the most someone would be willing to pay today for the asset. C) equivalent to the face value of the asset. D) the amount someone would pay in the future to have the asset today. E) the amount someone would pay in the future for the current stream of payments from the asset.

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) market rate of interest, the date of maturity, and the face value. E) marginal rate of income tax.

If Robert expects interest rates to fall in the near future, he will probably be willing to A) buy bonds now, and hold less money. B) buy bonds now, but only if their price falls. C) sell bonds now, and hold less money. D) put his money under his mattress rather than buy bonds. E) maintain only the current holding of bonds.

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) buy bonds now, but only if their price falls. C) sell bonds now, and hold more money. D) put her money under her mattress rather than in a bank account. E) maintain only the current holding of bonds.

In a competitive financial market, the equilibrium price of an asset will equal the A) present value of the asset. B) future value of the asset. C) sum of present value of the asset multiplied by the interest rate. D) future value of the asset multiplied by the interest rate. E) issue price of the asset.

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 will rise. B) the future value of the asset will rise. C) the current value of the asset will fall. D) the present value of the asset will fall. E) the present value of the asset is unaffected

If the current market price of a bond is less than the present value of the income stream the bond will produce, the price will ________ due to excess ________ of/for the bond. A) rise; supply B) fall; supply C) rise; demand D) fall; demand

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) correct C) discount D) inflate E) maximize

When the market price of a bond falls, ceteris paribus, then A) the term to maturity of the bond increases. B) the term to maturity of the bond decreases. C) the yield on that bond rises. D) the yield on that bond also falls. E) the market interest rate rises.

Suppose the market interest rate rises from 3% to 4%. This will lead to ________ in bond prices and ________ in bond yields. A) a fall; a fall B) a fall; a rise C) a rise; a fall D) a rise; a rise E) no change; no change

Suppose the market interest rate falls from 3% to 2%. This will lead to ________ in bond prices and ________ in bond yields. A) a fall; a fall B) a fall; a rise C) a rise; a fall D) a rise; a rise E) no change; no change

Suppose the market interest rate is stable at 4% 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 a reduction in riskiness and thus a higher expected present value from those bonds. C) there is no causal relationship between market interest rates and bond prices. D) bond purchasers perceive an increase in riskiness and thus a lower expected present value from those bonds. E) there is a positive relationship between interest rates and bond prices.

Suppose a Government of Canada bond is being offered in financial markets at a price that is higher than its present value. We can expect that A) the price of the bond will rise further. B) the face value of the bond will be adjusted to a lower value. C) the relatively high demand for the bond will cause its present value to rise. D) the lack of demand for this bond will cause its price to fall. E) the face value of the bond will be adjusted to a lower value.

Suppose a Government of Canada bond is being offered in financial markets at a price that is lower than its present value. We can expect that A) the lack of demand for this bond will cause its present value to fall. B) the price of the bond will fall further. C) the relatively high demand for this bond will cause its price to rise. D) the face value of the bond will be adjusted to a lower value. E) the face value of the bond will be adjusted to a higher value.

The term "demand for money" usually refers to the A) aggregate demand for money balances in the economy. B) average person's desire to hold cash. C) cash and deposits actually held by firms. D) sum of all desired holdings of cash. E) sum of all desired assets, including cash, bonds, and real property.

The opportunity cost of holding money rather than bonds is A) the rate of interest earned on bonds. B) the price level. C) forgone consumption. D) forgone liquidity. E) zero — there is no opportunity cost of holding money.

If a person is holding money for the purchase of goods and services, this demand for money is known as A) speculative demand. B) precautionary demand. C) transactions demand. D) real balance demand. E) nominal balance demand.

The "transactions demand" for money arises from the fact that A) there is uncertainty in the receipts of income. B) there is uncertainty about the movement of interest rates. C) households wish to have all their wealth in the form of money. D) households decide to hold money in order to make purchases of goods and services. E) households want to keep cash on had to buy bonds if bond prices drop.

The "precautionary demand" for money arises from the A) fear that interest rates will fall. B) fear that interest rates will rise. C) need to make predictable purchases of goods and services. D) uncertainty about when some expenditures will be necessary. E) desire to avoid paying interest on credit purchases.

Other things being equal, the transactions demand for money tends to increase when A) interest rates rise. B) interest rates stop rising. C) national income rises. D) national income falls. E) the price level falls.

Consider the demand for money. If real GDP falls, other things being equal, we can expect A) an increase in the speculative demand for money. B) an increase in the total demand for money. C) a decrease in transactions demand for money. D) an increase in transactions demand for money. E) an increase in precautionary demand for money.

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) transaction demand B) precautionary demand C) speculative demand D) present value demand E) portfolio demand

A firm that holds cash to avoid penalties associated with the late payment of bills is demonstrating which type of demand for money? A) transactions demand B) precautionary demand C) speculative demand D) present value demand E) risk-return demand

Among other things, people hold cash balances for which of the following reasons? 1) to meet unforeseen emergencies 2) to maximize their returns on interest-earning assets 3) to guard against the uncertainty of the timing of receipts and payments A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3

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 changes in interest rates and bond prices. C) to meet unforeseen business expenses. D) in anticipation of investing in capital purchases for the firm. E) to maintain adequate cash flow in case of inflation.

In the basic AD/AS macro model, it is assumed that, for any given interest rate, the demand for money depends on the A) aggregate demand for goods and services. B) level of government spending. C) rate of growth of real GDP. D) level of taxes. E) level of real GDP and the price level.

The demand for money (MD) function defines the relationship between A) interest rates and bond prices. B) inflation and bond prices. C) interest rates and financial assets. D) the quantity of money demanded and the price level. E) the quantity of money demanded and the rate of interest.

If there are just two assets, bonds and money, then an excess demand for money implies A) an excess supply of bonds. B) an excess demand for bonds. C) equilibrium in the bond market. D) an indeterminate equilibrium in the bond market. E) nothing about conditions of demand for the other financial asset.

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) hold more money when the current interest rate is very low. C) not hold money as long as bonds pay a positive rate of interest. D) hold lots of money even at very high interest rates. E) hold less money when the current interest rate is very low.

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. E) stay the same.

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 left. C) shift to the right. D) shift, but the direction of the shift cannot be predicted. E) become steeper but not shift.

If the annual market interest rate is 20%, the annual opportunity cost of having $50 cash in your pocket is A) $0. B) $2. C) $10. D) $50. E) $1000.

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) sell bonds; supply of bonds; increase in the price of bonds; decrease B) buy bonds; supply of bonds; decrease in the price of bonds; increase C) sell bonds; demand for bonds; increase in the price of bonds; decrease D) buy bonds; demand for bonds; increase in the price of bonds; decrease E) sell bonds; supply of bonds; decrease in the price of bonds; increase

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) sell bonds; supply of bonds; increase in the price of bonds; decrease B) buy bonds; supply of bonds; decrease in the price of bonds; increase C) sell bonds; demand for bonds; increase in the price of bonds; decrease D) buy bonds; demand for bonds; increase in the price of bonds; decrease E) sell bonds; supply of bonds; decrease in the price of bonds; increase

When there is an excess demand for money balances, monetary equilibrium is established by a process that involves 1) movement down the money demand function; 2) interest rates falling; 3) the price of bonds falling. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3

Consider a money market in which there is an excess supply of money at the prevailing interest rate. The likely response is: A) the corresponding excess supply for bonds will cause the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply. B) the corresponding excess demand for bonds will cause the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply. C) the money supply curve will shift to the left until the demand for money equals the supply. D) the money supply curve will shift to the right until the demand for money equals the supply. E) the money demand curve will shift to the right, causing the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply.

Consider a money market in which there is an excess demand for money at the prevailing interest rate. The likely response is: A) the corresponding excess demand of bonds will cause the price of bonds to decrease and the interest rate to rise, until the demand for money equals the supply. B) the money supply curve will shift to the left until the demand for money equals the supply. C) the money supply curve will shift to the right until the demand for money equals the supply. D) the money demand curve will shift to the right, causing the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply. E) the corresponding excess supply of bonds will cause the price of bonds to decrease and the interest rate to rise, until the demand for money equals the supply.

When there is an excess supply of money, monetary equilibrium is restored through A) interest rates rising. B) individuals attempting to sell bonds. C) the price of bonds falling. D) the price of bonds increasing. E) the price level falling.

Monetary equilibrium occurs when the A) growth in the money supply is zero. B) existing supply of money is willingly held by households and firms in the economy at the current rate of interest. C) nominal rate of interest equals the real rate of interest. D) the money supply is growing at a constant rate. E) supply and demand for all goods in the economy are equal at the current rate of interest.

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.

When the price level increases, ceteris paribus, it causes households and firms to try to A) reduce money balances, which drives interest rates down. B) reduce money balances, which drives interest rates up. C) reduce money balances, which drives national income up. D) increase money balances, which drives interest rates down. E) increase money balances, which drives interest rates up.

If there are just two assets, bonds and money, then an equilibrium between the supply and demand for money implies A) an excess supply of bonds. B) an excess demand for bonds. C) equilibrium in the bond market. D) an indeterminant equilibrium in the bond market. E) nothing about conditions of demand for the other financial asset.

How does monetary equilibrium re-establish itself when there is an excess supply of money balances? A) the interest rate rises B) individuals attempt to sell bonds C) the price of bonds falls D) the price of bonds increases E) the price level falls

The linkage between changes in monetary equilibrium and changes in aggregate demand is called the A) monetary transmission mechanism. B) simple multiplier. C) equilibrium mechanism. D) transactions mechanism. E) liquidity preference function

Other things being equal, a reduction in the money supply will lead to a A) fall in the rate of interest and an increase in investment expenditure. B) rise in the rate of interest and in increase in investment expenditure. C) fall in the rate of interest and a decrease in investment expenditure. D) rise in the rate of interest and a decrease in investment expenditure. E) rise in the rate of interest and no change in investment expenditure

The economy's investment demand function describes the A) positive relationship between desired investment, the rate of interest, and aggregate expenditure. B) positive relationship between desired investment and the rate of interest. C) negative relationship between the demand for money and the interest rate. D) negative relationship between desired investment and aggregate expenditure. E) negative relationship between the interest rate and desired investment.

The monetary transmission mechanism can be set in motion when a rise in the price level causes A) an increased demand for money balances, leading people to sell bonds, which in turn raises the interest rate. B) an increased demand for money balances, leading people to sell bonds, which in turn decreases the interest rate. C) an increased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate. D) a decreased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate. E) a decreased demand for money balances, leading people to sell bonds, which in turn raises the interest rate.

The monetary transmission mechanism describes the process by which changes in A) personal consumption affect real GDP. B) business investment influence real GDP. C) monetary equilibrium influence real GDP through changes in desired investment. D) monetary equilibrium influence the interest rate. E) interest rate affect the demand for money.

Which one of the following statements best describes the monetary transmission mechanism? A) An increase in personal consumption leads to an upward shift in the AE curve and thereby increases real 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) 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.

Consider monetary equilibrium and the monetary transmission mechanism. An exogenous fall in the price level will lead to A) 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. B) an excess supply of money resulting in a fall in the rate of interest, which shifts the AE function upward and increases the equilibrium level of income. C) people being able to buy more with their increased wealth, which will shift the AE function downward and decrease the equilibrium level of income. D) a movement to the right along the AE function. E) a movement to the left along the AE function.

An increase in the money supply sets the monetary transmission mechanism in motion which results in A) a rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. B) a fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. C) a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve. D) a rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve. E) a rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.

A decrease in the money supply sets the monetary transmission mechanism in motion which results in A) a rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. B) a fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. C) a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve. D) a rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve. E) a rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.

Consider monetary equilibrium and the monetary transmission mechanism. An exogenous decrease in the price level, with 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 real GDP along the aggregate demand curve. D) decrease the demand for money and decrease real GDP along the aggregate demand curve. E) decrease the demand for money and leave aggregate demand unchanged.

Consider the monetary transmission mechanism. A disturbance to monetary equilibrium which changes the interest rate will affect aggregate demand through 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.

A decrease in the money supply is most likely to A) raise interest rates, investment, and aggregate expenditures. B) raise interest rates, lower investment, and lower aggregate expenditures. C) lower 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.

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) upward and the aggregate demand curve to shift to the left. C) downward and the aggregate demand curve to shift to the right. D) downward and the aggregate demand curve to shift to the left. E) downward but the aggregate demand curve will remain unchanged.

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) upward and the aggregate demand curve to shift to the right. B) upward and the aggregate demand curve to shift to the left. C) downward and the aggregate demand curve to shift to the right. D) downward and the aggregate demand curve to shift to the left. E) downward but the aggregate demand curve will remain unchanged.

If real GDP is greater than potential GDP, the output gap could be eliminated by 1) an increase in government purchases; 2) an upward shift in the AE curve; 3) a reduction in the money supply. A) 1 only B) 2 only C) 3 only D) 1 or 2 E) 1 or 2 or 3

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) decrease, shifting the MD curve downward, lowering the interest rate and increasing desired investment, causing the AE curve to shift upward. B) decrease, shifting the MD curve upward, raising the interest rate and increasing desired investment, causing the AE curve to shift upward. C) increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift upward. D) increase, shifting the MD curve downward, lowering the interest rate and decreasing desired investment, causing the AE curve to shift downward. E) increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift downward.

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) strengthened because domestic interest rates must be equal to those in the rest of the world. B) weakened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world. C) strengthened because changes in autonomous expenditure cause monetary effects that influence interest rates 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.

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 inhibiting net exports and raising aggregate demand. B) a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. C) a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. D) an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. E) an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand.

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) a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. C) a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. D) an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. E) an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand.

Which of the following correctly describes the way in which a change in the money supply affects aggregate demand? A) a shift of the ID curve and a movement along the aggregate demand curve B) a movement along the ID curve and a shift of the aggregate demand curve C) a shift of both the ID curve and the aggregate demand curve D) movements along the ID curve and the aggregate demand curve E) a movement along the aggregate demand curve

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 likely to have a smaller effect on AD because the secondary effect of exchange rates will offset the changes created by monetary disturbances. C) are the same in either situation. 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.

Which of the following phenomena add a second channel to the monetary transmission mechanism? A) inflation B) diminishing marginal returns C) rising productivity D) open-market operations E) international capital mobility

Consider the monetary transmission mechanism. In an open economy, such as Canada's, an increase in the money supply leads to a fall in the interest rate. This is followed by A) an outflow of financial capital and an appreciation of the Canadian dollar. B) an inflow of financial capital and a depreciation of the Canadian dollar. C) an outflow of financial capital and a depreciation of the Canadian dollar. D) an inflow of financial capital and an appreciation of the Canadian dollar.

Consider the monetary transmission mechanism. In an open economy, such as Canada's, a decrease in the money supply leads to a rise in the interest rate. This is followed by A) an outflow of financial capital and an appreciation of the Canadian dollar. B) an inflow of financial capital and a depreciation of the Canadian dollar. C) an outflow of financial capital and a depreciation of the Canadian dollar. D) an inflow of financial capital and an appreciation of the Canadian dollar.

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) an increase; an increase; more money is available for investing in bonds from abroad B) an increase; a decrease; of the decline in domestic investment C) a decrease; an increase; of the increase in domestic investment D) a decrease; a decrease; of the decrease in domestic investment E) a decrease; a decrease, of the decrease in net exports

If the economy is experiencing an undesired inflationary gap, the Bank of Canada could A) increase the supply of money, lowering interest rates, which would shift the AD curve inward. B) decrease the demand for money, lowering interest rates, which would shift the AD curve outward. C) decrease the supply of money, raising interest rates, which would shift the AD curve inward. D) increase the supply of money, lowering interest rates, which would shift the AD curve outward. E) shift the investment demand curve to the right by lowering interest rates, which would shift the AD curve outward.

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 rise in the price level shifts the curve A) to the right, the interest rate rises and desired investment expenditure rises. B) to the left, the interest rate falls, and desired investment expenditure rises. C) to the right, the interest rate rises and desired investment expenditure falls. D) to the left, the interest rate rises and desired investment expenditure falls. E) to the right, the interest rate falls and desired investment expenditure falls.

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 monetary transmission mechanism C) the multiplier effect D) the speculative demand for money E) the precautionary demand for money

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) the real part of the economy cannot affect the level of money prices. D) the quantity of money has no effect on any real variables in the economy. E) money is neutral in its effect on absolute prices in the economy.

of the following best represents the view of the Classical economists regarding money? A) Relative prices are determined by the money supply. B) The monetary sector influences consumers' preferences and relative prices. C) The economy is composed of the real sector and the monetary sector, and the latter does not affect the former. D) The distribution of income is affected by the money supply. E) The allocation of resources is affected by the money supply.

According to the views of the Classical economists, if the money supply doubles, A) money prices will double. B) money prices will be halved. C) relative prices will double. D) real income will double. E) there will be no effect on money prices.

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) the allocation of resources was determined by the quantity of money and not by the forces of supply and demand. C) relative prices have no role in the real allocation of resources. D) a change in the quantity of money would not affect money prices or relative prices. E) a change in the quantity of money would change the price level but would not change relative prices.

Which of the following statements best describes the difference between the Classical and modern views regarding the role of money in the economy? A) Both schools of thought accept the neutrality of money within the economy. B) Unlike modern economists, Classical economists believed that the neutrality of money existed only in the long 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 Classical and modern economists accept the neutrality of money in the long run, but modern economists question neutrality in the short run. E) Both Classical and modern economists accept the neutrality of money in the short run, but modern economists question neutrality in the long run.

The long-run neutrality of money implies that A) changes to the money supply have no effect on either the price level or real GDP. B) changes to the money supply never have any effect on real GDP. C) 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. D) the economy's level of potential output will adjust to accommodate any change in the money supply. E) in response to any change in the money supply, the demand for money will adjust to cancel out its effects on all macroeconomic variables.

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) changes in the money supply have a stronger influence on investment demand than do changes in fiscal policy. C) the monetary transmission mechanism does not apply in an open-economy setting. D) the role of money in the long run is neutral. E) the path of real GDP in an economy can influence that economy's level of potential output

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) that the modern view of the neutrality of money is correct. B) supporting both the Classical and modern views of the neutrality of money. C) that both the Classical and modern views of the neutrality of money are incorrect. D) that the Classical view of the neutrality of money is correct. E) that has no bearing on the theories of either Classical or modern economists.

The proposition of long-run neutrality of money is supported by evidence over more than fifty years and many countries that there is a positive relationship between A) money supply growth and real GDP. B) money supply growth and interest rates. C) potential GDP and money supply growth. D) inflation rates and interest rates. E) inflation rates and money supply growth.

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) more sensitive the aggregate expenditure function to changes in the interest rate. C) larger the impact on the price level from any given increase in the money supply. D) less sensitive the aggregate expenditure function to changes in the interest rate. E) smaller the impact on the price level from any given increase in the money supply.

Consider the monetary transmission mechanism. Other things being equal, the steeper is the investment demand function, the A) more responsive is desired investment to a change in the interest rate. B) less responsive is desired investment to a change in the interest rate. C) less responsive is the interest rate to a change in the money supply. D) more responsive is the demand for money to a change in the interest rate. E) less responsive is the demand for money to a change in the interest rate.

Consider the monetary transmission mechanism. Other things being equal, the flatter is the investment demand function, the A) more responsive is desired investment to a change in interest rates. B) less responsive is desired investment to a change in interest rates. C) less responsive is the interest rate to a change in the money supply. D) more responsive is the demand for money to a change in interest rates. E) less responsive is the demand for money to a change in interest rates.

Consider the monetary transmission mechanism. 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) and the investment demand function are relatively flat. B) and the investment demand function are relatively steep. C) is relatively flat and the investment demand function is relatively steep. D) is relatively steep and the investment demand function is relatively flat. E) remains the same and the investment demand function is steep.

The effectiveness of monetary policy in bringing about changes in real GDP is enhanced when the 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 steep and the money demand function is relatively flat. D) investment demand curve is relatively flat and the money demand function is relatively steep. E) None of the above - monetary policy is always equally effective.

Monetary policy can have the largest impact on desired aggregate expenditures when the 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 steep and the money demand function is relatively flat. D) investment demand curve is relatively flat and the money demand function is relatively steep. E) None of the above - monetary policy is always equally effective.

Monetary policy will be least effective in changing aggregate demand when the 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 steep and the money demand function is relatively flat. D) investment demand curve is relatively flat and the money demand function is relatively steep. E) None of the above - monetary policy is always equally effective.

Consider the monetary transmission mechanism. A relatively steep investment demand curve and a relatively flat money demand curve A) make it impossible for the Bank of Canada to change the money supply. B) increase the effectiveness of expansionary monetary policy. C) imply that large increases in the money supply have little effect on aggregate expenditure. D) make the money supply a particularly powerful policy instrument. E) are believed by many monetarists to be realistic descriptions of the economy.

Any central bank, including the Bank of Canada, can implement its monetary policy by directly influencing either ________ or \_\_\_\_\_\_\_\_, but not both. A) money supply; money demand B) aggregate supply; aggregate demand C) the money supply; the interest rate D) aggregate demand; the interest rate E) the price level; the interest rate

Consider the implementation of monetary policy. One difficulty in attempting to stabilize the economy by controlling the money supply is that A) firms may be sensitive to changes in the rate of interest. B) the Bank of Canada can print more money. C) the commercial banks may choose not to hold excess reserves. D) the money demand function may be unstable. E) the Canadian government requires long-term loans.

If the Bank of Canada chooses to expand M2 by exactly $1 million, it could do so by A) buying $1 million worth of government securities on the open market. B) selling $1 million worth of government securities on the open market. C) increasing reserves at the commercial banks by $1 million. D) decreasing reserves at the commercial banks by $1 million. E) None of the above - the Bank of Canada cannot precisely control the money supply.

In practice, it is not possible for the Bank of Canada to control the money supply because A) the resulting effects on the value of the Canadian dollar are difficult to predict. B) it cannot control the process of deposit creation carried out by the commercial banks. C) it cannot control the amount of cash reserves that are injected into or withdrawn from the banking system. D) it does not have the legal power to do so. E) None of the above—the Bank of Canada could control the money supply if it chose to do so.

Suppose the Bank of Canada were to implement an expansionary monetary policy by buying government securities on the open market, thereby increasing cash reserves in the banking system. If the commercial banks do not expand their lending in response, then 1) there would be no change in the money supply at all; 2) the Bank of Canada could force the commercial banks to expand their lending, based on regulations in the Bank Act; 3) the increase in the overall money supply would be smaller than the Bank of Canada may have intended. A) 1 only B) 2 only C) 3 only D) 1 or 2 E) 2 or 3

One reason that the Bank of Canada does not try to influence the money supply directly is that A) the Bank of Canada has many other policy tools with which it can influence aggregate demand. B) the Bank of Canada does not have the mandate to change the money supply. C) because the money demand curve is almost horizontal, changes in the money supply would have little or no effect on the interest rate. D) because the investment demand curve is almost vertical, any change in the interest rate resulting from a change in money supply would have little or no effect on desired investment expenditure. E) the slope of the money demand curve is not precisely known, and so the effect on the interest rate of a change in money supply is uncertain.

Most central banks, including the Bank of Canada, implement monetary policy by A) controlling the money supply directly. B) influencing a short-term interest rate directly. C) influencing investment demand directly. D) influencing the demand for money directly. E) controlling the process of deposit creation in the commercial banking system.

The Bank of Canada chooses to influence interest rates directly rather than influencing the money supply directly because A) the former method does not require knowledge of the position of the money demand curve. B) the deposit creation mechanism in the banking system is outside the full control of the Bank of Canada. C) it is easier to communicate policy actions to the public by setting the interest rate. D) the former method does not require knowledge of the slope of the money demand curve. E) all of the above.

In practise, the Bank of Canada uses monetary policy to reduce undesirable fluctuations in real GDP by A) controlling business investment expenditures directly. B) controlling government spending. C) influencing market interest rates through changes in its target for the overnight interest rate. D) directly influencing the money supply which affects the interest rate and hence, consumption and investment. E) targeting the money supply directly.

What is the "bank rate"? A) The interest rate at which the Bank of Canada will lend funds to the Canadian government. B) The interest rate at which the Bank of Canada will lend funds to commercial banks. C) The interest rate that commercial banks charge their best customers. D) The interest rate that the Bank of Canada pays on deposits from the commercial banks. E) It is the same as a margin requirement.

Loans from the Bank of Canada are A) made only to the Canadian federal government and to provincial governments. B) made to commercial banks at the bank rate. C) made to commercial banks at the prime rate and are short-term in nature. D) made to large non-bank corporations. E) the Bank's major policy instrument.

To reduce short-term market interest rates, the Bank of Canada could A) reduce its target for the overnight rate. B) decrease the commercial banks' reserves. C) decrease the money supply directly. D) adjust the rate paid on Treasury bills. E) reduce the commercial banks' reserve requirements.

The Bank of Canada determines the "bank rate" by setting it equal to the upper end of a 50 basis-point-range that the A) Government of Canada pays for short term loans to meet interest payments on the public debt. B) Bank of Canada announces as a target range for the overnight interest rate. C) Bank of Canada announces as a target range for the exchange rate between the Canadian Dollar and the US Dollar. D) Bank of Canada announces as the target range for the five-year mortgage rate. E) Bank of Canada announces as its target for the core rate of inflation.

To raise short-term market interest rates, the Bank of Canada could A) purchase government securities in the open market. B) increase its target for the overnight rate. C) increase the commercial banks' required reserves. D) adjust the rate paid on Treasury bills. E) lower the reserve requirement.

In practice, the Bank of Canada implements its monetary policy by A) directly influencing the overnight interest rate. B) directly influencing the excess reserves in the commercial banking system. C) setting the money supply. D) directly influencing the price level. E) influencing the slope of the money demand curve.

The interest rate that commercial banks charge each other for the shortest period of borrowing or lending is called the A) term interest rate. B) prime rate. C) overnight interest rate. D) bank rate. E) preferred lending rate.

The interest rate that the Bank of Canada charges commercial banks for loans is called the A) term interest rate. B) prime rate. C) overnight interest rate. D) bank rate. E) preferred lending rate.

Suppose the Bank of Canada announces its target for the overnight interest rate at 2.5%. In that case, the Bank of Canada is willing to lend to commercial banks at \_\_\_\_\_\_\_\_% and is willing to pay \_\_\_\_\_\_\_\_% on deposits it receives from commercial banks. A) 2.25; 2.5 B) 2.5; 2.0 C) 2.5; 2.5 D) 2.75; 2.25 E) 3.5; 1.5

The Bank of Canada establishes a rate at which they will lend to commercial banks and a rate at which they will borrow from commercial banks. By doing so, A) the Bank of Canada can ensure that the actual overnight interest rate will never fall below 2%. B) the Bank of Canada can ensure that the commercial banks will not be earning excess profits. C) the Bank of Canada can ensure that money demand remains at the level necessary for monetary equilibrium. D) the Bank of Canada establishes a spread, into which all interest rates in the economy fall. E) the Bank of Canada can ensure that the actual overnight interest rate will fall between these two interest rates.

Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term rates in the market fall as a result. Households' and firms' demand for new loans from the commercial banks would \_\_\_\_\_\_\_\_. In order to make the new loans, the commercial banks require more \_\_\_\_\_\_\_\_. A) rise; government securities B) fall; currency C) rise; cash reserves D) remain stable; excess reserves E) fall; excess reserves

Suppose the Bank of Canada raises its target for the overnight interest rate and longer-term rates in the market rise as a result. Households' and firms' demand for loans from the commercial banks would \_\_\_\_\_\_\_\_. In order to accommodate this change, the commercial banks require \_\_\_\_\_\_\_\_. A) rise; more government securities B) fall; more cash reserves C) rise; more currency D) remain stable; no change to their reserves E) fall; fewer cash reserves

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 A) an increase in the demand for loans by buying government securities from the Bank of Canada, against which they can extend new loans. B) 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. C) a decrease in the demand for loans by selling government securities to the Bank of Canada and calling in existing loans. D) 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. E) an increase in the demand for loans by borrowing cash from the Bank of Canada with which they can extend new loans.

Suppose the actual overnight interest rate is 3.5%. If the Bank of Canada raises its target for the overnight interest rate to 4%, and longer-term interest rates in the market rise as a result, A) the demand for loans from commercial banks falls, the commercial banks sell government securities to the Bank of Canada, and the money supply falls. B) the demand for loans from commercial banks rises, the commercial banks buy government securities from the Bank of Canada, and the money supply falls. C) the demand for loans from commercial banks rises, the commercial banks sell government securities to the Bank of Canada, and the money supply rises. D) the demand for loans from commercial banks falls, the commercial banks buy government securities from the Bank of Canada, and the money supply falls. E) the demand for loans from commercial banks rises the commercial banks buy government securities from the Bank of Canada, and the money supply rises.

Suppose the actual overnight interest rate is 4%. If the Bank of Canada lowers its target for the overnight rate to 3.75%, the money supply will eventually A) increase as a result of open-market operations. B) increase as a result of an increase in excess reserves in the banking system. C) decrease as a result of an increase in excess reserves in the banking system. D) decrease as a result of open-market operations. E) decrease as a result of a decrease in the demand for new loans.

If the Bank of Canada wants to influence real economic variables in the short run, it uses A) policy instruments such as the exchange rate and investment to influence the economy. B) its only policy instrument—the overnight interest rate target—to influence aggregate demand. C) policy variables such as the exchange rate and investment to influence aggregate demand. D) policy variables such as open-market operations to influence aggregate demand. E) policy variables such as the money supply to influence investment and aggregate supply.

The overnight interest rate is crucial to the Bank of Canada when it implements its monetary policy because A) the Bank of Canada's first priority is to ensure the solvency of commercial banks. B) its changes in the overnight interest rate generally lead to changes in longer-term interest rates. C) overnight loans constitute a major source for open-market operations. D) the Bank of Canada has no ability to influence other interest rates. E) it is the result of the Bank of Canada's regular changes in the money supply.

Suppose the Bank of Canada announces its target for the overnight interest rate at 2.75%. What is the Bank's target range for the overnight interest rate? A) 1.75 - 3.75% B) 2.25 - 3.25% C) 2.5 - 3.00% D) 2.7 - 2.8% E) 2.74 - 2.76%

Suppose the Bank of Canada's announced target for the overnight interest rate is 2.75%. Why should we expect commercial banks to borrow and lend overnight funds at a rate very close to this target? A) Because the Bank of Canada Act requires that commercial banks borrow from each other at a rate no higher than 0.25% above the target rate. B) Because commercial banks know that they can borrow from the Bank of Canada at 3.00%, and lend to the Bank at 2.50% so the rate they charge each other will stay within that range. C) Because the Bank of Canada chooses its target rate based on the anticipated borrowing needs of the commercial banks. D) Because it is not legal for commercial banks to transact between each other at any rate outside of the Bank of Canada's target range. E) Because commercial banks face regulatory obstacles if they borrow from each other at any rate outside of the Bank of Canada's target range.

How does the Bank of Canada communicate its target for the overnight interest rate to the public? A) monthly announcements at fixed announcement dates (FADs) B) in its quarterly publication "Monetary Policy Report" C) announcements made 8 times per year at pre-specified fixed announcement dates (FADs) D) the target is communicated to the minister of finance for approval and then released to the public on a quarterly basis E) the target is communicated to the Prime Minister for approval and then released to the public at 8 pre-specified fixed announcement dates (FADs)

In Canada, open-market operations are A) government actions aimed at creating competition within the banking industry. B) loans made by the Bank of Canada to the commercial banks. C) conducted to enforce the reserve requirements of commercial banks. D) no longer carried out. E) the buying and selling of government securities by the Bank of Canada.

The Bank of Canada's purchases and sales of government securities, when they occur, are referred to as A) increases and decreases in government expenditure. B) margin requirements. C) open-market operations. D) reserve requirements. E) the setting of the bank rate.

If the Bank of Canada chooses to expand the money supply directly, it could A) sell government securities on the open market. B) sell some of its foreign currency assets. C) reduce its deposits at commercial banks. D) buy government securities on the open market. E) change the price level.

When the Bank of Canada enters the open market and buys or sells government securities, we refer to this as A) monetary policy. B) commercial lending. C) changing the target reserve ratio. D) setting the target ratio. E) open-market operations.

The Bank of Canada conducts its open-market operations directly in response to A) changes in aggregate demand. B) orders from Parliament. C) its announced changes in the money supply. D) changes in the price level. E) the changing demand for cash reserves from the commercial banks.

The amount of currency in circulation in the Canadian economy is described as being endogenous to the system. This is because A) the process of deposit creation by the commercial banks is determined by the Bank of Canada. B) the commercial banks determine the currency in circulation in response to the Bank of Canada's changes to the money supply. C) the Bank of Canada conducts its open-market operations in response to the changing demand for cash from the commercial banks. D) the Bank of Canada targets the money supply directly. E) the Bank of Canada targets the currency in circulation directly.

Suppose the Bank of Canada reduces its target for the overnight interest rate by 0.50 percentage points. In this situation, the Bank will likely need to accommodate the eventual resulting change in the demand for money by A) increasing the supply of money by buying government securities on the open market. B) increasing the supply of money by selling government securities on the open market. C) decreasing the supply of money by buying government securities on the open market. D) decreasing the supply of money by selling government securities on the open market. E) maintaining the current supply of money which will increase the effectiveness of the change in the overnight interest rate.

Suppose the Bank of Canada increases its target for the overnight interest rate by 0.25 percentage points. In this situation, the Bank will likely need to accommodate the resulting change in the demand for money by A) increasing the supply of money by buying government securities on the open market. B) increasing the supply of money by selling government securities on the open market. C) decreasing the supply of money by buying government securities on the open market. D) decreasing the supply of money by selling government securities on the open market. E) maintaining the current supply of money which will increase the effectiveness of the change in the overnight interest rate.

An expansionary monetary policy by the Bank of Canada could include A) moral suasion to increase the commercial banks' desired reserves. B) moral suasion to reduce lending by commercial banks. C) an open-market sale of government securities. D) a reduction of the Bank's target for the overnight interest rate. E) None of the above would be expansionary.

An expansionary monetary policy would ________ and would eventually increase the money supply. A) reduce short-term interest rates B) involve selling foreign-currency reserves in the foreign-exchange market C) involve selling government bonds on the open market D) increase short-term interest rates E) involve increasing the target for the overnight interest rate.

Suppose the Canadian economy had an inflationary gap. To decrease the level of aggregate desired investment, the Bank of Canada could A) buy securities in the open market. B) lower short-term interest rates. C) reduce its spending. D) raise its target for the overnight interest rate. E) raise the price level.

Suppose the Canadian economy had a recessionary gap. To increase the level of desired aggregate expenditure, the Bank of Canada could A) raise the bank rate. B) increase its spending. C) reduce the reserve requirements of the commercial banks. D) sell securities in the open market. E) reduce its target for the overnight interest rate.

The best description of the cause-and-effect chain of a contractionary monetary policy in the short run is that it will A) lower the interest rate, increase investment spending, and increase real GDP. B) raise the interest rate, decrease investment spending, and decrease real GDP. C) lower the interest rate, lower investment spending, and decrease real GDP. D) raise the interest rate, decrease investment spending, and increase real GDP. E) raise the interest rate, increase investment spending, and decrease real GDP.

The best description of the cause-and-effect chain of an expansionary monetary policy is that it will A) lower the interest rate, raise investment spending, and increase real GDP. B) raise the interest rate, decrease investment spending, and increase real GDP. C) raise the interest rate, increase investment spending, and increase real GDP. D) lower the interest rate, increase investment spending, and reduce real GDP. E) raise the interest rate, decrease investment spending, and decrease real GDP.

To remove an inflationary gap, the Bank of Canada would probably seek to A) increase its target for the money supply. B) decrease its target for the overnight interest rate. C) increase its target for the overnight interest rate. D) decrease the bank rate. E) buy government securities through open-market operations.

To remove a recessionary gap, the Bank of Canada would probably seek to A) increase its target for the overnight interest rate. B) increase the bank rate. C) decrease its target for the overnight interest rate. D) sell government securities through open-market operations. E) decrease its target for the money supply.

If there were a large and persistent recessionary gap, an appropriate monetary policy could include A) increasing the bank rate. B) increasing the overnight lending rate. C) decreasing reserves available to the commercial banks. D) the Bank of Canada reducing its target for the overnight interest rate. E) the Bank of Canada selling government securities to the public.

Changes in monetary aggregates such as M2 and M2+ can be a poor guide to the stance of monetary policy if A) commercial bank reserves are rising. B) interest rates are changing rapidly. C) interest rates are constant. D) money demand is changing in unpredictable ways. E) money demand is constant.

If desired investment spending is relatively sensitive to changes in interest rates, then monetary policy could be very useful because it would A) be very effective in reducing expenditure during inflationary periods and very effective in expanding expenditure during recessionary periods. B) be very effective in reducing expenditure during inflationary periods and ineffective in expanding expenditure during recessionary periods. C) be very ineffective in reducing expenditure during inflationary periods and very effective in expanding expenditure during recessionary periods. D) be very ineffective in reducing expenditure during inflationary periods and very ineffective in expanding expenditure during recessionary periods. E) be somewhat effective in reducing expenditure during inflationary periods and very ineffective in expanding expenditure during recessionary periods.

If we observe that the bank rate has increased, we can conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) Bank of Canada has adjusted the rate it pays on Treasury bills.

If we observe that the bank rate has fallen, we can conclude that the A) Bank of Canada has implemented a contractionary monetary policy. B) Bank of Canada has abandoned its inflation target. C) Government of Canada has reduced the money supply. D) Bank of Canada has implemented an expansionary monetary policy. E) Bank of Canada has adjusted the rate it pays on Treasury bills.

If we observe a small increase in the actual overnight interest rate over a several-day period, we can definitely conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above.

If we observe a small decrease in the actual overnight interest rate over a several-day period, we can definitely conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above.

If we observe that the actual rate of CPI inflation has fallen, we can certainly conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above.

If we observe that the actual rate of CPI inflation has increased, we can certainly conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above.

If we observe that short-term market interest rates have fallen, we can certainly conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above.

The monetary transmission mechanism describes how changes in the the money market (possibly caused by monetary policy) cause changes in the interest rate, which then cause changes in 1) aggregate demand and real GDP; 2) desired investment and net exports; 3) the price level. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1, 2, and 3

The Bank of Canada initially implements an expansionary monetary policy by A) directly increasing the money supply. B) selling government securities on the open market. C) buying government securities on the open market. D) reducing its target for the overnight interest rate. E) raising its target for the overnight interest rate.

The Bank of Canada initially implements a contractionary monetary policy by A) directly decreasing the money supply. B) raising its target for the overnight interest rate. C) selling government securities on the open market. D) buying government securities on the open market. E) reducing its target for the overnight interest rate.

Suppose the economy is experiencing an inflationary gap. Which of the following describes a likely policy response by the Bank of Canada? A) A contractionary monetary policy which leads to a lower interest rate, reduced investment demand, and a shift to the left of the AD curve. B) An expansionary monetary policy which leads to an increase in investment demand, and a shift to the right of the AD curve. C) An expansionary monetary policy which leads to a decrease in investment demand, and a shift to the left of the AD curve. D) A contractionary monetary policy which leads to an increase in investment demand, and a shift to the right of the AD curve. E) A contractionary monetary policy which leads to a reduction in investment demand, and a shift to the left of the AD curve.

How does the Bank of Canada set in motion the monetary transmission mechanism? A) by altering its target for the overnight interest rate B) by altering the price level C) by influencing the demand for money directly D) by influencing the exchange rate directly E) by influencing aggregate supply directly

Most central banks accept that, in the long run, monetary policy has an effect on A) the level of aggregate demand. B) the price level and the inflation rate only. C) the level of investment demand. D) all real economic variables. E) real GDP and the price level.

Many central banks have established formal targets for the rate of inflation because of the following fundamental observations about economic relationships: 1. there are high costs associated with inflation 2. high inflation causes high unemployment 3. monetary policy is the cause of sustained inflation A) 1 only B) 2 only C) 3 only D) 1 and 3 only E) 1, 2, and 3

High inflation is costly to firms and individuals. Of the following, who is most adversely affected by high inflation? A) a homeowner with a 25-year fixed-rate mortgage B) a student with student loans repayable in nominal terms at a fixed rate of interest C) a student with student loans repayable on an indexed basis at a variable rate of interest D) a senior whose retirement income is an indexed pension plan E) a senior whose retirement income is fixed in dollar terms

Which of the following describes the cause of a sustained inflation? A) the monetary transmission mechanism B) an aggregate demand shock significant enough to cause a substantial rise in the price level C) continual monetary expansion D) an aggregate supply shock significant enough to cause a substantial rise in the price level E) simultaneous AD and AS shocks.

Given its existing policy regime of "inflation targeting," the Bank of Canada would likely react to a large positive aggregate demand shock by A) lowering the bank rate. B) buying bonds from the open market. C) increasing its target for the overnight interest rate. D) decreasing its target for the overnight interest rate E) ignoring the shock and allowing the economy to adjust.

Given its existing policy regime of "inflation targeting," the Bank of Canada would likely react to a large negative AD shock by A) raising the bank rate. B) selling bonds on the open market. C) increasing its target for the overnight interest rate. D) decreasing its target for the overnight interest rate E) ignoring the shock and allowing the economy to adjust.

The long-run target currently used by the Bank of Canada is to set A) M2 = real GDP/M1 B) a long-run target range for the overnight lending rate. C) a long-run target range for the Canadian-U.S. exchange rate. D) a long-run target range for the 5-year mortgage rate. E) a long-run target range for the inflation rate.

Consider the following statement about inflation targeting: A policy of inflation targeting acts as an automatic stabilizer in the economy, just like the automatic fiscal stabilizers. Choose the most appropriate response to this statement. The statement is: A) true, because an inflationary gap is met with a contractionary monetary policy. B) true, because a recessionary gap is met with an expansionary monetary policy. C) not true, because inflation targeting requires active policy decisions by the Bank of Canada, whereas fiscal stabilizers need no policy implementation. D) not true, because inflation targeting automatically maintains inflation within the target range, whereas fiscal stabilizers require government policy decisions. E) true, because inflation targeting and fiscal stabilizers are essentially the same policy tool.

Because of the volatility of food and energy prices, the Bank of Canada pays more attention in the short run to changes in ________ than to changes in \_\_\_\_\_\_\_\_. A) core inflation; total CPI inflation B) total CPI inflation; core inflation C) total CPI inflation; inflation of the GDP deflator D) inflation of the GDP deflator; total CPI inflation E) the nominal exchange rate; the real exchange rate

One problem with focusing on the CPI when conducting monetary policy is that A) many elements in the CPI change for reasons unrelated to the state of the Canadian economy. B) it is closely related to the value of M2. C) changes in monetary policy have little effect on the CPI, especially in the long run. D) the CPI is too stable to accurately reflect the changes occurring in the Canadian economy. E) the CPI distorts the value of commercial bank reserves.

Most central banks in the developed countries focus their attention on A) the elimination of output gaps. B) reducing unemployment. C) the reduction and control of inflation. D) alleviating the harmful effects of inflation. E) the growth of potential output.

High and uncertain inflation is damaging to the economy because A) the price system is no longer capable of effectively signalling changes in relative scarcity through changes in relative prices. B) individuals who receive their incomes in fixed nominal terms are made worse off. C) there can be unexpected reallocations of real income between workers and firms. D) there can be unexpected reallocations of real income between borrowers and lenders. E) All of the above

It is widely accepted by economists that monetary policy is the most important determinant of a country's A) level of real GDP. B) level of potential output. C) aggregate supply curve. D) long-run rate of inflation. E) long-run rate of economic growth.

The Bank of Canada's formal policy target is \_\_\_\_\_\_\_\_. It's current target is to keep the annual inflation rate close to \_\_\_\_\_\_\_\_%. A) core inflation; 1 B) core inflation; 0 C) the money supply; 2 D) CPI inflation; 2 E) the money supply; 1

In an effort to maintain inflation at its targeted level the Bank of Canada designs its policies, in the short run, to A) eliminate all unemployment. B) keep real GDP close to potential output. C) minimize the growth of the money supply. D) allow the aggregate supply curve to close any output gaps. E) eliminate all negative shocks to the economy.

An example of how inflation targeting by the Bank of Canada helps to stabilize the economy is: A) firms and households are aware of the announced inflation target and adjust their behaviour so as to maintain this level of actual inflation. B) when a recessionary gap reduces the rate of inflation (below the target level) the Bank of Canada will implement an expansionary monetary policy, which helps to close the gap. C) when the actual inflation rate falls below the targeted level of inflation, then commercial banks automatically increase deposit creation. D) when an output gap opens in the economy, the inflationary target adjusts to close the gap. E) when an output gap opens in the economy, the Bank of Canada chooses the inflation target appropriate for closing the gap.

In the short run the Bank of Canada aims to \_\_\_\_\_\_\_\_, in an effort to \_\_\_\_\_\_\_\_. A) enhance any positive shocks; keep inflation within its target band B) reduce any positive or negative output gaps; keep inflation close to the official target C) ignore any shocks as they are automatically adjusting; keep GDP growth constant D) keep actual output within 1%-3% of potential output; keep the money supply growing at a constant rate E) ignore any shocks as they are automatically adjusting; keep inflation within its target band

The economic variables that the Bank of Canada tries to influence are ________ in the short run and ________ in the long run. A) the distribution of income; the unemployment rate B) real GDP; the path of the price level C) the distribution of income; economic efficiency D) real GDP; the exchange rate E) the exchange rate; the rate of inflation

Inflation targeting A) is irrelevant to the stability of the economy because of the long-run neutrality of money. B) is a destabilizing policy because it requires the Bank of Canada to engage in inappropriate policy responses. C) is a stabilizing policy because the Bank of Canada's policy adjustments act to stabilize real GDP growth. D) should be replaced with fiscal policy targeting because of the long-run neutrality of money. E) creates output gaps that must be then offset with fiscal policy stabilizers.

Inflation that is fully anticipated by workers, firms, and consumers A) leads to reductions in real incomes for all workers. B) is hard to predict. C) improves the efficiency of the price system. D) does not impact the purchasing power of individuals whose incomes are fully indexed to inflation. E) has no real or nominal effects in the economy.

Which of the following goods are included in Canada's measure of "core inflation"? A) natural gas B) a new car C) fresh vegetables D) excise tax on gasoline E) coffee

Consider a central bank that chooses to implement its monetary policy by expanding the money supply by a fixed percentage amount in every year. One important disadvantage with this approach to monetary policy is that it may A) lead to sustained inflation. B) be destabilizing if the demand for money is unstable. C) lead to stable growth of national income. D) be inconsistent with the Bank of Canada Act. E) create a recessionary output gap.

Most economists now accept the proposition that A) an ideal monetary policy would allow the money supply to grow at a constant rate. B) to reduce the long-run rate of inflation there must be a sustained monetary contraction. C) monetary policy leaves real GDP and the overnight lending rate unaffected in the short run. D) lowering the Bank Rate will have no effect on desired investment in the short run but will have a direct effect on core inflation. E) monetary policy is the only policy tool available for influencing aggregate demand.

Suppose Canadian real GDP is currently equal to potential GDP. Then, because of events elsewhere in the world, European investors decide to hold fewer Canadian financial assets, which leads to a sustained depreciation of the Canadian dollar. If the Bank of Canada is committed to its inflation target then it should A) implement an expansionary monetary policy by increasing its target for the overnight interest rate. B) implement an expansionary monetary policy by decreasing its target for the overnight interest rate. C) not intervene in the economy at all since this shock will not have any real effects in the short run. D) implement a contractionary monetary policy by increasing its target for the overnight interest rate. E) implement a contractionary monetary policy by decreasing its target for the overnight interest rate.

Suppose Canadian real GDP is currently equal to potential GDP. Then the Canadian dollar depreciates due to the reduced demand by European producers to purchase Canadian-made raw materials. If the Bank of Canada is committed to its inflation target then it should A) implement an expansionary monetary policy by increasing its target for the overnight interest rate. B) implement an expansionary monetary policy by decreasing its target for the overnight interest rate. C) not intervene in the economy at all since this shock will not have any real effects in the short run. D) implement a contractionary monetary policy by increasing its target for the overnight interest rate. E) implement a contractionary monetary policy by decreasing its target for the overnight interest rate.

Which of the following events would justify the Bank of Canada implementing an expansionary monetary policy, while maintaining its commitment to its inflation target? A) The appreciation of the Canadian dollar due to increases in the world prices of Canadian exports. B) The depreciation of the Canadian dollar due to persistent current account deficits of Canada. C) The OPEC oil-price shocks that result in inflation. D) The U.S. economy increasing its demand for Canadian goods and services. E) The stock market crash following the terrorist attacks on September 11, 2001.

Suppose Canadian real GDP is equal to potential GDP. An appreciation of the Canadian dollar then implies that the Bank of Canada should engage in A) a loosening of monetary policy because of the excess demand for Canadian products that is creating the appreciation. B) a tightening of monetary policy because of the excess demand for Canadian products that is creating the appreciation. C) no change in monetary policy because the exchange rate is always allowed to float freely. D) an increase in inflation because of the higher cost of imports. E) either a contractionary or an expansionary policy, depending on the cause of the appreciation.

Suppose Canadian real GDP is equal to potential GDP. A significant and sustained appreciation of the Canadian dollar on the foreign-exchange market then requires the Bank of Canada to A) engage in expansionary monetary policy to counter the rise in the dollar. B) engage in contractionary monetary policy to counter the rise in the dollar. C) identify the cause of the change in the exchange rate before taking any action to adjust policy. D) increase the target band for the inflation rate. E) increase the target band for the overnight lending rate.

Suppose Canadian real GDP is equal to potential GDP. A significant and sustained appreciation of the Canadian dollar would likely lead the Bank to engage in a contractionary monetary policy if the Bank's policy experts traced the cause of the appreciation to A) a decrease in the overnight lending rate. B) an increase in the desire of non-residents to purchase Canadian financial assets. C) an increase in the desire of non-residents to purchase more Canadian goods and services. D) a reduction in Canada's core inflation rate. E) a recession in Canada.

Suppose Canadian real GDP is equal to potential GDP. A significant and sustained appreciation of the Canadian dollar would likely lead the Bank to engage in an expansionary monetary policy if the Bank's policy experts traced the cause of the appreciation to A) a decrease in the overnight lending rate. B) an increase in the desire of non-residents to purchase Canadian financial assets. C) an increase in the desire of non-residents to purchase more Canadian goods and services. D) a reduction in Canada's core inflation rate. E) a recession in Canada.

Time lags in monetary policy can cause A) monetary policy to work in the opposite direction to what was initially predicted by economists. B) an expansionary policy to have a smaller effect than what was expected by policymakers. C) monetary expansions to work very quickly but cause monetary contractions to work very slowly. D) difficulty in the timing of appropriate policy and can even lead to destabilization. E) short-term monetary policy to work more effectively than long-term targeting

Economists at the Bank of Canada estimate that time lags in monetary policy imply that A) monetary policy is totally ineffective in changing overnight lending rates in the short run. B) monetary policy is totally ineffective in changing core inflation rates in the long run. C) monetary policy can cause changes in real GDP to occur in 9-12 months and changes in core inflation to occur in 18-24 months. D) monetary policy can cause changes in core inflation to occur in 9-12 months and changes in the exchange rate to occur in 18-24 months. E) monetary policy can cause changes in core inflation to occur in 9 to 12 months and changes in real GDP to occur in 18-24 months.

If an economist supports targeting inflation as opposed to monetary fine-tuning, this economist probably believes that time lags in the implementation of monetary policy are A) short but predictable. B) short but unpredictable. C) long and unpredictable. D) long but predictable. E) predictable in their short-run effects but unpredictable in the long run.

Long time lags in the effectiveness of monetary policy A) decrease the effectiveness of the Bank of Canada's fine tuning. B) decrease the destabilizing side-effects of Bank of Canada's monetary policy. C) increase the effectiveness of the Bank of Canada's fine tuning. D) increase the growth of the money supply. E) decrease the growth of the money supply.

If the Bank of Canada were required to gain approval for all changes in monetary policy from Parliament before implementing them, this would result in A) higher inflation in the long run. B) longer time lags in monetary policy. C) permanently higher unemployment. D) permanently higher exchange rates for the Canadian dollar. E) temporary reductions in the interest rate.

It might take a while before the effects of changes in monetary policy are realized in the economy because it takes a while for A) the overnight interest rate and longer-term interest rates to adjust. B) investment expenditures and net exports to adjust. C) government purchases to adjust. D) monetary policy to be implemented via open-market operations. E) the exchange rate to adjust.

Which of the following is correct regarding the implications of time lags associated with monetary policy? A) Lags in monetary policy would be relatively longer in a closed economy than in an open one. B) The destabilizing effects of monetary policy will not be observed if it is used only for fine- tuning purposes. C) The Bank of Canada should design its policy based upon what has been already observed in the economy. D) The Bank of Canada generally responds to shocks that are persistent and of a significant magnitude.

Suppose the Bank of Canada is criticized for implementing a contractionary monetary policy at a time when the inflation rate is at or near its target level. One explanation for this policy decision is likely that A) the Bank regularly maintains a contractionary policy stance in order to keep inflation at or near its target. B) it is extremely difficult to predict future events and a contractionary policy is the safest policy choice. C) the Bank anticipates a decrease in Canadian net exports and is acting now because of the unavoidable time lags. D) the Bank anticipates a decrease in investment spending and is acting now because of the unavoidable time lags. E) the Bank anticipates a rise in inflation and is acting now because of the unavoidable time lags.

Most economists now accept the proposition that 1) to reduce the long-run rate of inflation there must be a sustained monetary contraction; 2) monetary policy should be aimed at controlling the inflation rate in the long run, with a short- run focus on reducing output gaps; 3) high inflation, even if it is largely expected, can generate significant costs for the economy. A) 1 only B) 2 only C) 3 only D) 2 and 3 E) 1, 2 and 3

Suppose the Canadian economy is facing an inflationary output gap (Y \> Y\*). In our macro model, such an output gap can explain changes in which of the following variables? A) the average level of wages B) the level of wages in the forestry sector relative to the mining sector C) the level of wages in a high-growth region of the country relative to a slow-growth region D) the level of wages for skilled workers relative to unskilled workers E) the level of wages for female workers relative to male workers

The term NAIRU stands for the A) non-accelerating inflation rate of unemployment. B) natural and indexed rate of unemployment. C) non-accelerating, indexed and regulated unemployment. D) North American indexed rate of unemployment. E) North American inflation rate of unemployment.

Suppose economists were able to measure frictional unemployment as 3%, cyclical unemployment as 2%, and structural unemployment as 4%. Then we would know that the NAIRU is ________ and the actual unemployment rate is \_\_\_\_\_\_\_\_. A) 6%; 5% B) 5%; 9% C) 7%; 9% D) 7%; 7% E) 6%; 6%

If the unemployment rate is greater than the NAIRU, A) there will be upward pressure on wages. B) the AS curve will shift upward. C) there is a negative output gap. D) real national income is above potential GDP. E) there is an inflationary gap.

Suppose economists were able to measure frictional unemployment as 3%, cyclical unemployment as 2%, and structural unemployment as 4%. Then we would know that A) Y is below Y\* and there is downward pressure on wages. B) Y is below Y\* and there is upward pressure on wages. C) Y is equal to Y\* and there is no pressure on wages. D) Y is above Y\* and there is downward pressure on wages. E) Y is above Y\* and there is upward pressure on wages.

If the unemployment rate is less than the NAIRU, A) there is no pressure on the AS curve to shift. B) there is a recessionary output gap. C) demand forces will exert upward pressure on wages. D) the AS curve will shift downward. E) there will be downward pressure on wages.

Inflationary pressures that result from a rightward shift in the AD curve A) cause Y to fall below Y\*. B) will worsen any existing unemployment problem. C) will initiate a wage-price spiral. D) will eventually subside unless accompanied by continual increases in the money supply. E) will permanently increase output.

Other things being equal, unit costs will rise and the AS curve will shift upward if A) there is a fall in the price of oil. B) the government reduces payroll taxes. C) wage increases exceed productivity increases. D) wages rise. E) wage and price controls are in effect.

If the NAIRU is 8% and the actual unemployment rate is 5%, A) there is no pressure on the AS curve to shift. B) there is a recessionary gap. C) demand forces put upward pressure on wages. D) the AS curve will shift downward. E) it will get stuck there permanently.

Suppose the NAIRU for Canada is 6%, the actual unemployment rate is 7%, and productivity is constant. We can conclude that A) there is an inflationary gap. B) the NAIRU will readjust to 7%. C) the AD curve will automatically shift up. D) the excess demand for labour will put upward pressure on wages. E) the excess supply of labour will put downward pressure on wages.

Suppose the NAIRU for Canada is 6.5%, the actual unemployment rate is 5% and productivity is constant. We can conclude that A) there is a recessionary gap. B) the NAIRU will re-adjust to 5%. C) the AD curve will automatically shift up. D) the excess demand for labour will put upward pressure on wages. E) the excess supply of labour will put downward pressure on wages.

Suppose the NAIRU for Canada is 6.5%, and the actual unemployment rate is 5%. If the Bank of Canada reduces its target for the overnight interest rate, A) it will move real GDP back toward potential GDP. B) it will worsen the existing inflationary gap. C) it will increase the unemployment rate. D) the AD curve will shift to the left. E) the AS curve will shift upward.

Which of the following will lead to sustained inflation? A) the imposition of a new sales tax B) the sudden doubling of a key raw materials price C) a new payroll tax that raises firms' unit labour costs D) persistent expectations of continued inflation E) an early frost that damages the agricultural harvest

Which of the following would be expected to cause a sustained increase in the inflation rate rather than a once-and-for-all increase in the price level? A) the imposition of a new sales tax B) the sudden doubling of a key raw materials price C) a new payroll tax that raises unit wage costs D) expectations of higher future inflation E) an early frost that damages the agricultural harvest

The reason why inflation can persist even after its original causes have been removed is that A) workers expect wage increases to match increases in labour productivity. B) workers are willing to accept wage increases lower than the increase in productivity. C) the Bank of Canada ensures that money-supply growth matches growth in real GDP. D) inflationary expectations cause the AS curve to continue shifting upwards. E) governments embark on a deficit-cutting program.

Increases in nominal wages in the economy are generally the effect of which force(s)? A) output-gap effect B) expectational effect C) supply-shock inflation D) output gap effect plus expectational effect E) output gap effect plus expectational effect minus supply-shock inflation

Actual inflation would be 2% when expected future inflation is \_\_\_\_\_\_\_\_, output-gap inflation is \_\_\_\_\_\_\_\_, and supply-shock inflation is \_\_\_\_\_\_\_\_. A) 2%; 2%; 2% B) 2%; 0%; -2% C) 2%; 0%; 0% D) 1%; 1%; 1% E) 0%; 0%; -2%

Which of the following is consistent with constant inflation: expected future inflation of \_\_\_\_\_\_\_\_, output-gap inflation of \_\_\_\_\_\_\_\_, and supply-shock inflation \_\_\_\_\_\_\_\_. A) 2%; 2%; 2% B) 2%; 0%; -2% C) 2%; 0%; 0% D) 1%; 1%; 1% E) 0%; 0%; -2%

Which of the following statements are correct? The expectational effect of inflation 1) is nullified as soon as the government promises zero inflation; 2) often plays a role in accelerating inflation; 3) is not directly a monetary cause of inflation. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3

Suppose the actual rate of inflation in the economy is 5%. If we know that expected inflation is 2%, and that output-gap inflation is 1%, then we also know that A) the NAIRU is 5%. B) money wages must be rising by 5%. C) non-wage supply-shock inflation must equal 2%. D) expected inflation is rising by 2%. E) the actual rate of inflation is falling.

Average wages in Canada have increased each year since the Second World War, even though the economy has experienced some severe recessions during this time. The explanation for this continued increase in nominal wages is A) the existence of powerful labour unions in Canada. B) that the actual unemployment rate is consistently below the NAIRU. C) that wage effects of the inflationary gaps outweigh the wage effects of the recessionary gaps. D) the persistent expectation that the price level will increase. E) a continued shortage of labour.

Assume your salary is $2000 per month and the expectation is that over the next twelve months inflation will be 6%. In order to prevent a drop in your real salary over the year, your employer would have to agree to change your nominal salary by A) - 12%. B) - 6%. C) 0. D) + 6%. E) + 12%.

the basic AD/AS macro model, actual inflation is the sum of three separate components. They are A) accelerated inflation, expected inflation and output gap inflation. B) validated inflation, expected inflation, and output gap inflation. C) output gap inflation, wage-push inflation and demand inflation. D) output gap inflation, expected inflation and supply-shock inflation. E) accelerated inflation, demand inflation and supply inflation.

Assume your salary is $2000 per month and your employer gives you a raise of 6%. Over the next twelve months the inflation rate is 12%. Your real salary will change by A) +12%. B) + 6%. C) 0%. D) - 6%. E) - 12%.

Consider the AD/AS model with a sustained and constant inflation. In this case, A) there is no effective set of monetary policy tools to reduce inflation. B) there is a tendency for the price of bonds to be increasing rapidly. C) the AS curve is shifting upward because of inflation expectations. D) expected inflation tends to be significantly less than actual inflation. E) the AD curve is not shifting at all.

When a central bank attempts to stop a sustained inflation, it tries to remove the inflationary gap by A) shifting the AS curve upward. B) shifting the AS curve downward. C) increasing the outward shift of the AD curve. D) stopping the outward shift of the AD curve. E) taking no action and allowing the market to correct itself.

major reason why it is so difficult to eliminate a sustained inflation is that inflationary expectations A) make it impossible to stop the rightward shift of the AD curve. B) make it impossible to reduce aggregate expenditure. C) keep shifting the AS curve upward. D) keep shifting the AS curve downward. E) cannot be influenced by monetary policy.

A constant inflation in the AD/AS macro model is only possible when A) AS shifts upward at a uniform rate and AD shifts downwards at a uniform rate. B) AS shifts downward at a uniform rate and AD shifts upwards at a uniform rate. C) AD shifts upwards at a uniform rate and AS shifts upwards at the same uniform rate. D) AD shifts upwards at a uniform rate and AS shifts upwards at a higher uniform rate. E) None of the above - constant inflation is not possible.

A constant inflation rate can be illustrated by the AD curve shifting upward A) with no shifts in aggregate supply. B) at the same rate as aggregate supply shifts upward. C) at the same rate as aggregate supply shifts downward. D) faster than aggregate supply shifts upward. E) faster than aggregate supply shifts downward.

Consider an economy without any supply shocks. If the expected inflation rate is 3% and the actual inflation rate is also 3%, then it is probably true that A) real GDP equals potential GDP. B) real GDP is less than potential GDP. C) real GDP is more than potential GDP. D) we can deduce nothing about the level of GDP. E) the economy cannot be in a short-run equilibrium.

Canada's actual rate of inflation is fairly constant around the 2% level. We can conclude that A) real GDP must be below potential GDP because we also have positive unemployment. B) real GDP must be above potential GDP. C) the Bank of Canada is accommodating this level of inflation with increases in the money supply. D) the expectations about inflation are consistently wrong. E) the economy is consistently experiencing an inflationary gap.

Consider the AD/AS model with a sustained and constant rate of inflation. In this situation, the money supply is rising, which tends to reduce interest rates. However, interest rates are actually likely to remain stable. Why? A) Because the money transmission mechanism does not apply in a situation of sustained inflation. B) Because the rising price level is decreasing the demand for money which is pushing interest rates up. C) Because the declining interest rates cause the investment demand curve to shift to the right, which causes interest rates to rise. D) Because the rising price level is increasing the demand for money which tends to push interest rates up. E) Because the declining interest rates cause the investment demand curve to shift to the left, which causes interest rates to rise.

Assuming that the economy is currently in a long-run equilibrium at Y\*, a negative aggregate demand shock with no change in the money supply will eventually result in A) no change in the price level. B) an ongoing inflation in the economy. C) a lower price level and GDP below potential output. D) a higher price level and GDP at potential GDP. E) a lower price level and GDP at its potential level.

A rightward shift in the AD curve accompanied by a leftward shift of the AS curve will result in A) an increase the price level and an uncertain effect on unemployment. B) a reduction in the price level and an uncertain effect on unemployment. C) an increase in unemployment and an uncertain effect on the price level. D) a reduction in unemployment and an uncertain effect on the price level. E) a reduction in both unemployment and the price level.

A leftward shift in the AD curve accompanied by a leftward shift of the AS curve will A) increase the price level but have an uncertain effect on GDP. B) reduce the price level but have an uncertain effect on GDP. C) increase GDP but have an uncertain effect on the price level. D) reduce GDP but have an uncertain effect on the price level. E) increase both GDP and the price level.

A leftward shift of the AD curve accompanied by a rightward shift of the AS curve will A) increase unemployment but have an uncertain effect on the price level. B) reduce unemployment but have an uncertain effect on the price level. C) increase the price level but have an uncertain effect on unemployment. D) reduce the price level but have an uncertain effect on unemployment. E) increase both the price level and unemployment.

A rightward shift of the AD curve accompanied by a rightward shift of the AS curve will A) increase GDP but have an uncertain effect on the price level. B) reduce GDP but have an uncertain effect on the price level. C) increase the price level but have an uncertain effect on GDP. D) reduce the price level but have an uncertain effect on GDP. E) reduce both the price level and GDP.

If the central bank responds to repeated negative supply shocks with monetary validations, the economy will be faced with A) a one-time increase in prices. B) a one-time decrease in prices. C) alternating periods of inflation and deflation. D) steady reductions in real output. E) continuous inflation.

Suppose the economy is currently in long-run equilibrium with real GDP equal to potential GDP. A positive demand shock, that is not validated by the Bank of Canada, will eventually result in A) no change in the price level. B) an ongoing inflation in the economy. C) a lower price level and real GDP below potential output. D) a higher price level and GDP at potential output. E) an ongoing deflation in the economy.

Suppose there is an inflationary gap and the Bank of Canada does not respond in any way to change its monetary policy. This scenario will lead to A) an increase in wages and an upward shift of the AS curve. B) a wage-price spiral. C) a permanent decrease in output. D) the emergence of a recessionary gap. E) reduced transactions demand for money, an increase in the price of bonds, and a lower rate of interest.

Suppose there is a recessionary gap and the Bank of Canada holds the money supply constant. This scenario will eventually lead to A) an increase in wages and an upward shift of the AS curve. B) a reduction in wages and a downward shift of the AS curve. C) a permanent decrease in output. D) the emergence of an inflationary gap. E) increased transactions demand for money, and a higher rate of interest.

Beginning from a position of long-run equilibrium, an expansionary monetary policy by the Bank of Canada causes A) aggregate demand for goods and services to exceed potential output. B) aggregate demand for goods and services to fall short of potential output. C) an increase in most market interest rates. D) a fall in the general price level. E) an increase in the level of potential output.

Beginning from a position of long-run equilibrium, a contractionary monetary policy by the Bank of Canada causes A) aggregate demand for goods and services to exceed potential output. B) potential output to exceed aggregate demand for goods and services. C) a fall in most market interest rates. D) an increase in the general price level. E) an increase in potential output.

Assume that an economy is currently in long-run equilibrium at its potential output and that it is subjected to a positive demand shock. When the economy moves back to producing its potential level of national income, the price level will be A) equal to what it was originally before the demand shock. B) lower than it was in short-run equilibrium and the lower than it was originally. C) lower than it was in the short-run equilibrium but higher than it was originally. D) higher than it was in the short-run equilibrium but lower than it was originally. E) higher than it was in the short-run equilibrium and even higher than it was originally.

Assuming that the economy is currently in a long-run equilibrium with real GDP equal to Y\*, a positive AD shock (with no change in the money supply) will eventually result in A) no change in the price level. B) an ongoing inflation in the economy. C) a lower price level and GDP below its potential level. D) a higher price level and GDP at its potential level. E) a lower price level and GDP at its potential level.

For the economy of Ontario, which is a major oil user and importer, an increase in the world price of oil would be considered A) monetary validation. B) a negative demand shock. C) demand inflation. D) a negative supply shock. E) an adjustment process.

For the economy of Alberta, a major oil exporter, an increase in the world price of oil would be mostly A) supply inflation. B) a negative demand shock. C) a negative supply shock. D) a positive demand shock. E) a positive supply shock.

For the economy of Canada, a major oil user and exporter, a decrease in the world price of oil would be considered A) a negative demand and a negative supply shock. B) both a negative demand shock and a positive supply shock. C) both a positive demand shock and a negative supply shock. D) a negative demand shock only. E) a negative supply shock only.

At the end of the 1970s, the inflation rate in Canada had exceeded 10%. This high inflation was due mainly to A) external pressures on the Canadian dollar. B) steadily decreasing factor prices. C) steadily decreasing factor prices and a contractionary monetary policy. D) a substantial negative supply shock that was partly validated by monetary policy. E) the extremely high wage increases being won by strong labour unions.

Suppose the economy is operating at full employment. A permanent rightward shift in the AD curve will cause inflationary pressures that will A) cause Y to fall below Y\*. B) worsen any existing unemployment problem. C) initiate a wage-price spiral. D) eventually subside unless accompanied by expansionary monetary policy. E) permanently increase output.

The first OPEC oil-price shock in 1973 caused the AS curves in all industrialized countries to shift upward. The Bank of Canada validated this negative supply shock with an increase in the money supply, whereas in the United States such monetary validation did not take place. The predictable result was that A) both countries experienced large increases in price levels and almost no recession. B) Canada experienced a large increase in its price level but almost no recession, and the U.S. experienced a smaller increase in its price level but a significant recession. C) Canada experienced a one-time price increase and the U.S. experienced persistent inflation. D) the U.S. experienced a large increase in its price le›vel but almost no recession, and Canada experienced a smaller increase in its price level but a severe recession. E) both countries experienced small increases in price levels and severe recessions.

Suppose the economy is at full employment and the AS curve shifts upward due to a once- and-for-all increase in the price of oil. If the central bank does not respond to this shock, A) prices will rise and stay at the higher level with no further inflation. B) a recessionary gap will be created, which will eventually cause the AS curve to shift back downward. C) aggregate demand will shift up and cause further inflation. D) an inflationary gap will be created, which will cause the AS curve to shift upward again. E) a recessionary gap will be created and will cause a permanent reduction in employment.

If the central bank responds to a single negative 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) the price level and unemployment.

If there is repeated monetary validation to wage-push supply shocks, A) unemployment will continue to rise. B) the supply shocks will reverse themselves. C) workers will have higher real wages. D) there will be ongoing inflation. E) there will be a once-and-for-all rise in the price leve

Economists use the term "monetary validation" to refer to A) the money supply being increased in response to a demand shock. B) the Bank of Canada having a credible policy of zero inflation. C) the money supply being increased in response to a supply or a demand shock that raises the price level. D) people who hold smaller money balances at higher rates of interest. E) money supply increases which have been approved by Parliament.

The act of "monetary validation" by a central bank can A) cause a supply shock. B) perpetuate inflation. C) act to reduce inflation. D) increase unemployment. E) no longer be carried out by the Bank of Canada.

A central bank might decide to "validate" a negative supply shock because A) there is no other way to return the economy to full employment. B) the economy might suffer a long slump before wages and prices fall enough to restore full employment. C) central banks tend to pay little heed to inflation. D) it is an effective means of preventing inflation. E) there are no negative effects from this policy action.

Isolated negative aggregate supply shocks, in the absence of 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.

There can be strong pressure on the Bank of Canada to validate a large negative supply shock. The motive behind this pressure is A) to reduce unemployment below the NAIRU. B) that the 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.

If the economy is faced with continued negative supply shocks, such as annual wage increases for unionized workers, and there is no monetary validation, we can expect A) an inflationary gap. B) a one-time rise in the price level. C) rising unemployment until the wage increases cease, or are offset by other wage decreases. D) a shrinking output gap. E) peace in labour-management relations.

If the Bank of Canada validates a positive AD shock, A) it will have eliminated the possibility of a continued inflation. B) there is the risk of continued inflation. C) wages will fall to reduce the resulting unemployment. D) output will fall more rapidly than if the shock had not been validated. E) the AD curve will shift to the left and inflation will stop.

Suppose that an increase in world oil prices leads to an increase in Canadian aggregate demand but no change in Canadian aggregate supply. The short-term effect on the Canadian price level would be called A) monetary validation. B) a monetary transmission. C) demand inflation. D) a supply shock. E) an adjustment process.

Suppose that an increase in world oil prices leads to greater aggregate demand for Canadian exports of oil. If the Bank of Canada reduces the overnight interest rate in response to this increase in AD, this is called A) monetary validation. B) a demand shock. C) demand inflation. D) a supply shock. E) an adjustment process.

Supply inflation" refers to A) inflation arising from a leftward shift of the AS curve that is not the result of excess demand for factors of production. B) inflation arising from a shortage of labour. C) the increase in the price level that occurs when the excess demand for inputs pushes up input costs. D) the increase in the price level that occurs when there is excess supply of factors of production. E) any increase in the price level that results from an upward shift of the AD curve.

Demand inflation" refers to A) the inflation that results from a decrease in net exports. B) any inflation that is originally caused by a rightward shift of the AD curve but is maintained at a constant level by monetary validation. C) any inflation that is originally caused by a rightward shift of the AD curve but is accelerating due to monetary validation. D) only the inflation that results from an expansionary monetary policy. E) the inflation that results from any inflationary gap caused by a rightward shift of the AD curve.

Suppose the Canadian economy is booming due to rising net exports and there is political pressure to maintain the "good times." If the Bank of Canada does so by implementing an expansionary monetary policy, it would A) cause a temporary drop in inflation. B) decrease the actual inflation rate. C) cause a permanent recessionary gap. D) be acting to de-stabilize the economy. E) decrease employment.

An inflation that begins as a result of any demand or supply shock will eventually come to a halt A) if there is no monetary validation. B) in the long run. C) in the short run. D) independent of the economy's adjustment process. E) if expected inflation is positive but constant.

Suppose the economy is in a long-run equilibrium. The AS curve now shifts upward due to a one-time increase in the price of raw materials. If the central bank validates this supply shock, A) an inflationary gap will be created with further inflation B) an inflationary gap will be created, which will cause the AS curve to shift upward again. C) the aggregate demand curve will shift up and result in a higher price level. D) a recessionary gap will be created, which eventually causes the AS curve to shift downward. E) a recessionary gap will be created and will cause a permanent reduction of employment.

The reason that some economists advise central banks to never validate a negative supply shock is A) because the economy's adjustment process is ineffective. B) the monetary validation causes downward pressure on wages. C) the monetary validation results in a higher level of unemployment. D) that there are no short-run effects on any real variables, and so it is not worthwhile. E) to avoid the possibility of entrenching expectations and creating a wage-price spiral.

The acceleration hypothesis states that A) when the central bank holds an inflationary gap constant, inflation will tend to accelerate. B) if an economy is growing, inflation will grow at an ever-increasing rate. C) capital investment is the primary cause of inflation. D) monetary validation causes inflation. E) if a recessionary gap is not closed, unemployment will tend to accelerate.

If the central bank uses monetary policy to attempt to hold real GDP (Y) permanently above potential GDP (Y\*), A) inflation can be kept at a low, constant rate. B) inflation is not a problem, but unemployment is. C) inflation will accelerate over time. D) it will fail. E) the AD curve will shift leftward to cure the inflation problem.

Suppose we know the following information about a hypothetical economy: - real GDP = $550 billion - potential GDP = $500 billion - inflation rate = 4% If the central bank tries to keep real GDP constant at $550 billion, the inflation rate is likely to A) remain constant at 4% B) fall below 4% C) rise above 4% D) cause stagflation E) cause a recession

According to the "acceleration hypothesis," the inflation rate will accelerate when actual output is held A) at the NAIRU. B) at the level where unemployment is at the natural rate. C) below potential output. D) at potential output. E) above potential output.

The Bank of Canada has formally adopted an inflation target of 2%. One important reason for this is A) the supply-shock inflation will never exceed this amount. B) to avoid the temptation of validating positive economic shocks that could lead to accelerating inflation. C) that output-gap inflation will never exceed this amount. D) to allow for a permanent inflationary gap which is beneficial to the economy. E) that economists have determined that only an inflation rate of 2% is consistent with NAIRU.

It is often said that inflation is a "monetary phenomenon." The most accurate interpretation of this phrase is that A) the price level cannot rise without an increase in the money supply. B) a continuous rise in prices is possible only with continuing increases in the money supply. C) only an increase in the money supply can start a period of inflation. D) repeated supply shocks cannot drive up prices if there is no monetary validation. E) increases in the price level are always associated with increases in the money supply.

Consider the statement "Inflation is everywhere and always a monetary phenomenon." This statement does not hold true A) as long as demand and supply shocks are validated by expansionary monetary policy. B) if the economy's adjustment process is working effectively. C) for temporary bursts of inflation that are not accompanied by a monetary expansion. D) as long as the AD curve is shifting to the right at the same rate as the AS curve is shifting to the left. E) in industrialized economies.

The Phillips curve originally appeared to demonstrate a trade-off between inflation and unemployment. This was later thought to be deficient because A) it was later recognized that inflation and unemployment were unrelated. B) the influence on aggregate demand had not been incorporated. C) changes in unemployment had not been incorporated. D) the effects of fiscal policy on aggregate demand had not been incorporated. E) inflationary expectations had not been incorporated.

A contractionary monetary policy that has been imposed to reduce inflation will most likely A) have no effect on the short-run level of GDP and unemployment. B) not control inflation, since money supply changes have little or no effect on the price level. C) produce long-lasting unemployment if wages adjust rapidly. D) lead to a recession that is long and severe, under any circumstances. E) lead to a recession which will be short if inflation expectations adjust rapidly and accurately.

is difficult for the Bank of Canada to remove a sustained inflation without producing stagflation because inflationary expectations cause the A) AD curve to shift too far to the right. B) AD curve to shift too far to the left. C) AS curve to continue shifting upward. D) AS curve to continue shifting downward. E) AD curve to continue shifting to the right.

The reason why stagflation can occur when the Bank of Canada attempts to remove a sustained inflation is that inflationary expectations cause the A) AD curve to shift too far to the right. B) AD curve to shift too far to the left. C) AS curve to continue shifting downward. D) AS curve to continue shifting upward. E) AD curve to continue shifting to the right.

Of the three phases of a disinflation, the first phase consists of the central bank A) pursuing an expansionary monetary policy. B) directing its monetary policy to achieve a stable exchange rate. C) slowing the rate of monetary expansion. D) directing its monetary policy to reduce the unemployment rate. E) directing its monetary policy to reduce the overnight interest rate.

Of the three phases involved in the elimination of a sustained inflation in Canada, the second phase is characterized by A) the Bank of Canada pursuing an expansionary monetary policy. B) stagflation with falling output and continuing inflation. C) the Bank of Canada increasing the rate of monetary expansion. D) aggregate output being returned to potential output. E) increased inflation with rising output and falling unemployment.

If a central bank is to successfully end a sustained inflation, it is essential that it A) avoid any loss in national income. B) do so using a "cold-turkey" approach. C) change people's expectations of future inflation. D) maintain the sacrifice ratio at a constant level. E) avoid any increase in unemployment.

The process of disinflation can involve some period of increased inflation and reduced output. Economists refer to this as A) the sacrifice period. B) monetary validation. C) the recovery phase. D) an inflationary recession. E) stagflation.

A measure that has been developed to analyze the amount of output that must be given up in order to reduce the inflation rate by one percentage point is called the A) misery index. B) Phillips measure. C) credibility index. D) output gap. E) sacrifice ratio.

The sacrifice ratio is a measure of the A) number of people unemployed due to disinflation. B) loss of real GDP associated with inflation. C) the crowding out of investment due to increases in government purchases. D) unemployment associated with a recessionary gap. E) cumulative loss in real GDP due to a disinflation.

The sacrifice ratio is calculated by A) dividing the number unemployed by the labour force. B) dividing the number employed by the labour force. C) dividing the cumulative loss of real GDP (as a percentage of potential GDP) due to disinflation by the number of percentage points by which inflation fell. D) dividing the cumulative loss of potential GDP (as a percentage of actual GDP) due to disinflation by the number of percentage points by which inflation fell. E) adding the cumulative loss of real GDP (as a percentage of potential GDP) due to disinflation to the number of percentage points by which unemployment exceeds the NAIRU.

In general, the sacrifice ratio will be greater, the A) shorter it takes to revise inflationary expectations downwards. B) shorter it takes to revise inflationary expectations upwards. C) longer it takes to revise inflationary expectations upwards. D) longer it takes to revise inflationary expectations downwards. E) lower is the rate of unemployment.

In general, the sacrifice ratio will be smaller, the A) shorter it takes to revise inflationary expectations downwards. B) shorter it takes to revise inflationary expectations upwards. C) longer it takes to revise inflationary expectations upwards. D) longer it takes to revise inflationary expectations downwards. E) sacrifice ratio will be the same always.

The sacrifice ratio reflects the cost of ________ as measured by the \_\_\_\_\_\_\_\_. A) disinflation; loss in economic activity B) inflationary expectations; change in the rate of inflation C) supply shocks; change in the price level D) validation; change in inflationary expectations E) the Phillips curve; change in the NAIRU

Suppose policymakers are faced with ending a sustained inflation. They must weigh the future benefits of ________ against the immediate costs of \_\_\_\_\_\_\_\_. A) lower inflation; administering the policy B) a higher rate of economic growth; reduced output C) lower rate of economic growth; lower inflation D) lower inflation; reduced output and higher unemployment E) a higher real GDP; lower inflation

If the actual unemployment rate is equal to the NAIRU, then A) actual GDP will be higher than potential GDP. B) actual GDP will be below potential GDP. C) potential GDP will expand permanently. D) the unemployment rate is 0%. E) actual and potential GDP are equal.

When aggregate output is less than potential output, the unemployment rate ________ the NAIRU. A) falls toward B) falls below C) rises toward but never exceeds D) is equal to E) rises above

When aggregate output is greater than potential output, the unemployment rate ________ the NAIRU. A) falls toward B) falls below C) rises toward but never exceeds D) is equal to E) rises above

When the growth rate of the labour force is greater than the growth rate of total employment, the unemployment rate A) decreases. B) increases. C) is below NAIRU. D) is above NAIRU. E) is equal to NAIRU.

When the growth rate of the labour force is less than the growth rate of total employment, the unemployment rate A) decreases. B) increases. C) is below NAIRU. D) is above NAIRU. E) is equal to NAIRU.

If there are more job vacancies in the economy than there are unemployed workers, it is likely that A) fiscal policy aimed at increasing aggregate demand would cause the actual unemployment rate to move toward the NAIRU. B) the actual unemployment rate is less than the NAIRU. C) the economy has a high NAIRU. D) there is excessive involuntary unemployment in this economy. E) there is no structural unemployment in this economy.

If the actual unemployment rate is one percentage point less than the NAIRU, then A) actual and potential GDP are equal. B) actual GDP is greater than potential GDP. C) actual GDP is less than potential GDP. D) potential GDP will expand permanently. E) potential GDP will contract until it equals actual GDP.

The total amount of unemployment in the economy rises when the flows of individuals A) into unemployment are positive. B) into unemployment exceed the flows out of unemployment. C) out of unemployment exceed the flows into unemployment. D) out of unemployment are negative. E) out of unemployment are equal to the flows into unemployment.

The total amount of unemployment in the economy decreases when the flows of individuals A) into unemployment are positive. B) into unemployment exceed the flows out of unemployment. C) out of unemployment exceed the flows into unemployment. D) out of unemployment are negative. E) out of unemployment are equal to the flows into unemployment.

The total amount of unemployment in the economy is constant when the flows of individuals A) into unemployment are positive. B) into unemployment exceed the flows out of unemployment. C) out of unemployment exceed the flows into unemployment. D) out of unemployment are negative. E) out of unemployment are equal to the flows into unemployment.

One reason that economists are interested in gross flows in the labour market as well as in the stock of unemployment is that examining the gross flows A) gives a better estimate of NAIRU. B) gives a good estimate of the incidence of unemployment. C) excludes only the new entrants and retirements of people moving into and out of the labour force. D) in relation to the stock of unemployment can indicate the amount of time the average person spends unemployed. E) provides a better indication of the total number of people unemployed at any one time.

One reason that economists are interested in the gross flows in the labour market as well as the stocks of unemployed is that examining the flows A) gives us a better estimate of NAIRU. B) gives more insight into the amount of labour-market turnover. C) provides a better indication of the total number of people unemployed at any one time rather than just looking at the stocks. D) provides a good estimate of the overall level of employment. E) provides the only reliable way to measure cyclical unemployment

Suppose John finishes school and immediately gets a part-time job. The measured unemployment rate would A) rise because he was not in the labour force when in school. B) not change since he is now employed. C) fall because he was considered unemployed when in school. D) fall because he was not in the labour force when in school. E) not change because part-time jobs aren't counted in the labour force.

When the actual unemployment rate is equal to the NAIRU, we can say that A) all remaining unemployment is structural. B) the economy is experiencing no lost output due to frictional unemployment. C) the economy is at full employment. D) frictional unemployment is zero. E) frictional and structural unemployment are both zero.

When one worker is unemployed for one year, A) we no longer include that worker in labour-force statistics. B) there may be significant personal costs, but there is no cost to the economy. C) it is not a problem because as soon as the worker is employed again, any loss of output goes away. D) there is no effect on national income. E) the output that the worker would have produced is lost forever

Suppose in a given month the flow out of unemployment equals 300 000 per month, and the flow into unemployment equals 330 000 per month. The rate of unemployment has A) increased by 30 000. B) decreased by 30 000. C) increased by 10%. D) decreased by 10%. E) Not enough information to determine.

Suppose the official rate of unemployment reported by Statistics Canada is 7.2%. One reason that this is likely to be an understatement of the amount of "true" unemployment is that A) the official rate is a measure of gross flows into and out of unemployment rather than net flows. B) discouraged workers who have given up searching for a job, but would take one if offered, are not included. C) the official rate is a measure of net flows into and out of unemployment rather than gross flows. D) Statistics Canada does not have a good measure of the numbers of people entering the labour force. E) seasonal workers are not included at all in the official data.

Suppose the official rate of unemployment reported by Statistics Canada declines from one month to the next from 7.5% to 7.2%, but we also know that the stock of unemployed workers has not changed. How is this possible? A) The labour force has declined due to out-migration of working-age people. B) The labour force has grown as previously discouraged workers re-start their job-search process as unemployed individuals. C) Some individuals who were previously outside the labour force have joined the labour force and immediately found jobs. D) We have gone from a month with high seasonal unemployment to a month with low seasonal unemployment. E) We have gone from a month with low seasonal unemployment to a month with high seasonal unemployment.

Suppose we know the following information about the labour market. Over a one-month period: -total number of previously unemployed workers that found jobs = 150 000 -total number of previously employed workers that became unemployed = 150 000 During this month the gross flow into unemployment was ________ and the net flow into unemployment was \_\_\_\_\_\_\_\_. A) 150 000; zero B) 150 000; 150 000 C) zero; 150 000 D) zero; zero E) 300 000; 150 000

Suppose we know the following information about the labour market. Over a one-month period: -total number of previously unemployed workers that found jobs = 500 000 -total number of individuals what became unemployed = 500 000 During the same month the unemployment rate increased from 7.1% to 7.3%. It must be the case that A) the population increased during that month. B) the population decreased during that month. C) a certain number of people entered the labour force during that month. D) the gross flow and the net flow into unemployment are equal. E) a certain number of people left the labour force during that month.

Market-clearing theories of the labour market assume that labour markets A) always clear. B) are inefficient. C) have asymmetrically rigid wages. D) should be regulated to produce an efficient wage rate. E) will always provide a subsistence wage.

If labour markets had perfectly flexible wages, as the market-clearing theories suggest, involuntary unemployment would A) not exist. B) rise when the labour demand curve shifts to the left. C) rise when the labour demand curve shifts to the right. D) rise when the labour supply curve shifts to the left. E) rise when the labour supply curve shifts to the right.

What economists sometimes call "voluntary unemployment" occurs when A) a job is available but the worker has not yet found it. B) the level of real GDP is at or above the economy's potential output. C) a person is willing to accept a job at the going wage rate but cannot find one. D) a worker enters the job market for the first time. E) a worker is not willing to accept an available job at the going wage rate.

If, as the market-clearing theories suggest, all labour markets had perfectly flexible wages, real wages would rise when labour demand A) rises and fall when labour supply rises. B) rises and fall when labour supply falls. C) falls and rise when labour supply falls. D) rises and rise when labour supply rises. E) falls and falls when labour supply rises.

Market-clearing theories suggest that fluctuations in employment and wages can be caused by the supply side of the labour market through changes in the A) price level. B) level of net exports in the economy. C) marginal efficiency of investment. D) willingness of firms to hire workers. E) willingness of workers to supply their labour.

Market-clearing theories of the labour market argue that A) competitive labour markets can be relied upon to eliminate all unemployment. B) labour markets will clear and involuntary unemployment will thereby be eliminated. C) all unemployment is most easily corrected by government intervention in the economy. D) all unemployment arises from firms being unwilling to demand labour services. E) labour unions are necessary elements in reducing unemployment.

Market-clearing theories of the labour market feature ________ wages, and thus involuntary unemployment \_\_\_\_\_\_\_\_. A) perfectly flexible; exists B) sticky; does not exist C) sticky; exists D) perfectly flexible; does not exist

Which statement by an employer is consistent with the market-clearing theory of unemployment? A) "I pay more than the going rate so I can hire good workers." B) "I pay only enough to attract workers who are at the bottom of the pay scale." C) "I love it when inflation goes up because that drives down my wage costs." D) "Workers can always find jobs, if only they lower their expectations." E) "Unions have only their current members' interests at heart."

Empirical observation of employment and real-wage fluctuations over the business cycle in Canada and other developed countries A) is not able to refute the market-clearing theory of unemployment. B) shows that employment is volatile and real wages are not. C) shows that real wages are volatile and employment levels are not. D) supports the market-clearing theory that there is no involuntary unemployment. E) supports the market-clearing theory that labour markets always clear.

A central argument of non-market-clearing theories of unemployment is that A) labour markets will clear and unemployment will thereby be eliminated. B) all unemployment is caused by government intervention in the economy. C) all unemployment arises from firms being unwilling to hire extra workers. D) even competitive labour markets cannot be relied upon to eliminate involuntary unemployment. E) monetary policy is rarely effective at reducing unemployment.

What economists call "involuntary unemployment" occurs when A) a job is available but the worker has not yet found it. B) the level of real GDP is at or above the economy's potential output. C) a person is willing to accept a job at the going wage rate but cannot find one. D) a person enters the job market for the first time. E) a person is not willing to accept an available job at the going wage rate.

In non-market-clearing theories of the labour market an important explanation for the existence of involuntary unemployment is that labour markets exhibit A) an elastic labour demand curve. B) perfectly flexible wages. C) rigid or sticky wages. D) unshifting labour demand. E) unshifting labour supply.

Involuntary unemployment in a labour market is said to exist when the wage is ________ the market-clearing wage, this creating an excess ________ labour. A) greater than; demand for B) greater than; supply of C) equal to; employment of D) less than; supply of E) less than; demand for

Non-market-clearing theories of the labour market feature ________ wages, and thus involuntary unemployment \_\_\_\_\_\_\_\_. A) perfectly flexible; cannot exist B) perfectly flexible; can exist C) sticky; cannot exist D) sticky; can exist E) efficiency wages; cannot exist

Retaining a core group of experienced employees that feels entitled to some degree of job security requires that in a recession firms hold wages ________ the market-clearing level, thus ________ involuntary unemployment. A) above; avoiding B) above; creating C) equal to; avoiding D) below; avoiding E) below; creating

Long-term labour contracts are an important feature of ________ theories of the labour market. In contrast to a world with continuous bargaining of wages and employment, the existence of such contracts leads to a labour market in which involuntary unemployment is \_\_\_\_\_\_\_\_. A) non-market-clearing; possible B) non-market-clearing; impossible C) market-clearing; possible D) market-clearing; impossible E) market-clearing; always present

Wage contracts are often set for periods of up to three years. As a result, fluctuations in aggregate demand and aggregate supply tend to A) cause changes in the amount of involuntary unemployment. B) cause greater inflexibility of wages. C) have no effect in labour markets until wages are renegotiated. D) clear the labour market. E) either increase or decrease the NAIRU.

The main difference between market-clearing and non-market-clearing models of the economy is A) the long-run path of wages. B) the long-run path of employment. C) the degree of wage and price flexibility in the short run. D) the long-run path of output. E) the tendency for output to return to potential in the long run.

The market-clearing and non-market-clearing theories of unemployment both agree that A) actual unemployment rates will equal the NAIRU in the long run. B) wages and prices are perfectly flexible. C) unemployment is always voluntary. D) actual output adjusts only gradually to potential output. E) wages are rigid and adjust only over the long run.

Efficiency wages" are said to exist when wages are A) such that cyclical unemployment is zero. B) such that the NAIRU is zero. C) high enough above market levels that workers increase their productivity. D) equal to the market wage. E) just high enough to induce a worker to take a job.

The theory of "efficiency wages" provides A) a way in which firms can pay workers less than the market-clearing wage. B) an explanation for the high wages that unions are able to extract from firms. C) many firms with a good reason to dismiss workers. D) most workers with a good reason to quit. E) one explanation for why wages do not readily fall in response to excess supply in labour markets.

A likely consequence of firms paying "efficiency wages" is A) decreased unemployment. B) increased unemployment. C) lower real wages for employed workers. D) more competitive labour markets. E) rapid wage adjustment in the face of labour-market changes.

In macroeconomic theories of national-income determination, short-run changes in real GDP are typically associated with changes in ________ unemployment. A) frictional B) structural C) cyclical D) voluntary E) efficiency-wage

Consider Canada's employment insurance (EI) program, which provides benefits to eligible unemployed workers. If the program is designed such that benefits are more generous in regions with higher rates of unemployment, then we can expect that A) cyclical unemployment will increase. B) frictional unemployment will decrease because workers have more time to find a well-suited job. C) the NAIRU will decrease. D) labour markets will adapt to changes more quickly as a result. E) structural unemployment will increase and the NAIRU will be higher than otherwise.

Suppose that unemployed workers searching to replace their lost jobs become discouraged and so decide to temporarily give up the search. Such a decision A) increases the NAIRU. B) decreases the NAIRU. C) increases the official unemployment rate. D) decreases the official unemployment rate. E) has no effect on the official unemployment rate.

An increase in the rate of aggregate economic growth usually speeds up the rate of change in the structure of labour demand. As a result, we can expect that structural unemployment will \_\_\_\_\_\_\_\_, and will therefore cause the NAIRU to \_\_\_\_\_\_\_\_. A) decrease; increase B) decrease; decrease C) remain constant; remain constant D) increase; increase E) increase; decrease

Economic models in which the NAIRU can be influenced by changes in the actual rate of unemployment are said to include A) demographic shifts. B) efficiency-wage behaviour. C) hysteresis. D) labour-market clearing. E) rational expectations.

In macroeconomic models, the idea that NAIRU can be influenced by the actual rate of unemployment is referred to as A) efficiency-wage unemployment. B) hysteresis. C) the market-clearing theory. D) rational expectations. E) the Phillips curve.

A good example of an outcome that could lead to "hysteresis" in the labour market is A) new entrants to the labour market have a high rate of unemployment due to technological change. B) new entrants to the labour market have difficulty finding jobs, and as a result have a higher rate of unemployment throughout their working lives. C) unemployment is generated by an increase in the minimum wage. D) a negative supply shock persists. E) a negative demand shock persists.

A decrease in the share of the labour force that is unionized may ________ the degree of wage flexibility, which would put ________ pressure on NAIRU. A) increase; upward B) increase; downward C) decrease; upward D) decrease; downward E) have no effect on; no

If there were an increase in the share of the labour force that is unionized, it would likely lead to ________ wage flexibility, which would ________ the NAIRU. A) more; increase B) more; decrease C) less; increase D) less; decrease E) less; not change

The NAIRU is likely to be affected by all of the following EXCEPT A) a demographic shift. B) employment insurance. C) globalization. D) labour-market flexibility. E) recession.

In some European countries, labour-market policies make it very costly for firms to lay off or fire workers. Theory and evidence tells us that A) European unemployment is lower because workers are less likely to lose their jobs during an economic downturn. B) these policies have no effect on wages or employment in the long run. C) the European experience is more consistent with market-clearing theories of unemployment than that of Canada or the United States. D) these policies reduce labour-market flexibility and tend to increase unemployment. E) cyclical unemployment will always be higher in these European countries than in Canada or the United States.

Unemployment rates among workers in the 15-24 age group tend to be ________ the overall unemployment rate. An influx of workers of this age group into the labour force would tend to ________ the NAIRU. A) higher than; increase B) higher than; decrease C) lower than; increase D) lower than; decrease E) the same as; not change

The ongoing process of globalization of the world economy has an effect on the NAIRU in Canada. Choose the statement that best describes the likely effect. A) Since globalization has brought net economic benefits to Canada, it follows that the NAIRU must be decreasing. B) Canadian labour markets increasingly need to adjust to changing supply and demand conditions around the world. These ongoing adjustments tend to increase the NAIRU. C) Because Canada is experiencing greater trade with the rest of the world, the increasing demand for exports puts upward pressure on the demand for labour in Canada and thus tends to decrease the NAIRU. D) Canada's labour market is increasingly connected to labour markets in other parts of the world and the NAIRU in Canada tends to adjust to the same levels as those of our trading partners. E) Globalization has meant that Canadian labour markets are less exposed to economic fluctuations elsewhere in the world, which has decreased the NAIRU.

As Canada continues to become more integrated with the global economy, and our labour market is increasingly affected by demand and supply conditions elsewhere in the world, we can expect that A) all types of unemployment will certainly fall. B) all types of unemployment will certainly rise. C) government policies to ease the adjustment will have no effect. D) the NAIRU will tend to increase. E) the NAIRU in affected industries will tend to increase.

Which of the following statements best explains why unemployment rates in European countries have tended to be higher than unemployment rates in Canada or the United States? (Note: this statement refers not to the current recession in Europe but to a longer-term average.) A) European countries have higher-paying jobs than Canada or the U.S., which causes an influx of workers into the labour force, which then increases the unemployment rate. B) Workers in European countries have less skills and training than North American workers and therefore have higher rates of unemployment. C) European countries have experienced more recessionary gaps than Canada or the U.S. and therefore have significantly higher cyclical unemployment. D) Canada and the U.S. have greater labour-market flexibility than European countries. E) The Canadian and the U.S. economies are more heavily unionized than European countries.

Unemployment rates in Canada and the United States have been lower than those in Europe for many years. A generally accepted explanation for this trend is that A) unions are more powerful in North America than in Europe. B) social programs are more generous in North America than in Europe. C) employment insurance programs are more generous in North America than in Europe. D) firms are more risk averse in North America than in Europe. E) labour-market flexibility is greater in North America than in Europe.

Other things being equal, many economists believe that more generous employment- insurance benefits would A) lower frictional unemployment. B) lower structural unemployment. C) raise structural unemployment. D) raise frictional unemployment. E) have no effect on unemployment.

Many economists believe that the more strict rules for qualifying for employment-insurance benefits that were introduced by the federal government in the early 1990s led to A) lower cyclical unemployment. B) lower frictional unemployment. C) lower structural unemployment. D) higher structural unemployment. E) higher frictional unemployment.

Many economists believe that long-run economic growth is best promoted by ________ structural change, such as with a policy of \_\_\_\_\_\_\_\_. A) resisting; subsidizing failing industries B) resisting; retraining and relocation grants C) resisting; contractionary monetary policy D) adapting to; assisting retraining and relocation E) adapting to; subsidizing failing industries

One motivation for having publicly subsidized retraining programs is to A) reduce structural unemployment. B) reduce cyclical unemployment. C) resist adjustment to technological change. D) encourage employment in low-paying jobs. E) encourage the use of efficiency wages.

Which of the following would be the most appropriate policy for reducing structural unemployment? A) a combination of tax cuts and increased government spending B) a decrease in the money supply C) an increase in the money supply D) increased benefits for workers covered by employment insurance E) introduction of programs for the retraining and relocation of labour

Which of the following would be the most appropriate policy for reducing cyclical unemployment? A) a combination of tax cuts and increased government spending B) a decrease in the money supply C) increased benefits for workers covered by employment insurance D) reduced benefits for workers covered by employment insurance E) introduction of programs for the retraining and relocation of labour

Which of the following policies could the government implement to reduce cyclical unemployment? A) retraining programs for chronically unemployed people B) a national "job bank" listing available jobs throughout the country C) relocation allowances to move unemployed people around the country D) expansionary monetary policy E) contractionary monetary policy

Which of the following best explains why a certain amount of unemployment may be socially desirable? A) When some workers become unemployed it provides a chance for others in the labour force to become employed. B) Unemployed workers are able to benefit from employment insurance. C) The time spent unemployed by the worker is valuable for finding the most appropriate match with firms. D) A pool of unemployed workers drives down the average wage in the economy, and keeps workers from becoming greedy. E) A pool of unemployed workers provides an incentive to those employed to remain productive.

Suppose the Canadian government implements a new program to provide training to unemployed workers. The government is likely trying to reduce A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) the gross flow of people out of unemployment.

Theory suggests that frictional unemployment in Canada will decrease if A) workers have higher levels of education and training. B) labour-market flexibility in Canada decreases. C) the benefits received under the employment-insurance system have become less generous. D) the labour-force participation rate for men falls. E) the labour-force participation rate for women falls.

What is the difference between the government's debt and the government's deficit? A) The debt is the accumulation of past deficits whereas the deficit is the annual shortfall between revenues and disbursements. B) The debt is the annual shortfall of revenues minus disbursements whereas the deficit is the accumulation of past debts. C) The debt is the amount the government pays in interest payments whereas the deficit has not yet incurred interest charges. D) The debt is the amount payable to the Bank of Canada whereas the deficit is the annual shortfall of revenue minus disbursements. E) The debt is the difference between tax revenues and government expenditures whereas the deficit is the difference between tax revenues and borrowing.

A simple equation describing the government's budget constraint is A) government expenditure = tax revenue - borrowing. B) government expenditure = tax revenue + borrowing. C) government expenditure = tax revenue + debt-service payments. D) tax revenue = government expenditure + borrowing. E) tax revenue = borrowing - government expenditure.

Consider the following variables: G = government purchases i = interest rate on government debt D = stock of government debt T = net tax revenue The government's budget constraint can be expressed as A) (G + iD) = borrowing - T B) (G + iD) - T = borrowing C) (G + iD) + T = borrowing D) G - T - (iD) = borrowing E) (G - iD) = borrowing + T

Consider the following variables: G = government purchases i = interest rate on government debt D = stock of government debt T = net tax revenue The government's budget deficit can be expressed as A) ΔD = (G + iD) - T B) ΔD = (G - iD) + T C) deficit = D - (G + iD) + T D) deficit = D - T + (G + iD) E) T = ΔD - (G + iD)

In any given year, the government's debt-service payments are A) equal to the annual budget deficit. B) equal to the annual primary budget deficit. C) the interest payments on the outstanding stock of government debt. D) not related to the government deficit. E) not required unless the debt is held by foreigners.

In any given year, the government's debt-service payments are equal to A) (fiscal borrowing) × (the interest rate) B) (government spending) × (the interest rate) C) (government spending - tax revenue) × (the interest rate) D) (total outstanding government debt) × (the interest rate) E) (government spending + tax revenue) × (the interest rate)

Consider the government's budget constraint. The accumulated stock of government debt will begin to fall A) if the government's debt-service payments are zero. B) if the government does not borrow money. C) if the growth rate of real GDP is higher than the real interest rate. D) when the government's annual budget is in deficit. E) when the government's annual budget is in surplus.

The government's annual primary budget deficit is equal to the A) accumulation of government borrowing. B) decrease in the stock of government debt during the course of a year. C) excess of government's program expenditures over tax revenues in a given fiscal year. D) total amount of government spending on program expenses, personnel, and capital outlays. E) excess of current revenue over current expenditure.

Do we get a useful and meaningful statistic by dividing the national debt by the GDP? A) No — we are essentially "dividing apples by oranges," which is unhelpful. B) No — the GDP is not a meaningful measure of the well-being of the economy. C) Yes — we can then see how much of the national debt is owed by each individual citizen. D) Yes — we can see the burden of the debt in relation to the size of the economy. E) No — dividing a stock by a flow can never be sensible.

The government's primary budget deficit (or surplus) is the A) non-interest expenditures and interest payments. B) sum of total government expenditures and revenues. C) sum of interest payments and revenues. D) total budget deficit between two fiscal years. E) total budget deficit (or surplus) excluding debt-service payments.

The government's primary budget deficit (or surplus) is the difference between the A) non-interest expenditures and interest payments. B) interest payments and revenues. C) total budget deficit (or surplus) and debt-service payments. D) total budget deficit (or surplus) between one year and the next. E) total government expenditures and revenues.

The federal government's "primary budget deficit" A) includes domestic borrowing but excludes foreign borrowing. B) excludes debt-service payments. C) is the amount of government borrowing in a fiscal year. D) is the amount of tax revenue minus the amount of interest paid on the public debt. E) is the most important indicator of the level of government spending.

Consider the federal government's budget constraint. If the government's total budget deficit is $27 billion and its debt-service payments are $29 billion, then its A) primary budget deficit is $2 billion. B) primary budget deficit is $56 billion. C) primary budget surplus is $2 billion. D) primary budget surplus is $56 billion. E) Not enough information to determine.

Suppose that in Year 2 there was a higher federal budget deficit than in Year 1. This could be explained by ________ in Year 2. A) lower real interest rates. B) higher real GDP (with fiscal policy constant) C) lower real GDP (with fiscal policy constant) D) lower government expenditure (with real GDP constant) E) a lower primary budget surplus

The extent to which tax revenues are able to finance the discretionary part of total government expenditure is best measured by the A) cyclically adjusted deficit/surplus. B) government's current fiscal policy. C) debt-to-GDP ratio. D) government's primary budget deficit or surplus. E) tax-to-GDP ratio.

When a government changes its fiscal policy, it is A) changing the exchange rates to change national income. B) increasing the money supply to increase national income. C) changing government spending and/or tax rates to achieve some objective D) using government spending and taxes together with changing the money supply in order to achieve full employment. E) buying and selling private bonds to increase or decrease the overnight lending rate.

If we want to know whether tax revenues are sufficient to finance the discretionary part of government expenditure, which of the following measures should we analyze? A) the cyclically adjusted deficit/surplus B) the government's budget constraint C) the debt-to-GDP ratio D) the government's primary deficit/surplus E) the interest rate on government bonds compared to the growth rate of real GDP

If voters want to know how their tax dollars are being spent and how the federal government is managing its current spending, they should look at A) federal/provincial tax transfers. B) changes in the money supply. C) the primary budget balance. D) the overall budget balance. E) the inflation adjusted deficit.

Suppose the stock of government debt in Canada at the end of one fiscal year is $475 billion. If the stock of debt falls to $461 billion by the end of the next fiscal year, then we know that in that year A) the government had a primary budget surplus of $14 billion. B) the government had a primary budget deficit of $14 billion. C) tax revenues increased by $14 billion. D) the government had an annual budget surplus of $14 billion. E) debt-service payments fell by $14 billion.

If the government's tax revenues are less than its total spending (including debt-service payments), then we know 1) the government has an annual budget deficit; 2) the government has a primary budget deficit; 3) the stock of government debt is increasing. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3

If the government's total budget deficit is $24 billion and its debt-service payments are $20 billion, then its ________ is $4 billion. A) cyclically adjusted deficit B) primary budget deficit C) primary budget surplus D) government expenditure E) total tax revenue

The stock of government debt will continue to rise unless the government A) increases its taxes. B) decreases its expenditures. C) decreases the size of its transfers. D) runs a budget surplus. E) runs a budget deficit.

The government's current spending and taxation policies cannot affect the A) primary budget deficit. B) annual budget deficit. C) the size of its transfers. D) change in the stock of government debt. E) the existing stock of government debt.

The budget deficit function is graphed with the budget deficit on the vertical axis and ________ on the horizontal axis, and is \_\_\_\_\_\_\_\_. A) real GDP; downward sloping B) real GDP; upward sloping C) the interest rate; downward sloping D) the interest rate; upward sloping E) the interest rate; horizontal

Consider the government's budget deficit function. With an unchanged fiscal policy by government, an increase in GDP tends to ________ net tax revenues and thus ________ the budget deficit. A) raise; raise B) raise; lower C) lower; raise D) lower; lower E) lower; leave unchanged

Consider the budget deficit function. With an unchanged fiscal policy by government, an increase in national income causes ________ the budget deficit function. A) an upward movement along B) a downward movement along C) an upward shift of D) a downward shift of E) a downward rotation in

Consider the government's budget deficit function over Years 1 and 2. Suppose that in Year 2 there was a lower federal budget deficit than in Year 1. This could be explained by ________ in Year 2. A) higher government expenditures (with constant real GDP) B) higher real GDP (with constant fiscal policy) C) lower real GDP (with constant fiscal policy) D) a higher stock of government debt E) an upward shift of the budget deficit function

Consider the government's budget deficit function. Other things being equal, an autonomous increase in government purchases causes ________ the budget deficit function. A) an upward movement along B) a downward movement along C) an upward shift of D) a downward shift of E) no change in

Consider the government's budget deficit function, graphed with the budget deficit on the vertical axis and real GDP on the horizontal axis. The vertical position (or height) of the budget deficit function is determined by A) the government's fiscal policies. B) nominal GDP. C) the interest rate times taxes. D) the purchase and sale of government securities on the open market. E) the stock of government debt minus government spending.

Consider the government's budget deficit function, graphed with dollars on the vertical axis and real GDP on the horizontal axis. This function is downward sloping because as real GDP A) falls, the budget deficit function shifts down. B) falls, tax revenues rise, decreasing the deficit or increasing the surplus. C) rises, tax revenues rise, decreasing the deficit or increasing the surplus. D) rises, tax revenues fall, decreasing the deficit or increasing the surplus. E) rises, it leads to increasing debt-service payments.

If the economy goes into a recession, a government budget deficit is most likely to A) increase, because government expenditures and tax revenues will both rise. B) increase, because government expenditures will rise and tax revenues will decline. C) remain unchanged, although there will be a primary budget surplus. D) remain unchanged, because changes in government expenditures and tax revenues will balance each other out. E) decrease, because government expenditures will decrease and tax revenues will rise.

Suppose the government's budget deficit falls from one year to the next, but there has been no change in the government's fiscal policy. The change in the budget deficit can be explained by A) a rising real interest rate. B) a change in the stance of fiscal policy. C) a rising real GDP. D) a rise in the cyclically adjusted deficit. E) a rise in the primary budget deficit.

The government's cyclically adjusted budget deficit (CAD) is the budget deficit that would exist A) if real GDP were equal to potential GDP. B) with taxes and expenditures measured at the equilibrium level of GDP. C) if policy were changed to eliminate the business cycle. D) if tax rates were set to maximize tax revenues. E) if there were no discretionary fiscal interventions in the economy.

The best measure of the change in the stance of a government's fiscal policy is A) the actual budget deficit. B) the cyclically adjusted deficit. C) the change in the cyclically adjusted deficit. D) the change in the actual budget deficit. E) the change in the primary budget deficit.

The government's cyclically adjusted budget deficit (CAD) adjusts for A) any primary budget surplus or deficit incurred by the federal government. B) changes in investment to smooth fluctuations in national income. C) changes in spending or tax revenues caused by deviations in national income from potential output. D) increases in the money supply in excess of the real growth in the economy. E) interest rate changes that affect the absolute amount of debt-service payments.

Suppose the government's actual budget deficit is equal to the cyclically adjusted budget deficit. Then it must be the case that A) the primary budget deficit is zero. B) the overall government budget is balanced. C) the debt-to-GDP ratio is stable. D) real GDP is equal to potential GDP. E) the government is not reporting all of its expenses.

If the economy goes into a recession, the cyclically adjusted deficit is most likely to A) increase, because government expenditures and tax revenues will both rise. B) increase, because government expenditures will rise and tax revenues will decline. C) remain unchanged, although there will be a primary budget surplus. D) remain unchanged, unless government actively changes its fiscal policy. E) decrease, because government expenditures will decrease and tax revenues will rise.

Consider the following variables, defined as follows: d = debt-to-GDP ratio x = primary budget deficit as a percentage of GDP r = real interest rate on government bonds g = growth rate of real GDP Which of the following expressions correctly describes the change in the debt-to-GDP ratio? A) Δd = x + (r - g) + d B) Δd = x + (r - g) × d C) Δd = x(r - g) + d D) Δd = x(g - r) - d E) Δd = x + (g - r) × d

Consider a government with a positive stock of debt. If the growth rate of real GDP exceeds the real rate of interest on government bonds, then to keep the debt-to-GDP ratio constant the A) government must have a primary budget deficit. B) government must have a primary budget surplus. C) government must implement an expansionary fiscal policy. D) money supply should be increased at a constant rate. E) nominal interest rate must be constant.

Consider a government with a positive stock of debt, and suppose the real interest rate on government bonds equals the rate of growth of real GDP. In this case, the government's debt-to- GDP ratio will rise only if A) the debt-to-GDP ratio is already high. B) the primary budget surplus exceeds the overall budget surplus. C) the real interest rate is high. D) there is an overall budget deficit. E) there is a primary budget deficit.

Consider changes in the government's debt-to-GDP ratio. Suppose that over a one year period the government has a primary budget surplus, and the real interest rate on government bonds is higher than the growth rate of real GDP. What is the effect on the debt-to-GDP ratio? A) it will rise B) it will fall C) uncertain - it is necessary to know the relative size of the different effects D) it will remain stable - the two effects cancel each other out

Consider a government with an outstanding stock of public debt. If, in any given year, the government has a primary budget surplus and the real interest rate on government bonds is less than the growth rate of real GDP, then A) debt-service payments will be eliminated. B) the debt-to-GDP ratio is certainly negative. C) the debt-to-GDP ratio will certainly rise. D) the debt-to-GDP ratio will certainly fall. E) real GDP will certainly rise.

Consider a government with an outstanding stock of public debt. If, in any given year, the government has a primary budget surplus and the real interest rate on government bonds is more than the growth rate of real GDP, then A) the debt-to-GDP ratio will certainly fall. B) debt-service payments will be eliminated. C) the debt-to-GDP ratio is certainly negative. D) the debt-to-GDP ratio will certainly rise. E) the effect on the debt-to-GDP ratio is uncertain.

The concept of "national saving" refers to the A) difference between private saving and government saving. B) sum of private saving and government saving. C) money supply measure, M3. D) difference between the two measurements of the money supply, M3 - M2. E) total saving of the private sector.

What economists call "government saving" is the same as the A) government's actual budget surplus. B) difference between household saving and business saving. C) difference between household saving and private saving. D) dollar amount of bonds that the government holds at any given time. E) sum of the budget surplus and national saving.

An illustration of "crowding out" in macroeconomics is best provided by A) a decrease in government subsidies for low-cost housing causes an increase in private spending on housing. B) a decrease in the money supply decreases nominal GDP. C) an increase in tariffs causes a decrease in imports. D) an increase in the money supply crowds out the issuance of privately held debt. E) a fiscal expansion raises interest rates and thereby lowers private investment.

Consider a closed-economy AD/AS macro model. A policy-induced increase in the government's budget deficit is most likely to crowd-out private investment if A) interest rates decrease sharply as a result of the deficit. B) interest rates rise sharply as a result of the deficit. C) rising income increases the volume of saving and interest rates rise very little. D) there is a very large output gap. E) consumers reduce consumption as a result of the deficit.

Consider an open-economy AD/AS macro model. An expansionary fiscal policy will generally increase the government's budget ________ and also tends to ________ and thus ________ net exports. A) deficit; appreciate the currency; decrease B) surplus; depreciate the currency; increase C) deficit; appreciate the currency; increase D) surplus; appreciate the currency; decrease E) deficit; depreciate the currency; decrease

Consider a closed-economy AD/AS macro model. An expansionary fiscal policy will generally increase the government's budget ________ and also tends to ________ and thus ________ investment. A) deficit; raise interest rates; decrease B) surplus; reduce interest rates; increase C) deficit; raise interest rates; increase D) surplus; reduce interest rates; decrease E) deficit; reduce interest rates; increase

Consider a closed-economy AD/AS model. If an increase in the government's budget deficit drives up market interest rates, A) credit will become less expensive. B) nothing — government borrowing cannot push up interest rates. C) private expenditure will likely increase. D) some private investment expenditure will probably be crowded out. E) the money supply will increase.

In an open economy like Canada's, a policy-induced increase in the government's budget deficit tends to A) attract foreign capital and reduce interest rates. B) crowd out public consumption. C) crowd out net exports and reduce interest rates. D) attract foreign capital and crowd out net exports. E) depreciate the domestic currency.

In an open economy like Canada's, a fiscal expansion by the government tends to A) appreciate the currency. B) attract foreign capital and encourage increased investment. C) crowd out net exports and encourage private investment. D) attract foreign capital, appreciate the currency, and crowd out net exports. E) attract foreign capital, depreciate the currency, and crowd out net exports.

In an open economy with internationally mobile financial capital, we would expect a policy- induced increase in the government's budget deficit to crowd out A) consumption more than investment. B) consumption more than net exports. C) investment more than net exports. D) government purchases more than net exports. E) net exports more than investment.

The proposition that increases in government budget deficits in an open economy tend to crowd out net exports relies on the idea that A) government demand for labour tends to create manpower shortages in export industries. B) much government expenditure is typically directed towards imported goods and services. C) the resulting increase in interest rates attracts an inflow of financial capital that causes the currency to appreciate. D) the rise in private-sector wealth associated with the rising stock of bonds leads to a fall in the saving rate and therefore a current account deficit. E) there is downward pressure on interest rates that causes the currency to depreciate.

Until the onset of the most recent recession in 2009, Canadian governments (federal and provincial) had been running budget surpluses for about 10 years. Economic theory suggests that, other things being equal, these budget surpluses will lead to A) a rise in national saving, a fall in interest rates and a "crowding in" of investment and net exports. B) a fall in national saving, a rise in interest rates and a "crowding out" of investment and net exports. C) an appreciation of the domestic currency and a fall in Canada's net exports. D) a depreciation of the domestic currency and a fall in Canada's net exports. E) a rise in national saving, a rise in interest rates and a "crowding out" of investment and net exports.

Many economists argue that the long-term burden of government debt will include: 1) a redistribution of resources away from future generations toward the current generation; 2) reduced investment and as a result a lower long-run rate of economic growth; 3) a burden on future generations who will have to pay interest to the owners of government bonds. A) 1 and 2 B) 2 and 3 C) 1, 2, and 3 D) 2 only E) 3 only

There is a long-term burden of government debt in a closed economy when A) foreign owners of Canadian debt demand repayment. B) it is no longer possible to find individuals in the private sector willing to finance the debt. C) the burden of the debt is being borne by the current generation rather than future generations. D) present consumption and government expenditure are not reduced because of future crowding-out. E) the stock of physical productive capital is reduced because of crowding out.

It can be argued that a government budget deficit, rather than being a burden for future generations, may provide net benefits to future generations. This view is correct if the current budget deficit is used to A) pay transfers such as welfare and old age pensions in the present period. B) finance projects that deliver long-term benefits to society. C) invest in the purchasing of goods not available in the local economy. D) ensure that all interest paid goes to residents rather than foreigners. E) pay subsidies to Canadian firms to offset rising energy costs.

The concept of capital budgeting refers to the idea that A) government budgets should be designed to be balanced, while fully recognizing that changing economic circumstances may prevent such balance. B) if the debt-to-GDP ratio rises to unacceptable levels, the central bank can monetize portions of the government debt. C) counter-cyclical fiscal policy is included in the government budget. D) the government would classify all expenditures as either consumption (benefiting current generations) or investment (benefiting future generations). E) the government would direct a fixed percentage of its budget toward investment expenditure that would benefit future generations.

Decreasing government expenditures in order to reduce the government's budget deficit can involve certain costs. An example of such a cost could be A) larger school facilities to accommodate a growing population. B) longer queues for essential government services such as health-care services. C) encouraging future generations to be more self-sufficient and less reliant on government to provide for them. D) a lower portion of taxes being used to pay interest. E) improving the flexibility to practice counter-cyclical fiscal policy.

Financing a budget deficit by increasing the money supply will A) allow more flexibility in the design of monetary policy. B) increase investment over time. C) create greater inflationary pressure. D) have no short-run monetary effects on the economy. E) reduce the burden of government debt.

In the long run, the government budget will add to sustained inflation if A) they require decreases in the money supply. B) continual deficits are financed by the continual creation of new money. C) deficits are always accompanied by decreases in the money supply. D) government borrowing lowers interest rates. E) the government finances the deficit by borrowing from the private sector

In general, the government will have ________ flexibility in implementing counter-cyclical fiscal policy when the outstanding stock of government debt is ________ relative to the size of GDP. A) more; large B) more; small C) total; large D) less; small E) less; insignificant

Consider the government's debt-to-GDP ratio. A significant reason for a government to maintain a low debt-to-GDP ratio is so that A) the real interest rate remains high, which leads to increased investment. B) the Canadian dollar will appreciate and net exports will increase. C) the government has the flexibility to use expansionary fiscal policy if the economy enters a recession. D) the Bank of Canada has the flexibility to use contractionary policy. E) there is no "crowding in" of investment or net exports.

An annually balanced government budget is a A) destabilizer because fiscal policy is then pro-cyclical. B) destabilizer because the fiscal year is longer than the business cycle. C) stabilizer because it smooths out the peaks and troughs of the business cycle. D) stabilizer because it allows greater flexibility in the design of fiscal policy. E) stabilizer in most circumstances.

The policy objective of an annually balanced government budget A) is feasible and would be stabilizing. B) is feasible but would be destabilizing. C) would be stabilizing, but is difficult to achieve. D) is difficult to achieve and would be destabilizing. E) would eliminate the swings in real GDP.

An annually balanced government budget is a difficult policy goal to achieve because A) a significant portion of the government's budget is beyond the short-term discretion of the federal government. B) government has little control over interest-rate charges on its debt during a fiscal year. C) tax revenues automatically rise during economic booms and fall during recessions. D) transfer payments rise during recessions and fall during economic booms. E) —all of the above are reasons why a balanced budget is difficult to achieve.

If the Canadian federal government adopted a formal balanced budget rule, during times that GDP was rising it would have to A) increase tax rates and/or increase spending which would destabilize the economy. B) decrease spending and transfer payments while holding tax rates constant. C) decrease tax rates and/or increase spending which would destabilize the economy. D) decrease interest payments on the debt. E) decrease tax rates and/or decrease spending which would destabilize the economy.

If the Canadian federal government adopted a formal balanced budget rule, during times that GDP was falling it would have to A) increase tax rates and/or increase spending which would destabilize the economy. B) decrease spending and transfer payments while holding tax rates constant. C) decrease tax rates and/or increase spending which would destabilize the economy. D) decrease interest payments on the debt. E) increase tax rates and/or decrease spending which would destabilize the economy

An annually balanced government budget would tend to A) accentuate the swings in national income that accompany changes in autonomous expenditure flows. B) increase national income in response to changes in autonomous expenditure flows. C) reduce national income in all circumstances. D) reduce national income in response to changes in autonomous expenditure flows. E) reduce the swings in national income that accompany changes in autonomous expenditure flows.

Most economists believe that balancing the government budget over the business cycle, rather than for each fiscal year, A) is absolutely necessary for prudent management of the economy. B) is the same as an annually balanced budget. C) is a worthy idea but requires accurate forecasting and definition of the business cycle. D) would be pro-cyclical. E) would stabilize the economy and produce an annual budget balance of zero.

If the government were able to operate a "cyclically balanced budget," then the actual budget would A) be balanced every year. B) be balanced every four years. C) have surpluses during inflationary gaps. D) have surpluses during recessionary gaps. E) have deficits during inflationary gaps.

The Canadian tax and transfer system acts as an automatic stabilizer because A) net tax revenues decrease during economic booms and decrease during economic recessions. B) net tax revenues increase during economic booms and decrease during economic recessions. C) tax rates will automatically decrease to stimulate the economy during economic booms. D) tax rates will automatically increase if the government is running deficits. E) tax rates will automatically increase to stimulate the economy during economic recessions.

Suppose the government decided to ensure that its cyclically adjusted budget deficit was always zero. This policy would be problematic because A) it would act as a built-in destabilizer. B) it would entail a rising debt-to-GDP ratio. C) it would tend to mean that net exports would be crowded out. D) it would require continual fiscal expansion. E) it would require continual fiscal contraction.

Transfer payments (such as welfare payments and employment-insurance benefits) act as automatic stabilizers because they A) decrease the swings of the business cycle but make an annually balanced budget much harder to achieve. B) increase the swings of the business cycle but make an annually balanced budget much easier to achieve. C) increase the swings of the business cycle and make an annually balanced budget much harder to achieve. D) increase the government surplus during the expansionary phase of the business cycle. E) increase the debt-to-GDP ratio during the expansionary phase of the business cycle.

Suppose legislation in Canada required annually balanced government budgets. This legislation would A) require the Bank of Canada to expand and contract the money supply according to an annual timetable. B) force a balanced budget that could turn a minor downturn in the economy into a serious and prolonged recession. C) force increased levels of government spending automatically increasing the size of the government debt. D) allow deficits but prevent the government from running surpluses. E) require the Bank of Canada to lower interest rates during periods of inflation.

Annually balanced government budgets A) are easy to implement due to the total control of government over its budget components in the short run. B) would allow the level of government expenditures to be independent of the changes in real GDP. C) would reduce the size of output gaps. D) would undermine the success of stabilization policies implemented by the government. E) would require the federal government to control both fiscal and monetary policy.

Implementation of cyclically balanced government budgets A) result in larger output gaps than with annually balanced budgets. B) requires precise prediction of potential GDP to pinpoint the stages of the business cycle. C) eliminates the need for built-in fiscal stabilizers. D) is easier with frequent changes in political power. E) is successfully practiced in Canada.

2 sections of BOP current account

Trade Capital-service

Capital-service account in Canada’s BOP is the section of the __________ account, which records the \_\_\_\_\_\_\_\_

Current Payments/receipt that represent Income earned from asset holdings (interest/dividends)

Sales of Canadian steel to European importers would be a _____ in the ______ account

Credit Trade

Capital account

The part of the BOP that records payments/receipts from the purchase/sale of assets

Official financing account

Government’s transactions in its foreign exchange reserves

Current account surplus implies a

Capital outflow

Current account deficit implies a

Capital inflow

A depreciation of the Canadian dollar implies a ____ in the value of the dollar relative to other currencies

Fall

Depreciation of CAD increases quantity of foreign exchange \_\_\_\_\_\_\_\_

Supplied

Appreciation of Cad increases quantity of foreign exchange \_\_\_\_\_\_\_

Demanded

Supply of foreign exchange is the sum of (3)

Canadian exports Asset sales (capital inflows) Reserve currency

The demand for foreign exchange

Arises from all interactions that are a payment from CAN in the BOP

A rise in the world price of canadian exports causes the CAD to

Appreciate

A rise in the foreign price of Canadian imports will cause CAD to appreciate when

Demand is elastic Demand curve shifts left

A rise in the foreign prices of Canadian imports will cause the CAD to depreciate when

Demand is in elastic D curve shifts right slightly

Expansionary monetary policy effect on currency

Interest rate up Capital inflow Appreciation

Contractionary monetary policy effect on currency

Interest rate down Capital outflow Depreciation

3 causes of a current account deficit

Increased Level of investment Decreased level of public saving Increased budget deficit

Econ 295 Final Pt. 2 Flashcards

(611 cards)