1.The flatter is the money demand curve, the larger the impact of a given change

Question

1.The flatter is the money demand curve, the larger the impact of a given change in the money supply on real GDP (hint: draw yourself a graph showing a flat and a steep MD curve, and then move the MS curve )

True

False

2,If the demand for money increases and it is desirable that the Canadian dollar not appreciate in value, then the appropriate monetary policy would be to

A.  increase the required reserve ratio

B.  buy bonds on the open market

C.  sell bonds on the open market

D.  increase the bank rate

3.Suppose a central bank's policy is to keep the price level from either rising or falling. If aggregate supply increases due to say, a reduction in input prices, the central bank should

A.  increase interest rates to prevent the price level from falling

B.  reduce the money supply to prevent the price level from rising

C.  increase the money supply to keep the price level from falling

4.If market interest rates fall, the opportunity cost of investing in plant and equipment will also fall.

True

False

5.It will be harder for the Bank of Canada to effectively reduce the money supply if the banking system has substantial excess reserves.

True

False

6. All of the following, except which one, will occur during the monetary transmission mechanism when the Bank of Canada pursues expansionary monetary policy?

A.  a decrease in net exports

B.  a fall in the rate of interest

C.  a rise in the level of investment

D.  a rightward shift in the AD curve

E.  a depreciation of the Canadian dollar

1.The flatter is the money demand curve, the larger the impact of a given change in the money supply on real GDP (hint: draw yourself a graph showing a flat and a steep MD curve, and then move the MS curve )

True

False

Explanation / Answer

1. True, more the steeper the demand would be inelastic which leads to more impact on Real GDP.
2. Option B. With this the money supply increase which would help to improve the growth
3. Option A. By increasing the interest rates, the supply can be reduced which would help to maintain price stability
4. False. With the decrease in interest rate, people would invest in other projects to earn more than the market interest rate.
5. False. It can reduce through reserve ratios
6. Option D. Through monetary transmission mechanism the bank of Canada sets a target for the overnight interest rate, which influences market interest rate. The decreased interest rate would increase the supply and hence the AD curve increases which causes it to shift to right.

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