Deck 22: The Monetary Policy and Aggregate Demand Curves

Question 1

The reason inflation spiralled in Canada in the 1970s can be attributed to ________.

A)the central bank not following the Taylor Principle
B)the OPEC oil embargo
C)changing policies at the federal government level
D)an aggressive central bank policy buying bonds

Answer 1

A

Question 2

Higher inflation results from higher interest rates due to ________.

A)the Taylor principle
B)the Taylor rule
C)the slope of the monetary policy curve
D)the Fisher equation

Answer 2

A

Question 3

Explain the relationship between Bank of Canada's overnight rate and the real interest rate.

Answer 3

Because prices are sticky-changes in monetary policy will not have an immediate effect on inflation and expected inflation. As a result, when the Bank of Canada lowers the overnight interest rate, real interest rates fall; and when the Bank of Canada raises the overnight rate, real interest rates rise.

Question 4

The Taylor Principle differs from the Taylor rule because ________.

A)it does not provide a rule for how monetary policy should react to conditions in the economy
B)the Taylor principle relates to real interest rates and the Taylor rule pertains to nominal interest rates
C)the Taylor principle is exclusively used by the Bank of Canada while the Taylor rule is used by the U.S. Fed
D)the Taylor rule relates to inflation rates while the Taylor principle is applied to real interest rates

Question 5

Tightening monetary policy refers to ________.

A)higher real interest rates
B)higher nominal interest rates
C)lower real interest rates
D)lower nominal interest rates

Question 6

An increase in the interest rate due to Taylor principle changes result in ________.

A)a movement up the monetary policy curve
B)a movement down the monetary policy curve
C)an upward shift of the monetary policy curve
D)a downward shift of the monetary policy curve

Question 7

If the central bank did not follow the Taylor principle so that the real interest rate fell when inflation rose, ________.

A)inflation would increase
B)the nominal interest rate would not change
C)expected inflation would be equal to zero
D)output would remain unchanged

Question 8

If the monetary policy rule is given by r = 1.0 + 0.5p, then 1.0 represents ________.

A)the autonomous component of the real interest rate set by the central bank
B)the responsiveness of the real interest rate to the inflation rate
C)the nominal rate as described by the Taylor principle
D)none of the above

Question 9

If the central bank did not follow the Taylor principle ________.

A)inflation would spiral out of control
B)it could rely on autonomous monetary policy changes
C)it could rely on non-conventional monetary policy tools
D)B and C only

Question 10

The Bank of Canada conducts monetary policy by ________.

A)setting the overnight interest rate
B)buying and selling bonds in open market operations
C)changing the tax rate to influence aggregate demand
D)changing the exchange rate to influence aggregate demand

Question 11

If the monetary policy rule is given by r = 1.0 + 0.5p, then r represents ________.

A)the autonomous component of the real interest rate set by the central bank
B)the responsiveness of the real interest rate to the inflation rate
C)the real interest rate that is sent by the central bank
D)none of the above

Question 12

The monetary policy (MP)curve indicates the relationship between ________.

A)the overnight rate and the real interest rate
B)the overnight rate and the inflation rate
C)the inflation rate and the expected inflation rate
D)the real interest rate the central bank sets and the inflation rate

Question 13

If the monetary policy rule is given by r = 1.0 + 0.5p, then 0.5 represents ________.

A)the autonomous component of the real interest rate set by the central bank
B)the responsiveness of the real interest rate to the inflation rate
C)the nominal rate as described by the Taylor principle
D)none of the above

Question 14

The upward slope of the MP curve indicates that ________.

A)the central bank lowers real interest rates when inflation rises
B)the central bank raises real interest rates when inflation falls
C)the central bank raises nominal interest rates when inflation rises
D)the central bank raises real interest rates when inflation rises

Question 15

Central banks aim to ________.

A)keep inflation stable
B)keep expected inflation equal to zero
C)reduce inflation to zero
D)A and B only

Question 16

In the 1970s , the inflation rate in Canada reach levels over ________ percent.

A)2
B)5
C)10
D)12

Question 17

Explain the relationship between real and nominal interest rates when inflation is expected to remain unchanged in the short run.

Question 18

The Bank of Canada controls the overnight rate by ________.

A)varying the settlement balances it provides to the banking system
B)dictating terms of the LVTS
C)managing government savings
D)borrowing from the provincial government

Question 19

Because prices are sticky in the short-run, when the Bank of Canada raises the overnight rate, ________.

A)nominal interest rates fall
B)real interest rates rise
C)inflation falls
D)real interest rates fall

Question 20

Because prices are slow to move in the short-run, when the Bank of Canada lowers the overnight rate, ________.

A)nominal interest rates rise
B)real interest rates fall
C)inflation falls
D)real interest rates rise

Question 21

An increase in the money supply, other things equal, shifts the ________ curve to the ________.

A)IS; right
B)IS; left
C)MP; left
D)MP; right

Question 22

An autonomous tightening of monetary policy ________.

A)causes an upward movement along the monetary policy curve
B)causes a downward movement along the monetary policy curve
C)shifts the monetary policy curve upward
D)shifts the monetary policy curve downward

Question 23

If the Bank of Canada conducts open market ________, the money supply ________, shifting the MP curve to the right, everything else held constant.

A)purchases; decreases
B)sales; decreases
C)purchases; increases
D)sales; increases

Question 24

A decline in the money ________ shifts the MP curve to the ________, causing the interest rate to rise and output to fall, everything else held constant.

A)demand; right
B)demand; left
C)supply; right
D)supply; left

Question 25

If the Bank of Canada conducts open market purchases, the money supply ________, shifting the MP curve to the ________, everything else held constant.

A)decreases; right
B)decreases; left
C)increases; right
D)increases; left

Question 26

If the Bank of Canada conducts open market ________, the money supply ________, shifting the MP curve to the left, everything else held constant.

A)purchases; decreases
B)sales; decreases
C)purchases; increases
D)sales; increases

Question 27

An increase in the money supply shifts the MP curve to the right, causing the interest rate to ________ and output to ________, everything else held constant.

A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question 28

If the Bank of Canada conducts open market sales, the money supply ________, shifting the MP curve to the ________, everything else held constant.

A)decreases; right
B)decreases; left
C)increases; right
D)increases; left

Question 29

A decline in the money supply shifts the MP curve to the left, causing the interest rate to ________ and output to ________, everything else held constant.

A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question 30

When the financial crisis started in August 2007, inflation was rising and the Bank of Canada began an aggressive easing lowering of the overnight rate, which indicated that ________.

A)the Bank of Canada pursued an autonomous monetary policy tightening
B)the Bank of Canada pursued an autonomous monetary policy easing
C)the Bank of Canada had an automatic negative response to inflation based on the Taylor rule
D)the Bank of Canada had an automatic positive response to inflation based on the Taylor rule

Question 31

The Taylor Principle states that central banks raise nominal rates by ________ than any rise in expected inflation so that real interest rates ________ when there is a rise in inflation.

A)less; rise
B)more; fall
C)less; fall
D)more; rise

Question 32

An increase in the money ________ shifts the MP curve to the ________, causing the interest rate to fall and output to rise, everything else held constant.

A)demand; right
B)demand; left
C)supply; right
D)supply; left

Question 33

An expansionary monetary policy shifts the MP curve to the ________, reducing ________, everything else held constant.

A)left; output and increasing interest rates
B)left; both real output and interest rates
C)right; both interest rates and real output
D)right; interest rates and increasing real output

Question 34

As bonds become a riskier asset, the demand for money ________ and, all else constant, the equilibrium interest rate ________.

A)rises; rises
B)rises; falls
C)falls; rises
D)falls; falls

Question 35

When the central bank ________ the money supply, the MP curve shifts to the right, interest rates ________, and equilibrium aggregate output ________, everything else held constant.

A)increases; fall; increases
B)increases; rise; decreases
C)decreases; rise; decreases
D)decreases; fall; increases

Question 36

Based on the Taylor Principle, a central bank's endogenous response of decreasing interest rates when inflation falls ________.

A)causes an upward movement along the monetary policy curve
B)causes a downward movement along the monetary policy curve
C)shifts the monetary policy curve upward
D)shifts the monetary policy curve downward

Question 37

An autonomous increase in money demand, other things equal, shifts the ________ curve to the ________.

A)IS; right
B)IS; left
C)MP; left
D)MP; right

Question 38

An autonomous decrease in money demand, other things equal, shifts the ________ curve to the ________.

A)IS; right
B)IS; left
C)MP; left
D)MP; right

Question 39

An autonomous easing of monetary policy ________.

A)causes an upward movement along the monetary policy curve
B)causes a downward movement along the monetary policy curve
C)shifts the monetary policy curve upward
D)shifts the monetary policy curve downward

Question 40

Based on the Taylor Principle, a central bank's endogenous response of raising interest rates when inflation rises ________.

A)causes an upward movement along the monetary policy curve
B)causes a downward movement along the monetary policy curve
C)shifts the monetary policy curve upward
D)shifts the monetary policy curve downward

Question 41

In the IS and MP framework, an expansionary monetary policy causes aggregate output to ________ and the interest rate to ________, everything else held constant.

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question 42

Higher interest rates lead to reductions in the aggregate output due to ________.

A)reductions in autonomous consumer expenditure
B)reductions in planned investment expenditure
C)higher expected inflation
D)higher employment

Question 43

An increase in financial frictions causes the IS curve to shift ________ and the aggregate demand curve to shift ________.

A)left; left
B)left; right
C)right; left
D)right; right

Question 44

Everything else held constant, a monetary expansion is characterized by ________ output and ________ interest rates.

A)rising; rising
B)rising; falling
C)falling; rising
D)falling; falling

Question 45

An autonomous rise in ________ shifts the MP curve to the ________, everything else held constant.

A)net exports; right
B)net exports; left
C)money demand; right
D)money demand; left

Question 46

An increase in autonomous consumer expenditure causes the IS curve to shift ________ and the aggregate demand curve to shift ________.

A)left; left
B)left; right
C)right; left
D)right; right

Question 47

Despite an expansionary monetary policy, an economy experiences a recession. Everything else held constant, the recession could occur in spite of the rightward shift of the MP curve if ________.

A)consumer confidence decreases sharply
B)there is an investment boom
C)the money supply increases
D)taxes are cut

Question 48

In deriving the aggregate demand curve a ________ inflation rate leads the central bank to ________ real interest rates, thereby ________ the level of equilibrium aggregate output.

A)higher; raise; lowering
B)lower; raise; lowering
C)higher; lower; lowering
D)higher; lower; raising

Question 49

Everything else held constant, a monetary contraction is characterized by ________ output and ________ interest rates.

A)rising; rising
B)rising; falling
C)falling; rising
D)falling; falling

Question 50

Suppose the aggregate demand curve is given by Y = 12 - r then, if inflation increases by 1 percent ________.

A)aggregate output is unchanged
B)aggregate output increases
C)the nominal interest changes
D)the real interest rate falls

Question 51

Describe monetary easing at the Bank of Canada during the 2007-2009 Financial Crisis.

Question 52

An increase in autonomous investment spending causes the IS curve to shift ________ and the aggregate demand curve to shift ________.

A)left; left
B)left; right
C)right; left
D)right; right

Question 53

The aggregate demand curve is derived from the ________.

A)IS curve
B)MP curve
C)LM curve
D)A and B only

Question 54

A decrease in taxes causes the IS curve to shift ________ and the aggregate demand curve to shift ________.

A)left; left
B)left; right
C)right; left
D)right; right

Question 55

Explain the difference between autonomous changes in monetary policy and the Taylor principle.

Question 56

In the money market, a condition of excess demand for money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant.

A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question 57

Describe how the Bank of Canada would apply the Taylor principle.

Question 58

A contractionary monetary policy shifts the MP curve to the ________, reducing ________, everything else held constant.

A)left; output and increasing interest rates
B)left; both real output and interest rates
C)right; both interest rates and real output
D)right; interest rates and increasing real output

Question 59

Suppose the aggregate demand curve is given by Y = 12 - r then, if the nominal interest rate increases by 1 percent ________.

A)aggregate output is unchanged
B)aggregate output increases
C)the nominal interest changes
D)the real interest rate falls

Question 60

An increase in government purchases causes the IS curve to shift ________ and the aggregate demand curve to shift ________.

A)left; left
B)left; right
C)right; left
D)right; right

Question 61

Aggregate output and the interest rate are ________ related to government spending and are ________ related to taxes.

A)positively; positively
B)positively; negatively
C)negatively; positively
D)negatively; negatively

Question 62

An increase in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

A)rise; MP; right
B)rise; IS; right
C)fall; MP; left
D)fall; IS; left

Question 63

Everything else held constant, an expansionary ________ policy will cause the interest rate to rise, while an expansionary ________ policy will cause the interest rate to fall.

A)monetary; monetary
B)monetary; fiscal
C)fiscal; monetary
D)fiscal; fiscal

Question 64

An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.

A)up; rise
B)up; fall
C)down; rise
D)down; fall

Question 65

A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

A)rise; MP; right
B)rise; IS; right
C)fall; IS; left
D)fall; MP; left

Question 66

In the IS-MP framework a contractionary fiscal policy causes aggregate output to ________ and the interest rate to ________, everything else held constant.

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question 67

A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.

A)up; rise
B)up; fall
C)down; rise
D)down; fall

Question 68

An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant.

A)up; left
B)up; right
C)down; left
D)down; right

Question 69

A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant.

A)up; left
B)up; right
C)down; left
D)down; right

Question 70

Everything else held constant, changes in the interest rate affect planned investment spending and hence the equilibrium level of output, but this change in investment spending ________.

A)merely causes a movement along the IS curve and not a shift
B)is crowded out by higher taxes
C)is crowded out by higher government spending
D)is crowded out by lower consumer expenditures

Question 71

A decline in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.

A)rise; MP; right
B)rise; IS; right
C)fall; IS; left
D)fall; MP; left

Question 72

Which of the following statements concerning IS - MP analysis is true?

A)For a given change in taxes, the IS curve will shift less than for an equal change in government spending.
B)Changes in net exports arising from a change in interest rates causes a shift in the IS curve.
C)A fall in the money supply shifts the LM curve to the right.
D)Expansionary fiscal policy will cause the interest rate to fall.

Question 73

An increase in spending that results from expansionary ________ policy causes the interest rate to ________, everything else held constant.

A)fiscal; rise
B)fiscal; fall
C)incomes; rise
D)incomes; fall

Question 74

In the money market, a condition of excess supply of money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant.

A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question 75

A rise in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.

A)rise; MP; right
B)rise; IS; right
C)fall; IS; left
D)fall; MP; left

Question 76

A decline in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant.

A)up; left
B)up; right
C)down; left
D)down; right

Question 77

A decline in autonomous consumer expenditure causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

A)rise; left
B)rise; right
C)fall; left
D)fall; right

Question 78

An increase in autonomous consumer expenditure causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

A)rise; left
B)rise; right
C)fall; left
D)fall; right

Question 79

If an economy experiences high interest rates and high unemployment, the ISLM framework predicts that ________ policy has been too ________.

A)fiscal; expansionary
B)fiscal; contractionary
C)monetary; expansionary
D)monetary; contractionary

Question 80

In the IS-MP framework, an expansionary fiscal policy resulting from government purchases, causes aggregate output to ________ and the interest rate to ________, everything else held constant.

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase