Question 1

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Bank of Canada could move the economy more rapidly back to full employment output by:
A)increasing the money supply, but at the cost of permanently higher prices.
B)decreasing the money supply, but at the cost of permanently lower prices.
C)increasing the money supply, which would restore the original price level.
D)decreasing the money supply, which would restore the original price level.

Accepted Answer

Increasing the money supply can stimulate economic activity and help return the economy to full employment, but it may lead to permanently higher prices due to increased demand.

Question 2

One of the methods the Bank of Canada uses to change the money supply is open-market operations. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of a Bank of Canada decision to increase open-market purchases. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.

Accepted Answer

The answer of One of the methods the Bank of...

Question 3

Stagflation occurs when prices _____ and output _____.
A)fall; falls
B)fall; increases
C)rise; falls
D)rise; increases

Accepted Answer

Stagflation is a condition of high inflation combined with stagnant or slow economic growth. This means that prices are rising (inflation) while output (economic growth) is not increasing at the same pace or even decreasing (stagnant). Therefore, the correct answer is C, i.e. prices rise and output falls.

Question 4

In the short run, a favourable supply shock causes:
A)both prices and output to rise.
B)prices to rise and output to fall.
C)prices to fall and output to rise.
D)both prices and output to fall.

Accepted Answer

A favourable supply shock increases supply, leading to lower prices and higher output in the short run.

Question 5

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money:
A)both Central Bank A and Central Bank B should increase the quantity of money.
B)Central Bank A should increase the quantity of money, whereas Central Bank B should keep it stable.
C)Central Bank A should keep the quantity of money stable, whereas Central Bank B should increase it.
D)both Central Bank A and Central Bank B should keep the quantity of money stable.

Accepted Answer

An exogenous decrease in the velocity of money would lead to a decrease in the price level and output. To counteract this and maintain their respective goals (price level stability for Central Bank A and natural level of output for Central Bank B), both would need to increase the quantity of money to offset the decrease in velocity.

Question 6

If a change in government regulations allows banks to start paying interest on chequing accounts, this will:
A)increase the demand for money.
B)decrease the demand for money.
C)have no effect on the demand for money.
D)increase the demand for currency but decrease the demand for chequing accounts.

Accepted Answer

If banks start paying interest on chequing accounts, people will be more likely to hold their money in chequing accounts rather than in currency or other non-interest-bearing accounts. This will increase the demand for money.

Question 7

Suppose that laws are passed banning labour unions and that resulting lower labour costs are passed along to consumers in the form of lower prices. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this favourable supply shock. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.

Accepted Answer

The answer of Suppose that laws are passed banning labour...

Question 8

Exhibit: Supply Shock  Assume that the economy starts at point A, and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point _____ represents the short-run equilibrium immediately following the drought, and point _____ represents the eventual long-run equilibrium.
A)B; C
B)B; A
C)E; D
D)D; A

Accepted Answer

The answer of Exhibit: Supply Shock  Assume that the...

Question 9

Starting from long-run equilibrium, without policy intervention, the long-run impact of a temporary adverse supply shock is that prices will:
A)be permanently higher, and output will be restored to the natural rate.
B)return to the old level, and output will be restored to the natural rate.
C)be permanently higher, and output will be permanently lower.
D)return to the old level, but output will be permanently lower.

Accepted Answer

In the long run, prices return to their original level as the economy self-corrects, and output returns to the natural rate due to flexible prices and wages.

Question 10

If the Bank of Canada reduces the money supply by 5 percent, then the real interest rate will:
A)rise in both the short run and the long run.
B)rise in the short run but return to its original equilibrium level in the long run.
C)rise in the short run but fall below its original equilibrium level in the long run.
D)be unaffected in both the short run and the long run.

Accepted Answer

In the short run, a reduction in the money supply increases the real interest rate due to decreased liquidity. In the long run, prices adjust, and the real interest rate returns to its original level as the economy reaches a new equilibrium.

Question 11

Making use of Okun's law, if the Bank of Canada reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about:
A)5 percent in both the short run and the long run.
B)1.66 percent in both the short run and the long run.
C)5 percent in the short run, but will return to its natural rate in the long run.
D)1.66 percent in the short run, but will return to its natural rate in the long run.

Accepted Answer

According to Okun's law, a 1% decrease in GDP results in a 0.5% increase in unemployment. A 5% reduction in money supply would reduce GDP by 5%, increasing unemployment by 2.5%. However, the quantity theory of money suggests prices adjust in the long run, so unemployment returns to its natural rate.

Question 12

Suppose that droughts in Ontario and floods in Manitoba substantially reduce food production in Canada. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this adverse supply shock. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.

Accepted Answer

The answer of Suppose that droughts in Ontario and floods...

Question 13

If the demand for money increases, but the Bank of Canada keeps the money supply the same, then in the short run output will:
A)fall, and in the long run prices will remain unchanged.
B)remain unchanged, and in the long run prices will fall.
C)remain unchanged, and in the long run prices will remain unchanged.
D)fall, and in the long run prices will fall.

Accepted Answer

In the short run, an increase in money demand with a constant money supply leads to higher interest rates, reducing investment and output. In the long run, lower output can lead to lower prices.

Question 14

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:
A)both Central Bank A and Central Bank B should increase the quantity of money.
B)Central Bank A should increase the quantity of money, whereas Central Bank B should keep it stable.
C)Central Bank A should decrease the quantity of money, whereas Central Bank B should increase it.
D)both Central Bank A and Central Bank B should keep the quantity of money stable.

Accepted Answer

Central Bank A would decrease the quantity of money to counteract inflation from the oil price increase, while Central Bank B would increase it to support output.

Question 15

Assume that the long-run aggregate supply curve is vertical at Y = 3,000, while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 3 × M / P, and M = 1,000.
a.If the economy is initially in long-run equilibrium, what are the values of P and Y?
b.Now suppose a supply shock moves the short-run aggregate supply curve to P = 1.5. What are the new short-run P and Y?
c.If the aggregate demand curve and long-run aggregate supply curve are unchanged, what are the long-run equilibriumPandYafter the supply shock?
d.Suppose that after the supply shock the Bank of Canada wanted to hold output at its long-run level. What level of M would be required? If this level of M were maintained, what would be long-run equilibrium P and Y?

Accepted Answer

The answer of Assume that the long-run aggregate supply curve...

Question 16

Suppose you are an economist working for the Bank of Canada when droughts in Ontario and floods in Manitoba substantially reduce food production in Canada. Use the aggregate demand-aggregate supply model to illustrate graphically your policy recommendation to accommodate this adverse supply shock, assuming that your top priority is maintaining full employment in the economy. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values. State in words what happens to prices and output as a combined result of the supply shock and the recommended Bank of Canada accommodation.

Accepted Answer

The answer of Suppose you are an economist working for...

Question 17

If the Bank of Canada reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run, and:
A)prices will remain unchanged in the long run.
B)output will fall 5 percent in the long run.
C)prices will fall 5 percent in the long run.
D)output will remain unchanged in the long run.

Accepted Answer

The answer of If the Bank of Canada reduces the...

Question 18

The dilemma facing the Bank of Canada in the event that an unfavourable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate but with a _____ price level or allow the price level to return to its original level but with a _____ level of output in the short run.
A)higher; higher
B)higher; lower
C)lower; lower
D)lower; higher

Accepted Answer

Monetary policy can increase output to the natural rate by increasing the money supply, which raises the price level. Alternatively, it can allow the price level to decrease by not intervening, resulting in lower output in the short run.

Question 19

If the Bank of Canada accommodates an adverse supply shock, output falls _____, and prices rise _____.
A)less; more
B)less; less
C)more; less
D)more; more

Accepted Answer

When the Bank of Canada accommodates an adverse supply shock, it typically eases monetary policy to support output, causing output to fall less than it would without intervention, but this can lead to higher inflation, causing prices to rise more.

Question 20

The advent of interest-earning chequing accounts in the early 1980s led many households to keep a larger proportion of their wealth in chequing accounts. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this change in money demand. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.

Accepted Answer

The answer of The advent of interest-earning chequing accounts in...

Quiz 10: Introduction to Economic Fluctuations

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Bank of Canada could move the economy more rapidly back to full employment output by:

Stagflation occurs when prices _ and output _.

In the short run, a favourable supply shock causes:

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money:

If a change in government regulations allows banks to start paying interest on chequing accounts, this will:

Starting from long-run equilibrium, without policy intervention, the long-run impact of a temporary adverse supply shock is that prices will:

If the Bank of Canada reduces the money supply by 5 percent, then the real interest rate will:

Making use of Okun's law, if the Bank of Canada reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about:

If the demand for money increases, but the Bank of Canada keeps the money supply the same, then in the short run output will:

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:

If the Bank of Canada reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run, and:

If the Bank of Canada accommodates an adverse supply shock, output falls _, and prices rise _.