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Multiple choice/ short answer questions on Monetary Policy

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1. According to the multiplier model, the best way to reduce inflation is to
a. increase aggregate demand by cutting government spending or raising taxes.
b. increase aggregate demand by raising government spending or cutting taxes.
c. decrease aggregate demand by cutting government spending or raising taxes.
d. decrease aggregate demand by raising government spending or cutting taxes.

2. If the economy goes into a recession, automatic stabilizers will do all of the following except
a. increase income tax revenues.
b. increase the budget deficit.
c. increase unemployment insurance.
d. increase welfare payments.

Refer to the following table as you answer the next question.
Year Surplus or deficit (-)
billions of dollars
1946 -15.9
1947 4.0
1948 11.8
1949 .9
1950 -3.1

3. Which statement is true?
a. The budget deficit in 1950 was $2.3 billion.
b. From 1946 to 1950, the debt was $2.3 billion.
c. From 1945 to 1950, the debt rose by $2.3 billion.
d. In 1950, the debt was $2.3 billion.

4. Money can be many things, but it is not
a. a financial liability.
b. a financial asset.
c. liquid.
d. illiquid.

5. A reserve ratio of 0.10 means that a bank loans out __________ percent of its_______
a. 10; deposit liabilities
b. 10; excess reserves
c. 90; deposit liabilities
d. 90; excess reserves

6. In the real world, the currency to deposit ratio is
a. negative.
b. zero.
c. greater than 0 but less than or equal to 1.
d. greater than 1.

7. Monetary policy affects
a. inflation only.
b. output only.
c. both inflation and output.
d. neither inflation nor output.

8. If the Bank of Canada wanted to stimulate aggregate demand, it could
a. raise the target range for the overnight financing rate, thereby reducing interest rates throughout the economy.
b. raise the target range for the overnight financing rate, thereby increasing interest rates throughout the economy.
c. lower the target range for the overnight financing rate, thereby reducing interest rates throughout the economy.
d. lower the target range for the overnight financing rate, thereby increasing interest rates throughout the economy.

9. Which of the following is an example of an expansionary monetary policy?
a. Raising the bank rate.
b. Raising the overnight financing rate.
c. Selling bonds.
d. Buying bonds.

10. Bank of Canada sales of government bonds ________ bank reserves, and _______ the money supply.
a. increase; increase
b. decrease; decrease
c. decrease; increase
d. increase; decrease

11. In the AS/AD model, an expansionary monetary policy
a. increases aggregate demand by reducing interest rates.
b. increases aggregate demand by raising interest rates.
c. reduces aggregate demand by reducing interest rates.
d. reduces aggregate demand by raising interest rates.

12. Countercyclical monetary policy in the AS/AD model involves
a. contractionary monetary policy throughout the business cycle.
b. expansionary monetary policy throughout the business cycle.
c. contractionary monetary policy during boom periods and expansionary monetary policy during recession.
d. contractionary monetary policy during recession and expansionary monetary policy during boom periods.

13. Which of the following gives the correct relationship between nominal and real interest rates?
a. real interest rate = nominal interest rate + expected inflation rate
b. nominal interest rate = real interest rate + expected inflation rate
c. expected inflation rate = nominal interest rate + real interest rate
d. nominal interest rate = real interest rate ? expected inflation rate

14. Suppose an expansionary monetary policy reduces nominal interest rates. If this is the case, it follows that the expansionary monetary policy must have
a. reduced expected inflation.
b. increased expected inflation.
c. increased expected inflation less than it reduced real interest rates.
d. reduced real interest rates less than it increased expected inflation

15. Suppose the Japanese economy faces a recessionary gap of 120. If mpc is 0.6 and the price level is constant, the government should increase autonomous expenditures
a. by 20
b. by 48
c. by 72
d. by 120

Questions 16 and 17 (Short Answer)
16. Define and briefly explain the significance of each of the following terms.
a. Crowding out
b. Automatic stabilizer
c. Money multiplier
d. Open market operations
e. Budget deficit

17. Explain how the Bank of Canada can influence interest rates and the money supply in Canada. Be specific about the tools that the Bank of Canada has available for these purposes, and describe how these tools would be used in the case of a tight (restrictive) monetary policy.

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1. According to the multiplier model, the best way to reduce inflation is to
a. increase aggregate demand by cutting government spending or raising taxes.
b. increase aggregate demand by raising government spending or cutting taxes.
c. decrease aggregate demand by cutting government spending or raising taxes.
d. decrease aggregate demand by raising government spending or cutting taxes.

Answer: c. decrease aggregate demand by cutting government spending or raising taxes.

2. If the economy goes into a recession, automatic stabilizers will do all of the following except
a. increase income tax revenues.
b. increase the budget deficit.
c. increase unemployment insurance.
d. increase welfare payments.
Answer: a. increase income tax revenues.

Refer to the following table as you answer the next question.
Year Surplus or deficit (-)
billions of dollars
1946 -15.9
1947 4.0
1948 11.8
1949 .9
1950 -3.1

3. Which statement is true?
a. The budget deficit in 1950 was $2.3 biffion.
b. From 1946 to 1950, the debt was $2.3 billion.
c. From 1945 to 1950, the debt rose by $2.3 billion.
d. In 1950, the debt was $2.3 billion.
Answer: c. From 1945 to 1950, the debt rose by $2.3 billion.

4. Money can be many things, but it is not
a. a financial liability.
b. a financial asset.
c. liquid.
d. illiquid.
Answer: d. illiquid.

5. A reserve ratio of 0.10 means that a bank loans out __________ percent of its_______
a. 10; deposit liabilities
b. 10; excess reserves
c. 90; deposit liabilities
d. 90; excess reserves
Answer: c. 90; deposit liabilities

6. In the real world, the currency to deposit ratio is
a. negative.
b. zero.
c. greater than 0 but less than or equal to 1.
d. greater than 1.
Answer: c. greater than 0 but less than or equal to 1.

7. Monetary policy affects
a. inflation only.
b. output only.
c. both inflation and output.
d. neither inflation nor output.
Answer: c. both inflation and output.

8. If the Bank of Canada wanted to stimulate aggregate demand, it could
a. raise the target range for the overnight financing rate, thereby reducing interest rates throughout the economy.
b. raise the target range for the overnight financing rate, thereby increasing interest rates throughout the economy.
c. lower the target range for the overnight financing rate, thereby reducing interest rates throughout the economy.
d. lower the target range for the overnight financing rate, thereby increasing interest rates throughout the economy.

Answer: c. lower the target range for the overnight financing rate, thereby reducing interest rates throughout the economy.

9. Which of the following is an example of an expansionary monetary policy?
a. Raising the bank rate.
b. ...

Solution Summary

Answers to 17 Multiple choice/ short answer questions on multiplier model, recession, automatic stabilizers, budget deficit, money, reserve ratio, currency to deposit ratio, Monetary policy, stimulate aggregate demand, expansionary monetary policy, AS/AD model, Countercyclical monetary policy, nominal interest rates, real interest rates, recessionary gap, autonomous expenditures, Crowding out, Automatic stabilizer, Money multiplier, Open market operations, Budget deficit, money supply, tight (restrictive) monetary policy.

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See Also This Related BrainMass Solution

Please answer the multiple choice questions and answer questions in essay format with apa references

Please answer the the following questions.

1. The three central coordination problems any economic system must solve are:
a. what to produce, why to produce, how to produce.
b. what to produce, why to produce, for whom to produce.
c. what to produce, how to produce, for whom to produce.
d. what to produce, where to produce, how to produce.

2. An opportunity cost is:
a. easily measured in dollar terms.
b. the highest valued alternative that must be foregone whenever something is undertaken or acquired.
c. only incurred when important and costly decisions are to be made.
d. not implicit in every decision we make.

3. If at some price the quantity supplied exceeds the quantity demanded, then:
a. a surplus exists and the price will fall over time as sellers competitively bid down the price.
b. a shortage exists and the price will rise over time as buyers competitively bid up the price.
c. the price is below equilibrium.
d. equilibrium will be reestablished as the demand curve shifts to the left.

4. Macroeconomics is best suited to answer questions about:
a. unemployment among students in this campus
b. why rent is higher in big cities than in smaller ones
c. how fast the overall price level will rise next year
d. the demand for public transportation in Boston

5. An example of a good counted in this year's GDP is
a. a share of corporate stock
b. an acre of farmland
c. a used car
d. a new shirt

6. If private investment increased by $50 billion while GDP remained the same, which of the following could have occurred, all else being the same?
a. consumption spending decreased by $50 billion
b. exports increased by $50 billion
c. imports decreased by $50 billion
d. net exports increased by $50 billion

7. To combat inflation in an expansionary phase of the business cycle, the Fed should:
a. raise the required reserve ratio.
b. increase banks' excess reserves by reducing the discount rate.
c. undertake expansionary monetary policy.
d. increase the money supply.

8. Which of the following would most likely cause a recession?
a. Government spending increases and taxes are reduced.
b. Imports rise and exports fall.
c. An increase in consumer confidence and expenditures spending rises.
d. Interest rates fall and investment spending increases.

9. If an economy is at equilibrium at potential output and the AD curve shifts out, the economy will move to:
a. an inflationary gap.
b. a recessionary gap.
c. a short term equilibrium.
d. a business cycle.

10. Which of the following statements about trade restrictions is true?
a. Tariffs are quantity limits placed on imports.
b. Quotas are taxes governments place on imports.
c. Trade restrictions create higher prices for consumers.
d. Economists generally favor trade restriction policies.

Q.11. In most developing countries, there are long lines of taxis at airports, and these taxis often wait two or three hours. What does this tell you about the price in that market? Discuss using supply demand analysis. (200 words)

Q.12. Change in Income (∆Y) = $1000 billion
Change in Consumption (∆C) = $900 billion

a) What is the Marginal Propensity to Consume (MPC)?
b) What is the Multiplier?

Q.13. Are you in favor of either deficit spending on the part of government or one of a balanced federal budget and budget surpluses?

Present your argument and discuss the economic situations when your position can be successfully implemented and when it may be doomed to failure. (350 to 500 words)

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