Question

1. If the central bank purchases government bonds in the open market operation, the quantity of money in the economy will . A. decrease B. increase C. remain unchanged D. increase before it decreases 2. In the money market, which of the following will not shift the money demand curve? A. A higher price level. B. A lower short-term nominal interest rate. C. A higher real GDP. D. A lower real consumption expenditure. 3. Suppose that, in an economy, nominal GDP is $1,200 billion and the velocity of money is 5. The quantity of money is then . A. $240 billion B. $600 billion C. $400 billion D. $480 billion 4. In macroeconomics, monetary neutrality refers to A. the proposition that growth in money supply has no effect on real variables such as real GDP. B. the proposition that growth in money supply has no effect on the price level and inflation. C. the proposition that increased money supply has no effect on the price of short-term bonds in the long run. D. the proposition that increased money supply can have effects on employment in the long run. 5. Which of the following statements about the effects of an increase in the money supply is false? A. In the short run, the short-term real interest rate falls. B. In the short run, the short-term nominal interest rate falls. C. In the long run, the short-term real interest rate falls. D. In the long run, the short-term nominal interest rate rises. 6. According to the quantity theory of money, an increase in the money supply only raises the price level in the long run. This is because Page 2 of 9 ECON1020H, VERSION B A. the long-run aggregate supply is unaffected by the money supply, while the aggregate demand increases when the money supply increases. B. the long-run aggregate supply is lower when the money supply increases, while the aggregate demand is unaffected by the money supply. C. the short-run aggregate supply and the aggregate demand both increase. D. the effects of an increase in the money supply on the long-run aggregate supply and on the aggregate demand cancel out. 7. Suppose the price of a burger is 5.0 Canadian dollars in Toronto, and the exchange rate is 0.90 U.S. cents per Canadian dollar. Then A. the price of a burger is 4.64 U.S. dollars in New York if purchasing power parity holds. B. the price of a burger is 4.50 U.S. dollars in New York if purchasing power parity holds. C. the price of a burger is 4.05 U.S. dollars in New York if purchasing power parity holds. D. the price of a burger is 5.00 U.S. dollar in New York if purchasing power parity holds. 8. In March 2020, the nominal exchange rate of the Canadian dollar was 1.4 Canadian dollars per U.S. Dollar. In the same month, the overall price level in the U.S. was 149 U.S. dollars, and the overall price level in Canada was 139 Canadian dollars. Based on this information, the real exchange rate between Canada and the U.S. in March 2020 was A. 1.306 units of goods in Canada per unit of goods in the U.S. B. 1.501 units of goods in Canada per unit of goods in the U.S. C. 1.306 units of goods in the U.S. per unit of goods in Canada. D. 0.766 units of goods in the U.S. per unit of goods in Canada. 9. In an open economy where the net interest income abroad and net transfers are small and neglected, net exports equals A. government budget deficit plus private saving plus private investment. B. public saving plus private debt minus private investment. C. public saving minus private saving plus private investment. D. public saving plus private saving minus private investment. 10. The aggregate demand curve slopes downward because, when the price level rises, the real value of money is lower, hence A. consumption expenditure and investment expenditure rise, but net exports falls. B. consumption expenditure, investment expenditure, and net exports all fall. C. consumption expenditure, investment expenditure, and net exports all rise. D. consumption expenditure falls, while investment expenditure and net exports rise. 11. The United States is the destination of about 75 percent of Canadian exports. Suppose that the United States reduces imports from Canada due to an increase in tariffs imposed on CanaPage 3 of 9 ECON1020H, VERSION B dian goods. Which of the following is caused by reduced imports from Canada? A. The long-run aggregate supply curve in Canada shifts to the left. B. The quantity of real GDP demanded in Canada moves along the aggregate demand curve, but the Canadian aggregate demand does not shift. C. The aggregate demand curve in Canada shifts to the left because of lower exports. D. The short-run aggregate supply curve in Canada shifts to the left. 12. Which of the following assumptions can explain the upward slope of the short-run aggregate supply curve? A. When the price level rises, both the expected price level and the nominal wage remain unchanged in the short run. B. When the price level rises, the nominal wage adjusts in the short run. C. When the price level rises, the expected price level adjusts in the short run. D. When the price level rises, the level of potential output also rises in the short run. 13. Which of the following factors will not shift the aggregate demand curve? A. A lower nominal interest rate. B. A decrease in the expected real income. C. An increase in net taxes. D. An increase in the price level. 14. According to the sticky-wage hypothesis, when firms and workers lower their expectation on the price level, A. nominal wage rate lowers, shifting the short-run aggregate supply curve to the left. B. nominal wage rate rises, shifting the short-run aggregate supply curve to the right. C. nominal wage rate lowers, shifting the short-run aggregate supply curve to the right. D. nominal wage rate rises, shifting the short-run aggregate supply curve to the left. 15. An improvement in production technology will A. shift both the long-run and short-run aggregate supply curves to the right. B. shift the long-run aggregate supply curve to the right, while the short-run aggregate supply curve remains unchanged. C. shift the short-run aggregate supply curve to the right, while the long-run aggregate supply curve remains unchanged. D. shift the aggregate demand curve to the right. 16. In the long-run equilibrium of the aggregate economy, which of the following is false? A. The actual unemployment rate equals the natural rate of unemployment. B. The price level is indeterminate in the equilibrium. C. The expected price level equals the price level. D. The real GDP equals the potential GDP. Page 4 of 9 ECON1020H, VERSION B 17. Suppose that the central bank increases the money supply, ceteris paribus, which of the following is true about the effects on the economy in the long-run equilibrium? A. A higher level of potential GDP. B. A lower natural rate of unemployment. C. A higher price level. D. A lower nominal wage rate. Questions 18 through 20 are based on the following information: In the graph below, the long-run equilibrium of the aggregate economy is at point A, where the long-run aggregate supply curve (LAS) intersects the aggregate demand curve (AD0). Y ∗ is the level of real GDP in the long-run equilibrium. The short-run equilibrium is at point B, where the short-run aggregate supply curve (SAS) intersects AD0. Y0 is the real GDP at point B. 18. Which of the following statements about the short-run equilibrium (point B) and the longrun equilibrium (point A) is false? A. The real GDP in the short-run equilibrium (point B) is below the potential output. B. The nominal wage at point B is lower than the nominal wage at point A. C. The price level in the short-run equilibrium (point B) is below the expected price level. D. The unemployment rate in the short-run equilibrium (point B) is higher than the natural rate of unemployment. Page 5 of 9 ECON1020H, VERSION B 19. Which of the following is a plausible explanation of the short-run equilibrium (point B) as a deviation from the long-run equilibrium (point A)? A. An increase in the quantity of money. B. An increase in expected future income. C. A sudden destruction of a portion of capital stock. D. A sudden loss of consumer confidence in the future of the economy. 20. From the short-run equilibrium at point B, suppose the aggregate demand remains unchanged and there are no other shocks hitting the economy. The economy can adjust itself and move to the long-run equilibrium without policy intervention. Which of the following is true? A. The economy will move to a new long-run equilibrium, where the real GDP equals Y ∗ but the price level is below P ∗ . B. The economy will return to the long-run equilibrium (point A), where the real GDP equals Y ∗ and the price level is P ∗ . C. The economy will move to a new long-run equilibrium, where the real GDP is above Y ∗ and the price level is above P ∗ . D. The economy will move to a new long-run equilibrium, where the real GDP is below Y ∗ and the price level equals P ∗ . 21. Stagflation occurs when A. the rightward shifts of the aggregate demand curve lead to a prolonged period of decreases in both the real GDP and the price level. B. the government raises the labor income tax during an economic boom. C. the leftward shifts of the short-run aggregate supply curve lead to a prolonged period of decreases in real GDP and rising price level. D. the central bank raises the interest rate to dampen consumption and investment expenditure. 22. Which of the following events will enable an economy in stagflation to return to the longrun equilibrium? A. The high unemployment leads more workers to form unions to maintain collective bargaining power in wage negotiations. B. The high unemployment triggers a fall in nominal wage. C. The central bank raises the nominal interest rate. D. The government raises the income tax. 23. Which one of the following is false about the marginal propensity to consume? A. It is calculated as the change in consumption expenditure divided by the change in disposable income. B. It is between zero and one. Page 6 of 9 ECON1020H, VERSION B C. It does not vary with the autonomous expenditure. D. It can be greater than one since consumers can borrow to spend on consumption. 24. Which one of the following is true about the expenditure multiplier? A. Everything else remaining the same, the higher the marginal propensity to consume, the larger the multiplier. B. The multiplier increases if the government raises the net tax T . C. The multiplier measures the size of the intercept of the aggregate expenditure curve. D. In the theory of the determination of real GDP in the very short run, the multiplier is less than one. Questions 25 through 27 are based on the following information: In a hypothetical economy, the aggregate consumption expenditure is given by C = 20 + 0.6Yd , where Yd is the disposable income. In the current quarter, the net tax is T = 65, and the investment expenditure is I = 30. Government budget is balanced, meaning that the government expenditure is G = 65. Finally, net exports is N X = 0. All these variables are in real values. We hold the price level fixed. 25. Let Y be the real income. Which of the following is the correct expression for the aggregate expenditure AE in the above economy? A. AE = 76+0.6Yd B. AE = 76+0.6Y C. AE = 74+2.5Y D. AE = 74+2.5Yd 26. Assume that, given a price level, firms supply as much as the aggregate expenditure in the very short run. That is, Y = AE. The equilibrium real GDP given a price level is . A. 190 B. 185 C. 180 D. undetermined 27. Suppose the government raises its expenditure from 65 to 71 without changing net taxes. This will lead to an increase of real GDP by . A. 3.6 B. 6.0 C. 15.0 D. an undetermined amount Page 7 of 9 ECON1020H, VERSION B Questions 28 and 29 are based on the following information: In the graph below, the long-run equilibrium of the aggregate economy is at point A, where the long-run aggregate supply curve (LAS) intersects the aggregate demand curve (AD0). Y ∗ is the level of real GDP at point A. The short-run equilibrium is at point B, where the short-run aggregate supply curve (SAS) intersects AD0. Y0 is the real GDP at point B and P0 is the price level at point B. 28. Suppose that the economy is currently in the short-run equilibrium (point B). Which of the following is the most plausible consequence of an increase in the government expenditure G? A. The aggregate demand curve shifts to the left, and the economy deviates further away from the long-run equilibrium. B. With a certain size of the increase in G, the aggregate demand curve shifts to the right, and the economy recovers to the original long-run equilibrium (point A). C. The aggregate demand curve shifts to the right, though the real GDP stays below the potential GDP regardless of the size of the increase in G. D. The short-run aggregate supply curve shifts to the right, and the economy reaches a longrun equilibrium with the price level lower than P ∗ . 29. When the economy is in the short-run equilibrium (point B), an increase of G by 1.0 billion dollars results in an increase of real GDP by 1.2 billion dollars. What is the implied government expenditure multiplier? A. 1.1 B. 1.0 C. 1.2 D. 0.9 Page 8 of 9 ECON1020H, VERSION B 30. Under which of the following circumstances should we observe the smallest effect on real GDP if the government raises expenditure G while keeping net tax T unchanged? A. Government has a budget surplus, monetary policy remains unchanged. B. Government has a balanced budget, monetary policy remains unchanged. C. Government has a budget deficit, monetary policy remains unchanged. D. Government has a balanced budget, central bank cuts interest rate. 31. An open market operation A. refers to the central bank’s sales and purchases of corporate stocks. B. can change bank deposits but cannot alter the quantity of money. C. refers to the purchase or sale of Canadian currency in exchange for foreign currencies. D. is the central bank’s purchases or sales of government bonds from or to banks. 32. Which of the following is true about the overnight rate? A. It is the interest rate on the reserves of banks deposited in the central bank. B. It is the interest rate at which the central bank lends funds to banks. C. It is one of the interest rates at which banks lend funds to businesses and households. D. It is the interest rate at which banks borrow and lend overnight funds among themselves. 33. Which of the following is not an effect of a higher overnight rate set by the central bank? A. A smaller quantity of goods and services demanded. B. Lower short-term nominal interest rates. C. A smaller quantity of goods and services supplied. D. A lower price level. 34. When the central bank cuts the overnight rate, A. other short-term nominal interest rates fall, the aggregate demand curve shifts rightward, raising both the real GDP and the price level. B. other short-term nominal interest rates fall, the aggregate demand curve remains unchanged, raising only the price level. C. other short-term nominal interest rates fall, the short-term aggregate supply curve shifts to the right, raising the real GDP and lowering the price level. D. other short-term nominal interest rates are unaffected, neither the aggregate demand curve nor the short-run aggregate supply curve shifts, leaving the real GDP and the price level unchanged.

Answer 1

1. If the central bank purchases government bonds in the open market operation, the quantity of money in the economy will .

Ans. B. increase

Exp: When central bank purchases government bonds, it is an example of expansionary monetary policy.

2. In the money market, which of the following will not shift the money demand curve?

B. A lower short-term nominal interest rate.

Explanation: Changes in nominal interest rate mean a movement along the demand curve, not a shift of the demand curve.

3. Suppose that, in an economy, nominal GDP is $1,200 billion and the velocity of money is 5.

The quantity of money is then . A. $240 billion

Explanation: Quantity of money = Nominal GDP/Velocity of Money = 1200/5 = 240

4. In macroeconomics, monetary neutrality refers to
A. the proposition that growth in money supply has no effect on real variables such as real GDP.

Explanation: According to money neutrality, real GDP can only be affected by real variables, not by change in money supply.