Q: If the reserve ratio in the banking system is 20%, what is the theoretical simple money multiplier?

$$\text{Multiplier} = \frac{1}{0.2} = 5$$

Question 1

Suppose the Bank of Canada lowers its target interest rate. According to the AD-AS model, what is the most likely short-run effect on the economy?

Accepted Answer

Aggregate demand shifts to the right, increasing real GDP and the price level.

Question 2

Which of the following best explains why the short-run aggregate supply (SRAS) curve is upward sloping?

Accepted Answer

Because wages and some input prices are sticky in the short run, so higher prices increase firm profits and output.

Question 3

If the government increases its spending while all other components of aggregate demand remain unchanged, which equation shows the immediate effect on aggregate demand?

Accepted Answer

$$AD = C + I + (G + \Delta G) + NX$$

Question 4

A negative supply shock, such as a sudden increase in oil prices, will most likely cause which of the following in the short run?

Accepted Answer

A leftward shift of the SRAS curve, decreasing output and increasing prices.

Question 5

Which of the following is NOT a function of money?

Accepted Answer

Source of economic growth

Question 6

If the reserve ratio in the banking system is 20%, what is the theoretical simple money multiplier?

Accepted Answer

$$	ext{Multiplier} = \frac{1}{0.2} = 5$$

Question 7

Which of the following scenarios would cause a movement along the aggregate demand curve, rather than a shift?

Accepted Answer

A decrease in the price level due to lower inflation.

Question 8

Suppose the Bank of Canada sells government bonds on the open market. What is the expected effect on the money supply and aggregate demand?

Accepted Answer

Money supply decreases, shifting AD to the left.

Question 9

Which of the following best describes the difference between commodity money and fiat money?

Accepted Answer

Commodity money has intrinsic value, while fiat money's value is based on government trust.

Question 10

If the Canadian dollar appreciates relative to other currencies, what is the likely effect on net exports and aggregate demand?

Accepted Answer

Net exports decrease, shifting AD to the left.

Question 11

Which of the following is a limitation of monetary policy, especially when interest rates are near zero?

Accepted Answer

Liquidity trap

Question 12

In the long run, what determines the position of the long-run aggregate supply (LRAS) curve?

Accepted Answer

The economy's productive capacity, such as labour, capital, and technology

Question 13

Which of the following policies would be most appropriate for the Bank of Canada to use during a period of high inflation?

Accepted Answer

Contractionary monetary policy

Question 14

If people in the economy decide to hold more cash and deposit less in banks, what happens to the real-world money multiplier?

Accepted Answer

It decreases because less money is available for banks to lend.

Question 15

Which of the following best describes the wealth effect as it relates to aggregate demand?

Accepted Answer

As the price level rises, the real value of household wealth falls, leading to less consumption.

Question 16

A country experiences an increase in technology and a larger workforce. What is the likely effect on the LRAS curve?

Accepted Answer

LRAS shifts to the right, indicating higher potential output.

Question 17

Which of the following best describes the main goal of contractionary monetary policy?

Accepted Answer

To reduce inflation by decreasing aggregate demand

Question 18

If the Bank of Canada wants to use open market operations to increase the money supply, what should it do?

Accepted Answer

Buy government bonds from the public

Question 19

Which of the following would cause a leftward shift in the short-run aggregate supply (SRAS) curve?

Accepted Answer

An increase in raw material costs

Question 20

Suppose the economy is in a recessionary gap. Which combination of fiscal and monetary policy would most likely return the economy to long-run equilibrium?

Accepted Answer

Increase government spending and lower interest rates

Macroeconomics Study Notes: Aggregate Demand & Supply, Money & Banking, and Monetary Policy (Ch. 9–11)

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