Question 1

According to the liquidity preference theory, what is the opportunity cost of holding money?

Accepted Answer

The short-term nominal interest rate

Question 2

If the central bank increases the money supply through open-market operations, what is the immediate effect on the bond market?

Accepted Answer

Bond prices rise and interest rates fall

Question 3

Suppose the price level in an economy increases while real GDP remains constant. What happens to the demand for money, according to the liquidity preference theory?

Accepted Answer

The demand for money increases

Question 4

Given the bond price formula $$i = \frac{100}{P_b} - 1$$, where $$P_b is $$the bond price, what is the interest rate if the bond price is $80?

Accepted Answer

$$i = 0.25 or 25$$%

Question 5

Which of the following best describes the effect of an expansionary monetary policy in a closed economy in the short run?

Accepted Answer

Higher price level, lower interest rate, and higher real GDP

Question 6

In a small open economy with perfect capital mobility and flexible exchange rates, what is the long-run effect of an increase in the money supply on the domestic interest rate?

Accepted Answer

It remains equal to the world interest rate

Question 7

If the central bank wants to lower the policy interest rate, which of the following actions should it take?

Accepted Answer

Buy short-term government bonds in the open market

Question 8

Which of the following statements about the zero lower bound (ZLB) is correct?

Accepted Answer

The ZLB means there is a limit to how much monetary policy can stimulate the economy

Question 9

During the COVID-19 pandemic, the Bank of Canada switched from a corridor system to a floor system. What was a likely reason for this change?

Accepted Answer

To ensure the policy interest rate remained at the lower bound

Question 10

Which of the following is an example of quantitative easing?

Accepted Answer

The central bank purchases long-term government bonds

Question 11

Suppose the central bank sells $$10$$ billion in short-term government bonds. What is the expected effect on the money supply and the nominal interest rate?

Accepted Answer

Money supply decreases, nominal interest rate rises

Question 12

If the real interest rate is $$2\%$$ and the expected inflation rate is $$3\%$$, what is the nominal interest rate?

Accepted Answer

$$5\%$$

Question 13

Which of the following would shift the money demand curve to the right?

Accepted Answer

An increase in the price level

Question 14

In the money market, if the interest rate is above equilibrium, what will happen?

Accepted Answer

There will be excess supply of money, leading people to buy bonds and push bond prices up

Question 15

Which of the following best explains why a lower bond price implies a higher interest rate?

Accepted Answer

Because the interest rate is inversely related to the bond price, as shown by $$i = \frac{100}{P_b} - 1$$

Question 16

If a small open economy adopts a fixed exchange rate regime, what happens to the central bank's ability to conduct independent monetary policy?

Accepted Answer

The central bank loses its ability to change the money supply

Question 17

Which of the following is NOT a typical tool of conventional monetary policy?

Accepted Answer

Quantitative easing

Question 18

Suppose the central bank wants to reduce inflation that is above its target. What should it do?

Accepted Answer

Raise the policy interest rate

Question 19

Which of the following best describes the relationship between the money market and the loanable funds market?

Accepted Answer

The money market determines the nominal interest rate, while the loanable funds market determines the real interest rate

Question 20

After an increase in the money supply in a small open economy with flexible exchange rates, what is the expected effect on net exports?

Accepted Answer

Net exports increase due to currency depreciation

Monetary Policy: Theory, Mechanisms, and Pandemic Response (ECON-1020H Chapter 15 Study Notes)

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