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The Economics Of Money Banking And Financial Markets 6th Canadian Edition By Mishkin – Test Bank 

 

 

 

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Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 1   Why Study Money, Banking, and Financial Markets?

 

1.1   Why Study Financial Markets?

 

1) Financial markets promote economic efficiency by ________.

  1. A) channelling funds from investors to savers
  2. B) creating inflation
  3. C) channelling funds to those who have a productive use for them
  4. D) reducing investment

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

2) Well-functioning financial markets promote ________.

  1. A) inflation
  2. B) deflation
  3. C) unemployment
  4. D) economic growth

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

3) A key factor in producing high economic growth is ________.

  1. A) eliminating foreign trade
  2. B) well-functioning financial markets
  3. C) high interest rates
  4. D) stock market volatility

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

4) Markets in which funds are transferred from those who do not have a productive use for them to those who do are called ________.

  1. A) commodity markets
  2. B) fund-available markets
  3. C) derivative exchange markets
  4. D) financial markets

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

5) ________ markets transfer funds from people who do not have a productive use for them to people who do.

  1. A) Commodity
  2. B) Fund-available
  3. C) Financial
  4. D) Derivative exchange

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

6) Poorly performing financial markets can be the cause of ________.

  1. A) wealth
  2. B) poverty
  3. C) financial stability
  4. D) financial expansion

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

7) The bond markets are important because they are ________.

  1. A) easily the most widely followed financial markets in Canada
  2. B) the markets where foreign exchange rates are determined
  3. C) where corporations and governments borrow to finance their activities
  4. D) the markets where all borrowers get their funds

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

8) A security is also known as ________.

  1. A) a financial instrument
  2. B) a contingent claim
  3. C) the interest rate
  4. D) a liability

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

 

9) A bond is ________.

  1. A) not as good as investment as stocks
  2. B) pays interest sporadically
  3. C) never pays interest
  4. D) makes payments periodically for a specified period of time

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

10) The fluctuation of interest rates ________.

  1. A) never occurs because the central bank is involved in setting the rate
  2. B) is due to changes in stock prices
  3. C) cannot occur because there is only one interest rate
  4. D) impacts all Canadians

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

11) The cost of borrowing is commonly referred to as the ________.

  1. A) inflation rate
  2. B) exchange rate
  3. C) interest rate
  4. D) aggregate price level

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

12) Compared to interest rates on long-term bonds, interest rates on three-month Treasury bills fluctuate ________ and are ________ on average.

  1. A) more; lower
  2. B) less; lower
  3. C) more; higher
  4. D) less; higher

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

 

13) The interest rate on long-term corporate bonds is ________, on average, than other interest rates. The spread between it an other rates ________ over time.

  1. A) lower; remains constant
  2. B) lower; fluctuates
  3. C) higher; remains constant
  4. D) higher; fluctuates

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

14) Everything else held constant, a rise in interest rates will cause spending on housing to ________.

  1. A) rise
  2. B) remain unchanged
  3. C) either rise, fall, or remain the same
  4. D) fall

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.1 Recognize the importance of financial markets in the economy.

15) High interest rates might ________ purchasing a house or car but at the same time high interest rates might ________ saving.

  1. A) discourage; encourage
  2. B) discourage; discourage
  3. C) encourage; encourage
  4. D) encourage; discourage

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

16) An increase in interest rates might ________ saving because more can be earned in interest income.

  1. A) encourage
  2. B) discourage
  3. C) disallow
  4. D) invalidate

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

 

17) Everything else held constant, an increase in interest rates on student loans ________.

  1. A) may increase the cost of education
  2. B) may reduce the cost of education
  3. C) has no effect on educational costs
  4. D) increases costs for students with no loans

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

18) A common stock ________.

  1. A) cannot be purchased by individuals
  2. B) is also known as a debt security
  3. C) is a share of ownership in a corporation
  4. D) is a claim on assets

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

19) A share of common stock is a claim on a corporation’s ________.

  1. A) debt
  2. B) liabilities
  3. C) expenses
  4. D) earnings and assets

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

20) Lower interest rates might cause a corporation to ________ building a new plant that would provide more jobs.

  1. A) complete
  2. B) postpone
  3. C) consider
  4. D) start

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

 

21) Bonds of different maturities ________.

  1. A) show no common features
  2. B) have interest rates that tend to move together
  3. C) have interest rates that can differ substantially
  4. D) B and C only

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

22) The stock market is important because it is ________.

  1. A) where interest rates are determined
  2. B) the most widely followed financial market in the Canada
  3. C) where foreign exchange rates are determined
  4. D) the market where most borrowers get their funds

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

23) Stock prices, as measured by the S&P/TSX Composite Index, ________.

  1. A) have not changed much over time
  2. B) have risen smoothly over time
  3. C) have been extremely volatile over time
  4. D) have declined substantially since they peaked in the mid 1980s

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

24) Stock prices are ________.

  1. A) relatively stable trending upward at a steady pace
  2. B) relatively stable trending downward at a moderate rate
  3. C) extremely volatile
  4. D) unstable trending downward at a moderate rate

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

25) Changes in stock prices ________.

  1. A) do not affect people’s wealth and their willingness to spend
  2. B) affect firms’ decisions to sell stock to finance investment spending
  3. C) are predictable
  4. D) are unimportant to decision makers

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

26) A ________ is an example of a security, which is a claim on future income or ________.

  1. A) bond; interest rate
  2. B) bond; debt
  3. C) stock; assets
  4. D) stock; debt

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

27) On ________, October 19, 1987, the market experienced its worst one-day drop in its entire history with the S&P/TSX Composite falling by 11 percent.

  1. A) “Terrible Tuesday”
  2. B) “Woeful Wednesday”
  3. C) “Freaky Friday”
  4. D) “Black Monday”

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

28) Fluctuations in stock prices ________.

  1. A) have become less smaller since the year 2000
  2. B) since the year 2000 are about the same as they were before the year 2000
  3. C) have become more volatile since the year 2000
  4. D) have been almost eliminated since the year 2000

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

 

29) The S&P/TSX Composite reached a peak of over 14000 in 2008 and then fell by ________.

  1. A) 10%
  2. B) 30%
  3. C) 50%
  4. D) 70%

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

30) Why is it important to understand the bond market?

Answer:  The bond market supports economic activity by enabling the government and corporations to borrow to undertake their projects and it is the market where interest rates are determined.

Diff: 2      Type: ES

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

31) What is a stock? How do stocks affect the economy?

Answer:  A stock represents a share of ownership of a corporation, or a claim on a firm’s earnings/assets. Stocks are part of wealth, and changes in their value affect people’s willingness to spend. Changes in stock prices affect a firm’s ability to raise funds, and thus their investment.

Diff: 2      Type: ES

Skill:  Recall

Objective:  1.1 Recognize the importance of financial markets in the economy.

 

 

1.2   Why Study Financial Institutions and Banking?

 

1) Channelling funds from individuals with savings to those desiring funds when the saver does not purchase the borrower’s security is known as ________.

  1. A) barter
  2. B) redistribution
  3. C) financial intermediation
  4. D) taxation

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.2 Describe how financial intermediation and financial innovation affect banking and the economy

 

2) A financial crisis is ________.

  1. A) not possible in the modern financial environment
  2. B) a major disruption in the financial markets
  3. C) a feature of developing economies only
  4. D) typically followed by an economic boom

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.2 Describe how financial intermediation and financial innovation affect banking and the economy

 

3) Banks are important to the study of money and the economy because they ________.

  1. A) channel funds from investors to savers
  2. B) have been a source of rapid financial innovation
  3. C) are the only important financial institution in the US economy
  4. D) create inflation

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.2 Describe how financial intermediation and financial innovation affect banking and the economy

4) Financial crises are characterized by ________.

  1. A) surging employment
  2. B) hyperinflation
  3. C) decline in asset prices
  4. D) high profits in the financial sector

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.2 Describe how financial intermediation and financial innovation affect banking and the economy

 

5) Chartered banks, trust and mortgage loan companies, and credit unions and caisses populaires ________.

  1. A) no longer provide financial intermediation
  2. B) since deregulation now provide services only to small depositors
  3. C) accept deposits and make loans
  4. D) create fluctuations in the stock market

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  1.2 Describe how financial intermediation and financial innovation affect banking and the economy

 

6) Banks ________.

  1. A) are the smallest of the financial intermediaries
  2. B) are the largest financial intermediaries
  3. C) are barred from providing financial intermediation services
  4. D) can only provide services to corporations

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.2 Describe how financial intermediation and financial innovation affect banking and the economy

 

7) Financial institutions that accept deposits and make loans include ________.

  1. A) exchanges
  2. B) banks
  3. C) over-the-counter markets
  4. D) finance companies

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.2 Describe how financial intermediation and financial innovation affect banking and the economy

8) Which of the following are the largest financial intermediaries in the Canadian economy?

  1. A) Insurance companies
  2. B) Finance companies
  3. C) Banks
  4. D) Mutual funds

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.2 Describe how financial intermediation and financial innovation affect banking and the economy

 

 

9) The term “bank” generally includes all of the following institutions except ________.

  1. A) chartered banks
  2. B) credit unions
  3. C) trust and mortgage loan companies
  4. D) finance companies

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.2 Describe how financial intermediation and financial innovation affect banking and the economy

 

10) The delivery of financial services electronically is called ________.

  1. A) e-business
  2. B) e-commerce
  3. C) e-finance
  4. D) e-possible

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.2 Describe how financial intermediation and financial innovation affect banking and the economy

 

11) Financial innovation can lead to ________ and ________.

  1. A) phishing; financial gain
  2. B) higher interest rates; higher inflation
  3. C) higher profits; financial disasters
  4. D) lower interest rates; lower inflation

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.2 Describe how financial intermediation and financial innovation affect banking and the economy

 

12) What crucial role do financial intermediaries perform in an economy?

Answer:  Financial intermediaries borrow funds from people who have saved and make loans to other individuals and businesses and thus improve the efficiency of the economy.

Diff: 1      Type: ES

Skill:  Recall

Objective:  1.2 Describe how financial intermediation and financial innovation affect banking and the economy

 

13) Why is the study of financial innovation important?

Answer:  Financial innovation shows how creative thinking on the part of financial institutions can lead to higher profits.

Diff: 2      Type: ES

Skill:  Recall

Objective:  1.2 Describe how financial intermediation and financial innovation affect banking and the economy

 

1.3   Why Study Money and Monetary Policy?

 

1) Money is defined as ________.

  1. A) bills of exchange
  2. B) anything that is generally accepted in payment for goods and services or in the repayment of debt
  3. C) a repository of spending power
  4. D) the unrecognized liability of governments

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

2) The upward and downward movement of aggregate output produced in the economy is referred to as the ________.

  1. A) roller coaster
  2. B) see saw
  3. C) business cycle
  4. D) shock wave

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

3) Sustained downward movements in the business cycle are referred to as ________.

  1. A) inflation
  2. B) recessions
  3. C) economic recoveries
  4. D) expansions

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

4) During a recession, output declines resulting in ________.

  1. A) lower unemployment in the economy
  2. B) higher unemployment in the economy
  3. C) no impact on the unemployment in the economy
  4. D) higher wages for the workers

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

5) Prior to all recessions, there has been a drop in ________.

  1. A) inflation
  2. B) the money stock
  3. C) the rate of money growth
  4. D) interest rates

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

6) Evidence from business cycle fluctuations in Canada indicates that ________.

  1. A) a negative relationship between money growth and general economic activity exists
  2. B) recessions have been preceded by declines in share prices on the stock exchange
  3. C) recessions have been preceded by dollar depreciation
  4. D) recessions have been preceded by a decline in the growth rate of money

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

7) ________ theory relates changes in the quantity of money to changes in aggregate economic activity and the price level.

  1. A) Monetary
  2. B) Fiscal
  3. C) Financial
  4. D) Systemic

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

8) A sharp increase in the growth of the money supply is likely followed by ________.

  1. A) a recession
  2. B) a depression
  3. C) an increase in the inflation rate
  4. D) no change in the economy

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

9) Inflation ________.

  1. A) can be explained by changes in the price level and money supply
  2. B) cannot be explained historically
  3. C) is unrelated to monetary variables
  4. D) changes in government policy

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

10) The average price of goods and services in the economy is called ________.

  1. A) the aggregate price level
  2. B) inflation
  3. C) interest rates
  4. D) deflation

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

11) It is true that inflation is a ________.

  1. A) continual increase in the money supply
  2. B) continuous fall in prices
  3. C) decline in interest rates
  4. D) continual increase in the price level

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

12) Which of the following is a true statement?

  1. A) Money or the money supply is defined as Bank of Canada notes.
  2. B) The average price of goods and services in an economy is called the aggregate price level.
  3. C) The inflation rate is measured as the rate of change in the federal government budget deficit.
  4. D) The aggregate price level is measured as the rate of change in the inflation rate.

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

13) If ten years ago the prices of the items bought last month by the average consumer would have been much lower, then one can likely conclude that ________.

  1. A) the aggregate price level has declined during this ten-year period
  2. B) the average inflation rate for this ten-year period has been positive
  3. C) the average rate of money growth for this ten-year period has been positive
  4. D) the aggregate price level has risen during this ten-year period

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

14) From 1968-2014 the price level in Canada increased more than ________.

  1. A) twofold
  2. B) threefold
  3. C) sixfold
  4. D) ninefold

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

15) Complete Milton Friedman’s famous statement, “Inflation is always and everywhere a ________ phenomenon.”

  1. A) recessionary
  2. B) discretionary
  3. C) repressionary
  4. D) monetary

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

16) There is a ________ association between inflation and the growth rate of money ________.

  1. A) positive; demand
  2. B) positive; supply
  3. C) negative; demand
  4. D) negative; supply

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

17) Evidence from Canada and other foreign countries indicates that ________.

  1. A) there is a strong positive association between inflation and growth rate of money supply over long periods of time
  2. B) there is little support for the assertion that “inflation is always and everywhere a monetary phenomenon”
  3. C) countries with low monetary growth rates tend to experience higher rates of inflation, all else being constant
  4. D) money growth is clearly unrelated to inflation

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

18) Countries with low inflation rates include ________.

  1. A) Canada, Sweden and the United States
  2. B) Canada, Ukraine and the United States
  3. C) Turkey, Ukraine and Zambia
  4. D) Turkey, Ukraine and Canada

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

19) Countries that experience very high rates of inflation may also have ________.

  1. A) balanced budgets
  2. B) rapidly growing money supplies
  3. C) falling money supplies
  4. D) constant money supplies

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

20) In the 1970s, in Canada, interest rates trended upward. During this same time period, ________.

  1. A) the rate of money growth declined
  2. B) the rate of money growth increased
  3. C) the government budget deficit (expressed as a percentage of GNP) trended downward
  4. D) inflation fell

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

21) The management of money and interest rates is called ________ policy and is conducted by a nation’s ________ bank.

  1. A) debt; superior
  2. B) fiscal; superior
  3. C) fiscal; central
  4. D) monetary; central

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

22) ________ policy involves decisions about government spending and taxation.

  1. A) Monetary
  2. B) Fiscal
  3. C) Risk Management
  4. D) Systemic

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

23) When tax revenues are greater than government expenditures, the government has a budget ________.

  1. A) crisis
  2. B) deficit
  3. C) surplus
  4. D) revision

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

24) A budget ________ occurs when government expenditures exceed tax revenues for a particular time period.

  1. A) deficit
  2. B) surplus
  3. C) surge
  4. D) surfeit

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

25) Budget deficits can be a concern because they might ________.

  1. A) ultimately lead to higher inflation
  2. B) lead to lower interest rates
  3. C) lead to a slower rate of money growth
  4. D) lead to higher bond prices

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

26) Budget deficits are important because deficits ________.

  1. A) cause bank failures
  2. B) always cause interest rates to fall
  3. C) may lead to a financial crisis
  4. D) always cause prices to fall

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

27) What happens to economic growth and unemployment during a business cycle recession? What is the relationship between the money growth rate and a business cycle recession?

Answer:  During a recession, output declines and unemployment increases. Prior to every recession in Canada the money growth rate has declined, however, not every decline is followed by a recession.

Diff: 2      Type: ES

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

 

 

28) Describe the relationship between the aggregate price level and the growth rate in money supply. Can the relationship be used to explain inflation?

Answer:  The price level and the money supply generally move closely together. There is a positive relationship between inflation and the growth rate of the money supply. Friedman says that “inflation is always and everywhere a monetary phenomenon.”

Diff: 2      Type: ES

Skill:  Recall

Objective:  1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

1.4   Why Study International Finance?

 

1) Canadian companies can borrow funds ________.

  1. A) only in Canadian financial markets
  2. B) only in foreign financial markets
  3. C) in both Canadian and foreign financial markets
  4. D) only from the Canadian government

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.4 Explain the importance of exchange rates in a global economy

 

2) The price of one country’s currency in terms of another country’s currency is called the ________.

  1. A) foreign exchange rate
  2. B) interest rate
  3. C) TSE index
  4. D) inflation rate

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.4 Explain the importance of exchange rates in a global economy

 

3) The foreign exchange rate is ________.

  1. A) determined by the banks
  2. B) not important to Canadian individuals
  3. C) the relative price of two currencies
  4. D) the ratio of the foreign aggregate price level to the domestic aggregate price level

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.4 Explain the importance of exchange rates in a global economy

 

 

4) The market where one currency is converted into another currency is called the ________ market.

  1. A) security
  2. B) bond
  3. C) derivatives
  4. D) foreign exchange

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.4 Explain the importance of exchange rates in a global economy

 

5) Everything else constant, a stronger Canadian dollar will mean that ________.

  1. A) vacationing in England becomes more expensive
  2. B) vacationing in England becomes less expensive
  3. C) French cheese becomes more expensive
  4. D) Japanese cars become more expensive

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.4 Explain the importance of exchange rates in a global economy

6) Which of the following is most likely to result from a stronger Canadian dollar?

  1. A) Canadian goods exported aboard will cost less in foreign countries, and so foreigners will buy more of them.
  2. B) Canadian goods exported aboard will cost more in foreign countries and so foreigners will buy more of them.
  3. C) Canadian goods exported abroad will cost more in foreign countries, and so foreigners will buy fewer of them.
  4. D) Canadians will purchase fewer foreign goods.

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.4 Explain the importance of exchange rates in a global economy

 

7) Everything else held constant, a weaker Canadian dollar will likely hurt ________.

  1. A) textile exporters in Quebec
  2. B) wheat farmers in Saskatchewan that sell domestically
  3. C) automobile manufacturers in Ontario that use domestically produced inputs
  4. D) furniture importers in British Columbia

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.4 Explain the importance of exchange rates in a global economy

 

 

8) Everything else held constant, Canadians who love French wine benefit most from ________.

  1. A) a decrease in the dollar price of euros
  2. B) an increase in the dollar price of euros
  3. C) a constant dollar price for euros
  4. D) a ban on imports from Europe

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.4 Explain the importance of exchange rates in a global economy

 

9) Everything else held constant, a stronger Canadian dollar benefits ________ and hurts ________.

  1. A) Canadian businesses; Canadian consumers
  2. B) Canadian businesses; foreign businesses
  3. C) Canadian consumers; Canadian businesses
  4. D) foreign businesses; Canadian consumers

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.4 Explain the importance of exchange rates in a global economy

 

10) From 2002 to 2011, the Canadian dollar ________ in value.

  1. A) appreciated by approximately 25%
  2. B) appreciated by approximately 50%
  3. C) depreciated by approximately 50%
  4. D) depreciated by approximately 25%

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  1.4 Explain the importance of exchange rates in a global economy

11) When in 1985 a British pound cost approximately C$1.30, a Shetland sweater that cost 100 British pounds would have cost $130. With a weaker Canadian dollar, the same Shetland sweater would have cost ________.

  1. A) less than $130
  2. B) more than $130
  3. C) $130, since the exchange rate does not affect the prices that Canadian consumers pay for foreign goods
  4. D) $130, since the demand for Shetland sweaters will decrease to prevent an increase in price due to the stronger dollar

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.4 Explain the importance of exchange rates in a global economy

 

12) Everything else held constant, a decrease in the value of the Canadian dollar relative to all foreign currencies means that the price of foreign goods purchased by Canadians ________.

  1. A) increases
  2. B) decreases
  3. C) remains unchanged
  4. D) increases initially but then decreases

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  1.4 Explain the importance of exchange rates in a global economy

 

13) Canadian farmers who sell beef to Europe benefit most from ________.

  1. A) a decrease in the Canadian dollar price of euros
  2. B) an increase in the Canadian dollar price of euros
  3. C) a constant Canadian dollar price for euros
  4. D) a European ban on imports of Canadian beef

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.4 Explain the importance of exchange rates in a global economy

 

14) If the Canadian dollar price of a euro increases from $1.00 to $1.10, then, everything else held constant, ________.

  1. A) a European vacation becomes less expensive
  2. B) a European vacation becomes more expensive
  3. C) the cost of a European vacation is not affected
  4. D) foreign travel becomes impossible

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  1.4 Explain the importance of exchange rates in a global economy

15) From 2002-2011, the dollar strengthened in value against other currencies. Who was helped and who was hurt by this strong dollar?

Answer:  Canadian consumers benefitted because imports were cheaper and consumers could purchase more. Canadian businesses and workers in those businesses were hurt as domestic and foreign sales of Canadian products fell.

Diff: 2      Type: ES

Skill:  Applied

Objective:  1.4 Explain the importance of exchange rates in a global economy

 

 

1.5   Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

1) The most comprehensive measure of aggregate output is ________.

  1. A) gross domestic product
  2. B) net national product
  3. C) the TSE Index
  4. D) national income

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

2) The gross domestic product is the ________.

  1. A) the value of all wealth in an economy
  2. B) the value of all goods and services sold to other nations in a year
  3. C) the market value of all final goods and services produced in an economy in a year
  4. D) the market value of all intermediate goods and services produced in an economy in a year

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

3) You buy a second hand car from a dealer. Which of the following items are counted in Canadian GDP?

  1. A) No part of the purchase price as this car was manufactured in an earlier year
  2. B) The portion of the purchase price attributable to repairs made by the dealer
  3. C) The portion of the purchase price attributable to both repairs and commissions to the salesman
  4. D) The portion of the purchase price attributable to repairs, commissions and profits to the dealer

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

4) If an economy has aggregate output of $2 trillion, then aggregate income is ________.

  1. A) $1 trillion
  2. B) $2 trillion
  3. C) $3 trillion
  4. D) $4 trillion

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

5) When the total value of final goods and services is calculated using current prices, the resulting measure is referred to as ________.

  1. A) real GDP
  2. B) the GDP deflator
  3. C) nominal GDP
  4. D) the index of leading indicators

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

6) Nominal GDP is output measured in ________ prices while real GDP is output measured in ________ prices.

  1. A) current; current
  2. B) current; fixed
  3. C) fixed; fixed
  4. D) fixed; current

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

7) GDP measured with constant prices is referred to as ________.

  1. A) real GDP
  2. B) nominal GDP
  3. C) the GDP deflator
  4. D) industrial production

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

8) If your nominal income in 2013 was $30000, and prices doubled between 2002 and 2013, to have the same real income, your nominal income in 2002 must be ________.

  1. A) $10000
  2. B) $15000
  3. C) $20000
  4. D) $100,000

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

9) If your nominal income in 2002 is $50000, and prices increase by 50 percent between 2002 and 2013, then to have the same real income, your nominal income in 2013 must be ________.

  1. A) $50000
  2. B) $75000
  3. C) $100,000
  4. D) $150,000

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

10) To convert a nominal GDP to a real GDP, you would use ________.

  1. A) the PCE deflator
  2. B) the CPI measure
  3. C) the GDP deflator
  4. D) the PPI measure

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

11) If nominal GDP in 2013 is $10 trillion, and 2013 real GDP in 2002 prices is $9 trillion, the GDP deflator price index is ________.

  1. A) 1
  2. B) 1.1
  3. C) 11
  4. D) 100

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

12) When prices are measured in terms of fixed (base-year) prices they are called ________ prices.

  1. A) nominal
  2. B) real
  3. C) inflated
  4. D) aggregate

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

13) The measure of the aggregate price level that is most frequently reported in the media is the ________.

  1. A) GDP deflator
  2. B) producer price index
  3. C) consumer price index
  4. D) household price index

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

14) To calculate the growth rate of a variable, you will ________.

  1. A) calculate the percentage change from one time period to the next
  2. B) calculate the difference between the two variables
  3. C) add the ending value to the beginning value
  4. D) divide the increase by the number of time periods

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

15) If real GDP grows to $9.5 trillion in 2014 from $9 trillion in 2013, the growth rate for real GDP is ________.

  1. A) 6 percent
  2. B) 10 percent
  3. C) 5 percent
  4. D) 0.5 percent

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

16) If real GDP in 2013 is $10 trillion, and in 2014 real GDP is $9.5 trillion, then real GDP growth from 2013 to 2014 is ________.

  1. A) 0.5 percent
  2. B) 5 percent
  3. C) 0 percent
  4. D) -5 percent

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

17) If the aggregate price level at time t is denoted by Pt, the inflation rate from time t – 1 to t is defined as

  1. A) = (- )/
  2. B) = (Pt + 1- Pt – 1)/ Pt – 1
  3. C) = (Pt + 1- Pt)/ Pt
  4. D) = (Pt- Pt – 1)/ Pt

Answer:  A

Diff: 3      Type: MC

Skill:  Applied

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

18) If the price level increases from 200 in year 1 to 220 in year 2, the rate of inflation from year 1 to year 2 is ________.

  1. A) 20 percent
  2. B) 10 percent
  3. C) 11 percent
  4. D) 120 percent

Answer:  B

Diff: 3      Type: MC

Skill:  Applied

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

 

19) If the CPI is 120 in 2002 and 180 in 2012, then between 2002 and 2012, prices have increased by ________.

  1. A) 180 percent
  2. B) 80 percent
  3. C) 60 percent
  4. D) 50 percent

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

20) If the CPI in 2012 is 200, and in 2013 the CPI is 180, the rate of inflation from 2012 to 2013 is ________.

  1. A) 20 percent
  2. B) 10 percent
  3. C) 0 percent
  4. D) -10 percent

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

21) What is measured by the Gross Domestic Product (GDP)? what is included and what is excluded in the calculation of GDP?

Answer:  GDP is the most commonly used measure of aggregate output. It is the market value of all final goods and services produced in the economy during the course of a year. In calculating the GDP we exclude two sets of items. First, we exclude all goods that have been produced in the past, and not in the measured year, and second we exclude all intermediate goods as their value is included in the value of the final goods.

Diff: 2      Type: ES

Skill:  Recall

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

22) Are the following transactions included in the calculation of the GDP? Why?

  1. books you buy from the university bookstore
  2. purchase of government bonds
  3. writing a cheque to your dentist for his services
  4. purchase by a car manufacturer of tyres for the produced vehicles

Answer:

  1. Yes, it is a purchase of a final good, the book.
  2. No, purchases of stocks and bonds are not included in the calculation of the GDP.
  3. Yes, it is a service that should be included in the GDP.
  4. No, because the tyres for the car manufacturer are an intermediate good and as such it is not included in the calculation of the GDP.

Diff: 2      Type: ES

Skill:  Applied

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

23) What is the aggregate income? How is the aggregate income related to the gross domestic product?

Answer:  Aggregate income is the total income of factors of production. It is equal to aggregate output.

Diff: 2      Type: ES

Skill:  Recall

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

24) Why is the real GDP a better measure of economic activity than nominal GDP?

Answer:  Real GDP is a more reliable measure because values are measured in terms of fixed prices.

Diff: 2      Type: ES

Skill:  Recall

Objective:  Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate

 

Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 3   What Is Money?

 

3.1   Meaning of Money

 

1) A person’s house is part of her ________.

  1. A) money
  2. B) income
  3. C) liabilities
  4. D) wealth

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

 

2) Money is ________.

  1. A) anything that is generally accepted in payment for goods and services or in the repayment of debt
  2. B) a flow of earnings per unit of time
  3. C) the total collection of pieces of property that are a store of value
  4. D) always based on a precious metal like gold or silver

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

 

3) To an economist, ________ is anything that is generally accepted in payment for goods and services or in the repayment of debt.

  1. A) wealth
  2. B) income
  3. C) money
  4. D) credit

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

 

4) Currency is defined as ________.

  1. A) anything accepted for payment of goods and services
  2. B) paper money and coins
  3. C) a unit of account
  4. D) foreign exchange

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

5) Money is ________.

  1. A) the same as currency
  2. B) anything that is generally accepted in payment of goods or services or in the repayment of debts
  3. C) not used as a unit of account
  4. D) defined as paper money and coins

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

 

6) Currency includes ________.

  1. A) paper money and coins
  2. B) paper money, coins, and cheques
  3. C) paper money and cheques
  4. D) paper money, coins, cheques, and savings deposits

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

 

7) There is no single precise measure of money or the money supply for economists because ________.

  1. A) the government considers money supply statistics to be confidential and refuses to publish them
  2. B) deciding what is generally accepted in payment for goods and services or in the repayment of debt is difficult to determine
  3. C) economists cannot agree if currency should be considered money
  4. D) definitions change all the time

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

 

8) Even economists have no single, precise definition of money because ________.

  1. A) money supply statistics are a state secret
  2. B) the Bank of Canada does not employ or report different measures of the money supply
  3. C) the “moneyness” or liquidity of an asset is a matter of degree
  4. D) economists find disagreement interesting and refuse to agree for ideological reasons

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

 

 

9) The total collection of pieces of property that serve to store value is a person’s ________.

  1. A) wealth
  2. B) income
  3. C) money
  4. D) credit

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

10) ________ is used to make purchases while ________ is the total collection of pieces of property that serve to store value.

  1. A) Money; income
  2. B) Wealth; income
  3. C) Income; money
  4. D) Money; wealth

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

 

11) ________ is a flow of earnings per unit of time.

  1. A) Income
  2. B) Money
  3. C) Wealth
  4. D) Currency

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

 

12) An individual’s annual salary is her ________.

  1. A) money
  2. B) income
  3. C) wealth
  4. D) liabilities

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

 

 

13) When we say that money is a stock variable, we mean that ________.

  1. A) the quantity of money is measured at a given point in time
  2. B) we must attach a time period to the measure
  3. C) it is sold in the equity market
  4. D) money never loses purchasing power

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

 

14) The difference between money and income is that ________.

  1. A) money is a flow and income is a stock
  2. B) money is a stock and income is a flow
  3. C) there is no difference—money and income are both stocks
  4. D) there is no difference—money and income are both flows

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

15) Income is a ________ and wealth is a ________.

  1. A) stock; flow
  2. B) flow; stock
  3. C) variable; constant
  4. D) constant; variable

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

 

16) Which of the following is a true statement?

  1. A) Money and income are flow variables.
  2. B) Money is a flow variable.
  3. C) Income is a flow variable.
  4. D) Money and income are stock variables.

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.1 Describe what money is

 

 

17) Which of the following statements uses the economists’ definition of money?

  1. A) I plan to earn a lot of money over the summer.
  2. B) Betsy is rich—she has a lot of money.
  3. C) I hope that I have enough money to buy my lunch today.
  4. D) The job with New Company gave me the opportunity to earn more money.

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  3.1 Describe what money is

 

18) In the country of Moneyland the law allows you to repay mortgage in rocks. Thus, ________.

  1. A) Moneyland is a poor country
  2. B) rocks in this country are considered as money
  3. C) money is scarce
  4. D) Moneyland is a developing country

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  3.1 Describe what money is

 

19) Explain the concepts of wealth and income and how they relate to the concept of money.

Answer:  Non-economists often use money synonymously with wealth or income.  Wealth is a stock variable that describes the total collection of property that is used to store value. Income is a flow of earnings over some period of time.  Money is a stock variable; it is a certain amount at a point of time and can be used in the payment of goods and services.

Diff: 2      Type: ES

Skill:  Applied

Objective:  3.1 Describe what money is

 

3.2   Functions of Money

 

1) If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are ________.

  1. A) bank deposits
  2. B) reserves
  3. C) money
  4. D) loanable funds

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

2) For a commodity to function effectively as money it must be ________.

  1. A) easily standardized, making it easy to ascertain its value
  2. B) difficult to make change
  3. C) deteriorate quickly so that its supply does not become too large
  4. D) hard to carry around

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

3) ________ are the time and resources spent trying to exchange goods and services.

  1. A) Bargaining costs
  2. B) Transaction costs
  3. C) Contracting costs
  4. D) Barter costs

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

4) Compared to an economy that uses a medium of exchange, in a barter economy ________.

  1. A) transaction costs are higher
  2. B) transaction costs are lower
  3. C) liquidity costs are higher
  4. D) liquidity costs are lower

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

 

5) Of money’s three functions, the one that distinguishes money from other assets is its function as a ________.

  1. A) store of value
  2. B) unit of account
  3. C) standard of deferred payment
  4. D) medium of exchange

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

6) When compared to exchange systems that rely on money, disadvantages of the barter system include ________.

  1. A) the requirement of a double coincidence of wants
  2. B) lowering the cost of exchanging goods over time
  3. C) lowering the cost of exchange to those who would specialize
  4. D) encouraging specialization and the division of labor

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

7) The conversion of a barter economy to one that uses money ________.

  1. A) increases efficiency by reducing the need to exchange goods and services
  2. B) increases efficiency by reducing the need to specialize
  3. C) increases efficiency by reducing transactions costs
  4. D) does not increase economic efficiency

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

8) Which of the following statements best explains how the use of money in an economy increases economic efficiency?

  1. A) Money increases economic efficiency because it is costless to produce.
  2. B) Money increases economic efficiency because it discourages specialization.
  3. C) Money increases economic efficiency because it decreases transactions costs.
  4. D) Money cannot have an effect on economic efficiency.

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

 

9) Which of the following is a true statement?

  1. A) The conversion of a barter economy to one that uses money increases efficiency by increasing the cost of exchange.
  2. B) The conversion of a barter economy to one that uses money increases efficiency by increasing the cost to those who wish to specialize.
  3. C) The conversion of a barter economy to one that uses money increases efficiency by reducing transactions costs.
  4. D) The conversion of a barter economy to one that uses money does not increases efficiency.

Answer:  C

Diff: 3      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

10) When economists say that money promotes ________, they mean that money encourages specialization and the division of labour.

  1. A) bargaining
  2. B) contracting
  3. C) efficiency
  4. D) greed

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

11) Money ________ transaction costs, allowing people to specialize in what they do best.

  1. A) reduces
  2. B) increases
  3. C) enhances
  4. D) eliminates

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

12) All of the following are necessary criteria for a commodity to function as money except ________.

  1. A) it must deteriorate quickly
  2. B) it must be divisible
  3. C) it must be easy to carry
  4. D) it must be widely accepted

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

 

13) Whatever a society uses as money, the distinguishing characteristic is that it must ________.

  1. A) be completely inflation proof
  2. B) be generally acceptable as payment for goods and services or in the repayment of debt
  3. C) contain gold
  4. D) be produced by the government

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

14) All but the most primitive societies use money as a medium of exchange, implying that ________.

  1. A) the use of money is economically efficient
  2. B) barter exchange is economically efficient
  3. C) barter exchange cannot work outside the family
  4. D) inflation is not a concern

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

15) Kevin purchasing concert tickets with his debit card is an example of the ________ function of money.

  1. A) medium of exchange
  2. B) unit of account
  3. C) store of value
  4. D) specialization

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

16) When money prices are used to facilitate comparisons of value, money is said to function as a ________.

  1. A) unit of account
  2. B) medium of exchange
  3. C) store of value
  4. D) payments-system ruler

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

 

17) A problem with barter exchange when there are many goods is that in a barter system ________.

  1. A) transactions costs are minimized
  2. B) there exists a multiple number of prices for each good
  3. C) there is only one store of value
  4. D) exchange of services is impossible

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

18) In a barter economy the number of prices in an economy with N goods is ________.

  1. A) [N(N – 1)]/2
  2. B) N(N/2)
  3. C) 2N
  4. D) N(N/2) – 1

Answer:  A

Diff: 3      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

19) If there are five goods in a barter economy, one needs to know ten prices in order to exchange one good for another. If, however, there are ten goods in a barter economy, then one needs to know ________ prices in order to exchange one good for another.

  1. A) 20
  2. B) 25
  3. C) 30
  4. D) 45

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

20) If there are four goods in a barter economy, then one needs to know ________ prices in order to exchange one good for another.

  1. A) 8
  2. B) 6
  3. C) 5
  4. D) 4

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

 

21) Because it is a unit of account, money ________.

  1. A) increases transaction costs
  2. B) reduces the number of prices that need to be calculated
  3. C) does not earn interest
  4. D) discourages specialization

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

22) Dennis notices that jackets are on sale for $99. In this case money is functioning as a ________.

  1. A) medium of exchange
  2. B) unit of account
  3. C) store of value
  4. D) payments-system ruler

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

23) As a store of value, money ________.

  1. A) does not earn interest
  2. B) cannot be a durable asset
  3. C) must be currency
  4. D) is a way of saving for future purchases

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

24) Patrick places his pocket change into his savings bank on his desk each evening. By his actions, Patrick indicates that he believes that money is a ________.

  1. A) medium of exchange
  2. B) unit of account
  3. C) store of value
  4. D) unit of specialization

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

 

25) ________ is the relative ease and speed with which an asset can be converted into a medium of exchange.

  1. A) Efficiency
  2. B) Liquidity
  3. C) Deflation
  4. D) Specialization

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

26) Increasing transactions costs of selling an asset make the asset ________.

  1. A) more valuable
  2. B) more liquid
  3. C) less liquid
  4. D) more moneylike

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

27) Since it does not have to be converted into anything else to make purchases, ________ is the most liquid asset.

  1. A) money
  2. B) stock
  3. C) artwork
  4. D) gold

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

28) Of the following assets, the least liquid is ________.

  1. A) stocks
  2. B) travellers cheques
  3. C) chequing deposits
  4. D) a house

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

29) Ranking assets from most liquid to least liquid, the correct order is ________.

  1. A) savings bonds; house; currency
  2. B) currency; savings bonds; house
  3. C) currency; house; savings bonds
  4. D) house; savings bonds; currency

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

30) People hold money even during inflationary episodes when other assets prove to be better stores of value. This can be explained by the fact that money is all of the following except ________.

  1. A) perfectly liquid
  2. B) a unique good for which there are no substitutes
  3. C) the only thing accepted in economic exchange
  4. D) backed by gold

Answer:  A

Diff: 3      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

31) If the price level doubles, the value of money ________.

  1. A) doubles
  2. B) more than doubles, due to scale economies
  3. C) rises but does not double, due to diminishing returns
  4. D) falls by half

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

32) A fall in the level of prices ________.

  1. A) does not affect the value of money
  2. B) has an uncertain effect on the value of money
  3. C) increases the value of money
  4. D) reduces the value of money

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

 

33) A hyperinflation is ________.

  1. A) a period of extreme inflation generally greater than 50 percent per month
  2. B) a period of anxiety caused by rising prices
  3. C) an increase in output caused by higher prices
  4. D) impossible today because of tighter regulations

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

34) During hyperinflations, ________.

  1. A) the value of money rises rapidly
  2. B) money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale
  3. C) middle-class savers benefit as prices rise
  4. D) money’s value remains fixed to the price level; that is, if prices double so does the value of money

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

35) Because inflation in Germany after World War I sometimes exceeded 1000 percent per month, one can conclude that the German economy suffered from ________.

  1. A) deflation
  2. B) disinflation
  3. C) hyperinflation
  4. D) superdeflation

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.2 List and summarize the functions of money

 

36) If merchants in the country Zed choose to close their doors, preferring to be stuck with rotting merchandise rather than worthless currency, then one can conclude that Zed is experiencing a ________.

  1. A) superdeflation
  2. B) hyperdeflation
  3. C) disinflation
  4. D) hyperinflation

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

 

37) Explain how cigarettes could be called “money” in prisoner-of-war camps of World War II.

Answer:  The cigarettes performed the three functions of money. They served as the medium of exchange because individuals did exchange items for cigarettes. They served as a unit of account because prices were quoted in terms of the number of cigarettes required for the exchange. They served as a store of value because an individual would be willing to save their cigarettes even if they did not smoke because they believed that they could exchange the cigarettes for something that they did want at some time in the future.

Diff: 2      Type: ES

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

38) Can packs of cigarettes be used as commodity money?

Answer:  We must see whether cigarettes satisfy the 5 criteria for a commodity to function effectively as money:

  1. Easily standardized—yes they are, cigarettes come is packs.
  2. Widely accepted—yes, if they are used in a setting such as WW II prisoners of war.
  3. Divisible—yes, packs of cigarettes are divisible to single cigarettes.
  4. Easy to carry—yes, cigarettes are lightweight.
  5. Must not deteriorate quickly—yes, cigarettes do not deteriorate easily.

Diff: 2      Type: ES

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

39) Economists say that money is a store of value. since there are other assets that are a more desirable store of money, why do people hold money at all?

Answer:  People hold money although it is not the best store of value, because of an important economic feature of money, liquidity. Liquidity is a highly desired property of assets. Liquidity measures how easily and fast an asset can be converted into a medium of exchange. Since money is a medium of exchange it is the most liquid asset, and thus, highly desirable although it is not the best store of value.

Diff: 2      Type: ES

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

40) Why are people are willing to hold money even if it is not the most attractive store of value?

Answer:  The answer to this question relates to the economic concept of liquidity, the relative ease and speed with which an asset can be converted into a medium of exchange. Money is the most liquid asset of all because it is the medium of exchange; it does not have to be converted into anything else in order to make purchases. Other assets involve transaction costs when they are converted into money.

Diff: 2      Type: ES

Skill:  Applied

Objective:  3.2 List and summarize the functions of money

 

 

3.3   Evolution of the Payments System

 

1) The payments system is ________.

  1. A) the method of conducting transactions in the economy
  2. B) used by union officials to set salary caps
  3. C) an illegal method of rewarding contracts
  4. D) used by your employer to determine salary increases

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

2) As the payments system evolves from barter to a monetary system, ________.

  1. A) commodity money is likely to precede the use of paper currency
  2. B) transaction costs increase
  3. C) the number of prices that need to be calculated increase rather dramatically
  4. D) specialization decreases

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

 

3) A disadvantage of ________ is that it can be very heavy and hard to transport from one place to another.

  1. A) commodity money
  2. B) fiat money
  3. C) electronic money
  4. D) paper money

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

 

4) Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money.

  1. A) commodity
  2. B) fiat
  3. C) electronic
  4. D) funny

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

 

 

5) When paper currency is decreed by governments as legal tender, legally it must be ________.

  1. A) paper currency backed by gold
  2. B) a precious metal such as gold or silver
  3. C) accepted as payment for debts
  4. D) convertible into an electronic payment

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

 

6) The evolution of the payments system from barter to precious metals, then to fiat money, then to cheques can best be understood as a consequence of the fact that ________.

  1. A) paper is more costly to produce than precious metals
  2. B) precious metals were not generally acceptable
  3. C) precious metals were difficult to carry and transport
  4. D) paper money is less accepted than cheques

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

7) Compared to cheques, paper currency and coins have the major drawbacks that they ________.

  1. A) are easily stolen
  2. B) are hard to counterfeit
  3. C) are not the most liquid assets
  4. D) must be backed by gold

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

 

8) Introduction of cheques into the payments system reduced the costs of exchanging goods and services. Another advantage of cheques is that ________.

  1. A) they provide convenient receipts for purchases
  2. B) they can never be stolen
  3. C) they are more widely accepted than currency
  4. D) the funds from a deposited cheque are available for use immediately

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

 

 

9) The evolution of the payments system from barter to precious metals, then to fiat money, then to cheques can best be understood as a consequence of ________.

  1. A) government regulations designed to improve the efficiency of the payments system
  2. B) government regulations designed to promote the safety of the payments system
  3. C) innovations that reduced the costs of exchanging goods and services
  4. D) competition among firms to make it easier for customers to purchase their products

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  3.3 Identify different types of payment systems

 

10) Compared to an electronic payments system, a payments system based on cheques has the major drawback that ________.

  1. A) cheques are less costly to process
  2. B) cheques take longer to process, meaning that it may take several days before the depositor can get her cash
  3. C) fraud may be more difficult to commit when paper receipts are eliminated
  4. D) legal liability is more clearly defined

Answer:  B

Diff: 3      Type: MC

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

11) Which of the following sequences accurately describes the evolution of the payments system?

  1. A) Barter, coins made of precious metals, paper currency, cheques, electronic funds transfers
  2. B) Barter, coins made of precious metals, cheques, paper currency, electronic funds transfers
  3. C) Barter, cheques, paper currency, coins made of precious metals, electronic funds transfers
  4. D) Barter, cheques, paper currency, electronic funds transfers

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  3.3 Identify different types of payment systems

 

12) During the past two decades an important characteristic of the modern payments system has been the rapidly increasing use of ________.

  1. A) cheques and decreasing use of currency
  2. B) electronic payments
  3. C) commodity monies
  4. D) fiat money

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

 

 

13) Which of the following is not a form of e-money?

  1. A) A debit card
  2. B) A credit card
  3. C) A stored-value card
  4. D) A smart card

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  3.3 Identify different types of payment systems

 

14) E-cash is used for payments ________.

  1. A) that are always secure
  2. B) that are very important
  3. C) on the internet
  4. D) in any transaction

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

 

15) A smart card is the equivalent of ________.

  1. A) cash
  2. B) savings bonds
  3. C) savings deposits
  4. D) certificates of deposit

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  3.3 Identify different types of payment systems

16) An electronic payments system has not completely replaced the paper payments system because of all of the following reasons except ________.

  1. A) expensive equipment is necessary to set up the system
  2. B) security concerns
  3. C) privacy concerns
  4. D) transportation costs

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

 

 

17) In explaining the evolution of money, ________.

  1. A) government regulation is the most important factor
  2. B) commodity money, because it is valued more highly, tends to drive out paper money
  3. C) new forms of money evolve to lower transaction costs
  4. D) paper money is always backed by gold and therefore more desirable than cheques

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  3.3 Identify different types of payment systems

 

18) What factors have slowed down the movement to a system where all payments are made electronically?

Answer:  The equipment necessary to set up the system is expensive, security of the information, and privacy concerns are issues that need to be addressed before an electronic payments system will be widely accepted.

Diff: 1      Type: ES

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

 

19) What is a cheque? what are their advantages and disadvantages?

Answer:  A cheque is an instrument used to transfer money from your account to someone else’s account when she deposits the cheque.

Advantages: Reduces transportation costs associated with the payments system as they frequently cancel each other. Also, they make the transactions for large amounts much easier as they can be written for any amount up to the balance in the account. Finally loss from theft is greatly reduced and they provide convenient receipts for purchases.

Disadvantages: It takes time to get cheques from one place to another, it takes several days for a cheque to be processed from your bank, and the paper work required to process them is costly.

Diff: 1      Type: ES

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

20) Explain the evolution of the payments system. Is the system headed towards a cashless society?

Answer:  Societies begin with a barter system and then introduce commodity money which was replaced with paper money.  Fiat money, is legal tender, based on the backing of an authority — typically the government.  Cheques and electronic payments were the next evolution in the system. A cashless society is unlikely due to several concerns: 1) it is expensive to set up and 2) it raises privacy and security concerns.

Diff: 1      Type: ES

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

 

 

21) What are electronic payments? how do they reduce transaction costs? by how much?

Answer:  In the past when paying bills you had to mail a cheque but now banks provide a website in which you log on, make a few clicks and make the payment that is transmitted electronically. You can even avoid logging in as reoccurring bills can be automatically deducted from your bank account. Electronic payments reduce transaction costs as you do not have to pay a stamp to send a cheque and also you save time paying your bills electronically. Estimated cost savings when a bill is paid electronically rather than a cheques exceed one dollar.

Diff: 2      Type: ES

Skill:  Recall

Objective:  3.3 Identify different types of payment systems

 

3.4   Measuring Money

 

1) If an individual moves money from a demand deposit account to a money market mutual fund, ________.

  1. A) M1+ decreases and M2 stays the same
  2. B) M1+ stays the same and M2+ increases
  3. C) M1+ stays the same and M2 stays the same
  4. D) M1+ decreases and M2 decreases

Answer:  D

Diff: 3      Type: MC

Skill:  Applied

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

2) If an individual moves money from a chequing account to a money market mutual fund, ________.

  1. A) M1+ decreases and M2+ increases
  2. B) M1+ stays the same and M2+ increases
  3. C) M1+ decreases and M2+ stays the same
  4. D) M1+ increases and M2+ decreases

Answer:  C

Diff: 3      Type: MC

Skill:  Applied

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

3) Defining money becomes ________ difficult as the pace of financial innovation ________.

  1. A) less; quickens
  2. B) more; quickens
  3. C) more; slows
  4. D) more; stops

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

 

4) Monetary aggregates are ________.

  1. A) measures of the money supply reported by the Bank of Canada
  2. B) measures of the wealth of individuals
  3. C) never redefined since “money” never changes
  4. D) reported by the Department of Finance annually

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

5) Recent financial innovation makes the Bank of Canada’s job of conducting monetary policy ________.

  1. A) easier, since the Bank of Canada now knows what to consider money
  2. B) more difficult, since the Bank of Canada now knows what to consider money
  3. C) easier, since the Bank of Canada no longer knows what to consider money
  4. D) more difficult, since the Bank of Canada no longer knows what to consider money

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

6) ________ is the narrowest monetary aggregate that the Bank of Canada reports.

  1. A) M0
  2. B) M1+
  3. C) M2
  4. D) M3

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

7) The currency component includes paper money and coins held in ________.

  1. A) bank vaults
  2. B) ATMs
  3. C) the hands of the nonbank public
  4. D) the central bank

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

8) The components of the M1+ monetary aggregate are chequable deposits plus ________.

  1. A) currency
  2. B) currency plus savings deposits
  3. C) currency outside banks
  4. D) currency plus money market deposits

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

9) The M1+ measure of money includes ________.

  1. A) small denomination time deposits
  2. B) chequable deposits
  3. C) money market deposit accounts
  4. D) money market mutual fund shares

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

10) Which of the following is not included in the measure of M2?

  1. A) Personal deposits
  2. B) Non-personal demand deposits
  3. C) Currency
  4. D) Foreign currency deposits

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

11) Which of the following is not included in M1+ but is included in M1++?

  1. A) Currency outside banks
  2. B) Currency held by banks
  3. C) Chequable deposits at banks, TMLs and CUCPs
  4. D) Nonchequable deposits at banks, TMLs and CUCPs

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

 

12) Which of the following is not included in the M2 measure of money but is included in the M3 measure of money?

  1. A) Currency
  2. B) Personal deposits
  3. C) Demand deposits
  4. D) Foreign currency deposits

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

13) Which of the following is included in both M1+ and M2?

  1. A) Currency
  2. B) Savings deposits
  3. C) Small-denomination time deposits
  4. D) Money market deposit accounts

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

14) Which of the following is not included in the monetary aggregate M2?

  1. A) Currency
  2. B) Money market mutual funds
  3. C) Personal deposits
  4. D) Notice deposits

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

15) Which of the following is included in M2+ but not in M2?

  1. A) Personal deposits
  2. B) Demand deposits
  3. C) Currency
  4. D) Money market mutual funds

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

 

16) If an individual redeems a Canada savings bond for currency, ________.

  1. A) M1+ stays the same and M2++ decreases
  2. B) M1+ increases and M2++ increases
  3. C) M1+ increases and M2++ stays the same
  4. D) M1+ stays the same and M2++ stays the same

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

17) If an individual redeems a Canada savings bond for currency, ________.

  1. A) M1+ stays the same and M2 decreases
  2. B) M1+ increases and M2 increases
  3. C) M1+ increases and M2 stays the same
  4. D) M1+ stays the same and M2 stays the same

Answer:  B

Diff: 3      Type: MC

Skill:  Applied

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

18) If an individual moves money from a notice deposit at a bank to a deposit account at a credit union, ________.

  1. A) M2 decreases and M2+ stays the same
  2. B) M2 decreases and M2+ increases
  3. C) M2 increases and M2+ stays the same
  4. D) M2 increases and M2+ increases

Answer:  A

Diff: 3      Type: MC

Skill:  Applied

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

19) If an individual moves money from currency to a personal deposit account, ________.

  1. A) M1+ decreases and M2+ stays the same
  2. B) M1+ stays the same and M2+ increases
  3. C) M1+ stays the same and M2+ stays the same
  4. D) M1+ increases and M2+ stays the same

Answer:  C

Diff: 3      Type: MC

Skill:  Applied

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

 

20) If an individual moves money from a money market mutual fund to currency, ________.

  1. A) M1+ increases and M2+ stays the same
  2. B) M1+ stays the same and M2+ increases
  3. C) M1+ stays the same and M2+ stays the same
  4. D) M1+ increases and M2+ decreases

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

21) The currency component of M2 shows that there is ________ in cash in the hands of each person in Canada.

  1. A) $150
  2. B) $15000
  3. C) $1500
  4. D) $15

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

22) The measures of money supply used by the Bank of Canada are ________ indices.

  1. A) simple-sum
  2. B) complex
  3. C) multiplicative
  4. D) accurate

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

23) Divergent growth rates of monetary aggregates are problematic because ________.

  1. A) it means that monetary aggregates are not very accurate
  2. B) it suggests that monetary policy is ineffective
  3. C) it means that the effect of monetary policy becomes harder to predict
  4. D) it suggests that the choice of monetary aggregate by policy makers does not matter

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

 

24) In the money index used by the Bank of Canada: M = X1 + X2 + … + Xn, the n monetary components have ________.

  1. A) a weight of 1/n
  2. B) different weights
  3. C) a weight of n
  4. D) a weight of 1

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

25) In the money index used by the Bank of Canada: M = X1 + X2 + … + Xn, the Xs are ________.

  1. A) the proportional weights for calculating M
  2. B) the increasing weights in calculating M
  3. C) the n monetary components of M
  4. D) the decreasing weights in calculating M

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

26) The formula used the Bank of Canada in calculating the money supply is ________.

  1. A) M = A1X1 + A2X2 + … + AnXn
  2. B) M =
  3. C) M = X1 + X2 + +Xn
  4. D) M =

Answer:  C

Diff: 3      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

27) Weighting monetary components in a simple-sum aggregate index ________.

  1. A) has never been attempted because it is too complex
  2. B) might be attempted with rigourous use of microeconomic, aggregation and index number theory
  3. C) might not perform as well as the simple-sum index
  4. D) might not predict inflation and business cycles better than conventional measures

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

 

28) Why are most of the U.S. dollars held outside of the United States?

Answer:  Concern about high inflation eroding the value of their own currency causes many people in foreign countries to hold U.S. dollars as a hedge against inflation risk.

Diff: 1      Type: ES

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

29) Data show that an average Canadian and American citizens hold CA$1500 and US$2000 of their currency respectively. Since money is bulky, it can be stolen, pays no interest and in general we do not see our fellow Canadians holding $1500 in their pockets, where are these dollars and who is holding them?

Answer:  One group that hold big amounts of currency are the criminals since currency is not traceable as cheques that can be used as evidence against them. Also, some businesses that are evading taxes operate as cash businesses which makes their transactions less traceable and they can avoid declaring income on which they would have to pay taxes. Finally, one group that holds Canadian and American (to a larger extent) dollars are foreigners in countries where they do not trust their own currency as they frequently experience high inflation that erodes the value of their currency.

Diff: 2      Type: ES

Skill:  Recall

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

30) Explain the relationship between currency and the M1+ monetary aggregate. What does the “plus” sign represent?

Answer:  Currency includes paper money and coins in circulation M1+ includes all chequeable deposits at chartered banks, trust and mortgage loans companies, credit unions and caisses populaires.  The “plus” sign represents TMLS, credit unions and caisses populaires.

Diff: 2      Type: ES

Skill:  Applied

Objective:  3.4 Compare and contrast the M1 and M2 money supplies

 

Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 7   The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

 

7.1   Computing the Price of Common Stock

 

1) A stockholder’s ownership of a company’s stock gives her the right to ________.

  1. A) vote and be the primary claimant of all cash flows
  2. B) vote and be the residual claimant of all cash flows
  3. C) manage and assume responsibility for all liabilities
  4. D) vote and assume responsibility for all liabilities

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

2) Stockholders’ rights include ________.

  1. A) the right to vote
  2. B) the right to manage
  3. C) primary claims on all cash flows
  4. D) ownership of bonds

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

3) Stockholders’ rights include ________.

  1. A) the right to manage
  2. B) the right to change personnel policy
  3. C) the right to veto management’s decisions
  4. D) residual claim on all of a company’s assets

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

4) Stockholders are residual claimants, meaning that they ________.

  1. A) have the first priority claim on all of a company’s assets
  2. B) are liable for all of a company’s debts
  3. C) will never share in a company’s profits
  4. D) receive the remaining cash flow after all other claims are paid

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

5) Common stock is the principal way that corporations raise ________.

  1. A) short-term debt
  2. B) foreign exchange
  3. C) long-term debt
  4. D) equity capital

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

6) Dividends are paid from ________.

  1. A) liabilities
  2. B) debts
  3. C) net earnings
  4. D) interest

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

7) Periodic payments of net earnings to shareholders are known as ________.

  1. A) capital gains
  2. B) dividends
  3. C) profits
  4. D) interest

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

8) The value of any investment is found by computing the ________.

  1. A) present value of all future sales
  2. B) present value of all future liabilities
  3. C) future value of all future expenses
  4. D) present value of all future cash flows

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

 

9) The value of any investment is found by computing the ________.

  1. A) present value of all coupon payments
  2. B) present value of all future liabilities
  3. C) future value of all dividends
  4. D) value in today’s dollars of all future cash flows

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

10) In the one-period valuation model, the value of a share of stock today depends upon ________.

  1. A) the present value of both dividends and the expected sales price
  2. B) only the present value of the future dividends
  3. C) the actual value of the dividends and expected sales price received in one year
  4. D) the future value of dividends and the actual sales price

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

11) In the one-period valuation model, the current stock price increases if ________.

  1. A) the expected sales price increases
  2. B) the expected sales price falls
  3. C) the required return increases
  4. D) dividends are cut

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

12) In the one-period valuation model, an increase in the required return on investments in equity ________.

  1. A) increases the expected sales price of a stock
  2. B) increases the current price of a stock
  3. C) reduces the expected sales price of a stock
  4. D) reduces the current price of a stock

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

 

13) In the one-period valuation model with no dividend payments the current price of the stock is given by ________.

  1. A) P0 =
  2. B) P0 = +
  3. C) P0 = × 100
  4. D) P0 = × 365

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

14) Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10 percent, the current price of the stock would be ________.

  1. A) $110.11
  2. B) $121.12
  3. C) $100.10
  4. D) $100.11

Answer:  C

Diff: 3      Type: MC

Skill:  Applied

Objective:  7.1 Calculate the price of common stock

 

15) Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5 percent, the current price of the stock would be ________.

  1. A) $110.00
  2. B) $101.00
  3. C) $100.00
  4. D) $96.19

Answer:  D

Diff: 3      Type: MC

Skill:  Applied

Objective:  7.1 Calculate the price of common stock

 

 

16) The analysts predict that the price of corporation’s XYZ stock one year from now will be $20. XYZ announced that is not going to pay dividends next year. You decide that you would be satisfied to earn a 10 percent on the investment on this stock, thus, this stock is worth ________ for you now.

  1. A) $18.00
  2. B) $18.18
  3. C) $21.10
  4. D) $21.00

Answer:  B

Diff: 3      Type: MC

Skill:  Applied

Objective:  7.1 Calculate the price of common stock

 

17) The analysts predict that the price of corporation’s XYZ stock one year from now will be $120. XYZ announced that is not going to pay dividends next year. You decide that you would be satisfied to earn a 12 percent on the investment on this stock, thus, this stock is worth ________ for you now.

  1. A) $100.20
  2. B) $108.80
  3. C) $107.14
  4. D) $132.00

Answer:  C

Diff: 3      Type: MC

Skill:  Applied

Objective:  7.1 Calculate the price of common stock

18) General Electric announces that it is going to cut its dividends by $0.02 per share in the future. This, everything else remaining the same, will cause its current stock price to ________.

  1. A) increase
  2. B) decrease
  3. C) remain the same
  4. D) fluctuate

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  7.1 Calculate the price of common stock

 

19) In the generalized dividend model, if the expected sales price is in the distant future ________.

  1. A) it does not affect the current stock price
  2. B) it is more important than dividends in determining the current stock price
  3. C) it is equally important with dividends in determining the current stock price
  4. D) it is less important than dividends but still affects the current stock price

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

20) In the generalized dividend model, a future sales price far in the future does not affect the current stock price because ________.

  1. A) the present value cannot be computed
  2. B) the present value is almost zero
  3. C) the sales price does not affect the current price
  4. D) the stock may never be sold

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

21) In the generalized dividend model, the current stock price is the sum of ________.

  1. A) the actual value of the future dividend stream
  2. B) the present value of the future dividend stream
  3. C) the future value of the future dividend stream
  4. D) the present value of the future sales price

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

22) Using the Gordon growth model, a stock’s price will increase if ________.

  1. A) the dividend growth rate increases
  2. B) the growth rate of dividends falls
  3. C) the required rate of return on equity rises
  4. D) the expected sales price rises

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

23) In the Gordon growth model, a decrease in the required rate of return on equity ________.

  1. A) increases the current stock price
  2. B) increases the future stock price
  3. C) reduces the future stock price
  4. D) reduces the current stock price

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  7.1 Calculate the price of common stock

 

 

24) Using the Gordon growth formula, if D1 is $2.00, ke is 12 percent or 0.12, and g is 10 percent or 0.10, then the current stock price is ________.

  1. A) $20
  2. B) $50
  3. C) $100
  4. D) $150

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  7.1 Calculate the price of common stock

 

25) Using the Gordon growth formula, if D1 is $1.00, ke is 10 percent or 0.10, and g is 5 percent or 0.05, then the current stock price is ________.

  1. A) $10
  2. B) $20
  3. C) $30
  4. D) $40

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  7.1 Calculate the price of common stock

 

26) One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate.

  1. A) an increasing
  2. B) a fast
  3. C) a constant
  4. D) an escalating

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

27) In the Gordon Growth Model, the growth rate is assumed to be ________ the required return on equity.

  1. A) greater than
  2. B) equal to
  3. C) less than
  4. D) proportional to

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

 

28) What is the current price of a telecommunication company’s stock if the current dividend is $0.80, the expected constant growth rate in dividends is 5% and the required return is 10%?

  1. A) $16.00
  2. B) $16.80
  3. C) $8.00
  4. D) $8.40

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  7.1 Calculate the price of common stock

 

29) What is the current price of a utility company’s stock if the current dividend is $0.20, the expected constant growth rate in dividends is 2% and the required return is 8%?

  1. A) $2.00
  2. B) $2.20
  3. C) $3.20
  4. D) $3.40

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  7.1 Calculate the price of common stock

 

30) A company’s dividend in one year is $1.00 and this is expected to increase at a constant rate of 2%. If the required return on this stock increases from 10% to 12$ by how much will the stock price change?

  1. A) Increase by 20%
  2. B) Decrease by 20%
  3. C) Increase by 16.67%
  4. D) Decrease by 16.67%

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  7.1 Calculate the price of common stock

 

31) You believe that a corporation’s dividends will grow 5 percent on average into the foreseeable future. If the company’s last dividend payment was $5 what should be the current price of the stock assuming a 12 percent required return?

Answer:  Use the Gordon Growth Model.

$5(1 + .05)/(.12 – .05) = $75

Diff: 3      Type: ES

Skill:  Applied

Objective:  7.1 Calculate the price of common stock

 

32) What rights does ownership interest give stockholders?

Answer:  Stockholders have the right to vote on issues brought before the stockholders, be the residual claimant, that is, receive a portion of any net earnings of the corporation, and the right to sell the stock.

Diff: 1      Type: ES

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

33) Explain the Gordon growth model of stock pricing. Explain how changes in each component affect the current stock price. On what assumptions is the model based?

Answer:  The basic model is

 

0 =

where

P0  =   the current stock price

D1 =   the next period’s dividend

ke   =   the required rate of return

g    =   the dividend growth rate

Increases in the dividend or the dividend growth rate increase the stock price, while an increase in the required rate of return lowers the stock price.

The two assumptions that are the basis of the model are that dividends are assumed to grow at a constant rate, and that the dividend growth rate is less than the required rate of return.

Diff: 1      Type: ES

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

34) Explain why the Gordon growth model does not need to incorporate the end period price.

Answer:  Students must explain that since the end period is presumed to be an infinite number of years in the future, the present value of that amount is effectively zero.

Diff: 2      Type: ES

Skill:  Recall

Objective:  7.1 Calculate the price of common stock

 

 

7.2   How the Market Sets Stock Prices

 

1) In asset markets, an asset’s price is ________.

  1. A) set equal to the highest price a seller will accept
  2. B) set equal to the highest price a buyer is willing to pay
  3. C) set equal to the lowest price a seller is willing to accept
  4. D) set by the buyer willing to pay the highest price

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  7.2 Recognize the impact of new information on stock prices

2) Information plays an important role in asset pricing because it allows the buyer to more accurately judge ________.

  1. A) liquidity
  2. B) risk
  3. C) capital
  4. D) policy

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.2 Recognize the impact of new information on stock prices

 

3) New information that might lead to a decrease in an asset’s price might be ________.

  1. A) an expected decrease in the level of future dividends
  2. B) a decrease in the required rate of return
  3. C) an expected increase in the dividend growth rate
  4. D) an expected increase in the future sales price

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  7.2 Recognize the impact of new information on stock prices

 

4) A change in perceived risk of a stock changes ________.

  1. A) the expected dividend growth rate
  2. B) the expected sales price
  3. C) the required rate of return
  4. D) the current dividend

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.2 Recognize the impact of new information on stock prices

 

 

5) A stock’s price will fall if there is ________.

  1. A) a decrease in perceived risk
  2. B) an increase in the required rate of return
  3. C) an increase in the future sales price
  4. D) current dividends are high

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  7.2 Recognize the impact of new information on stock prices

 

6) A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________, everything else held constant.

  1. A) reduces; future sales price; expected rate of return
  2. B) reduces; current dividend; expected rate of return
  3. C) increases; required rate of return; future sales price
  4. D) increases; required rate of return; dividend growth rate

Answer:  D

Diff: 3      Type: MC

Skill:  Applied

Objective:  7.2 Recognize the impact of new information on stock prices

7) The subprime financial crisis lead to a decline in stock prices because ________.

  1. A) of a lowered expected dividend growth rate
  2. B) of a lowered required return on investment in equity
  3. C) higher expected future stock prices
  4. D) higher current dividends

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  7.2 Recognize the impact of new information on stock prices

 

8) Increased uncertainty resulting from the subprime crisis ________ the required return on investment in equity.

  1. A) raised
  2. B) lowered
  3. C) had no impact on
  4. D) decreased

Answer:  A

Diff: 3      Type: MC

Skill:  Applied

Objective:  7.2 Recognize the impact of new information on stock prices

 

 

9) In October 2008, the stock market crashed, falling by ________ from its peak value a year earlier.

  1. A) over 40 percent
  2. B) over 30 percent
  3. C) over 50 percent
  4. D) over 25 percent

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  7.2 Recognize the impact of new information on stock prices

 

10) An increase in uncertainty for the economy will ________.

  1. A) increase stock prices due to a higher required return
  2. B) not affect stock prices
  3. C) increase stock prices due to a lower required return
  4. D) depress stock prices due to a higher required return

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  7.2 Recognize the impact of new information on stock prices

 

11) Dishonest corporate accounting procedures would cause stock prices to ________.

  1. A) remain unchanged
  2. B) decrease due to lower expected dividend growth and lower required return
  3. C) decrease due to lower expected dividend growth and higher required return
  4. D) increase due to higher expected dividend growth and lower required return

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  7.2 Recognize the impact of new information on stock prices

 

7.3   The Theory of Rational Expectations

 

1) Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that ________.

  1. A) expectations influence the behavior of participants in the economy and thus have a major impact on economic activity
  2. B) expectations influence only a few individuals, have little impact on the overall economy, but can have important effects on a few markets
  3. C) expectations influence many individuals, have little impact on the overall economy, but can have distributional effects
  4. D) models that ignore expectations have little predictive power, even in the short run

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

2) The view that expectations change relatively slowly over time in response to new information is known in economics as ________.

  1. A) rational expectations
  2. B) irrational expectations
  3. C) slow-response expectations
  4. D) adaptive expectations

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

3) If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economics would say that expectation formation is ________.

  1. A) irrational
  2. B) rational
  3. C) adaptive
  4. D) reasonable

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

 

4) If expectations are formed adaptively, then people ________.

  1. A) use more information than just past data on a single variable to form their expectations of that variable
  2. B) often change their expectations quickly when faced with new information
  3. C) use only the information from past data on a single variable to form their expectations of that variable
  4. D) never change their expectations once they have been made

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

5) If during the past decade the average rate of monetary growth has been 5 percent and the average inflation rate has been 5 percent, everything else held constant, when the Bank of Canada announces that the new rate of monetary growth will be 10 percent, the adaptive expectation forecast of the inflation rate is ________.

  1. A) 5 percent
  2. B) between 5 and 10 percent
  3. C) 10 percent
  4. D) more than 10 percent

Answer:  A

Diff: 3      Type: MC

Skill:  Applied

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

6) The major criticism of the view that expectations are formed adaptively is that ________.

  1. A) this view ignores the fact that people use more information than just past data to form their expectations
  2. B) it is easier to model adaptive expectations than it is to model rational expectations
  3. C) adaptive expectations models have no predictive power
  4. D) people are irrational and therefore never learn from past mistakes

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

7) In rational expectations theory, the term “optimal forecast” is essentially synonymous with ________.

  1. A) correct forecast
  2. B) the correct guess
  3. C) the actual outcome
  4. D) the best guess

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

8) If a forecast is made using all available information, then economists say that the expectation formation is ________.

  1. A) rational
  2. B) irrational
  3. C) adaptive
  4. D) reasonable

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

9) If a forecast made using all available information is not perfectly accurate, then it is ________.

  1. A) still a rational expectation
  2. B) not a rational expectation
  3. C) an adaptive expectation
  4. D) a second-best expectation

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

10) If additional information is not used when forming an optimal forecast because it is not available at that time, then expectations are ________.

  1. A) obviously formed irrationally
  2. B) still considered to be formed rationally
  3. C) formed adaptively
  4. D) formed equivalently

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

11) An expectation may fail to be rational if ________.

  1. A) relevant information was not available at the time the forecast is made
  2. B) relevant information is available but ignored at the time the forecast is made
  3. C) information changes after the forecast is made
  4. D) information was available to insiders only

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

 

12) According to rational expectations theory, forecast errors of expectations ________.

  1. A) are more likely to be negative than positive
  2. B) are more likely to be positive than negative
  3. C) tend to be persistently high or low
  4. D) are unpredictable

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

13) Rational expectations forecast errors will on average be ________ and therefore ________ be predicted ahead of time.

  1. A) positive; can
  2. B) positive; cannot
  3. C) negative; can
  4. D) zero; cannot

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

14) People have a strong incentive to form rational expectations because ________.

  1. A) they are guaranteed of success in the stock market
  2. B) it is costly not to do so
  3. C) it is costly to do so
  4. D) everyone wants to be rational

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

15) If market participants notice that a variable behaves differently now than in the past, then, according to rational expectations theory, we can expect market participants to ________.

  1. A) change the way they form expectations about future values of the variable
  2. B) begin to make systematic mistakes
  3. C) no longer pay close attention to movements in this variable
  4. D) give up trying to forecast this variable

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

 

16) According to rational expectations, ________.

  1. A) expectations of inflation are viewed as being an average of past inflation rates
  2. B) expectations of inflation are viewed as being an average of expected future inflation rates
  3. C) expectations formation indicates that changes in expectations occur slowly over time as past data change
  4. D) expectations will not differ from optimal forecasts that use all available information

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

17) Suppose Barbara looks out in the morning and sees a clear sky so decides that a picnic for lunch is a good idea. Last night the weather forecast included a 100 percent chance of rain by midday but Barbara did not watch the local news program. Is Barbara’s prediction of good weather at lunch time rational? Why or why not?

Answer:  No, this prediction does not use rational expectations. Although Barbara based her guess on the information that was available to her at the time, additional information was readily available that could have been used to improve her prediction.

Diff: 3      Type: ES

Skill:  Applied

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

18) Assume that your economics professor announces to your class that after thirty years of giving exams only on scheduled dates, this semester she will give only surprise quizzes. What is the rational expectation response to this new policy? Why does your self-interest require that you change your behavior? What would the consequences be for students who changed their expectations about exams adaptively?

Answer:  Instead of being able to study for exams on known dates, students must now be prepared for an exam at any possible time. Students must study regularly, before each class. Self-interest dictates that students change their behavior, as their grade depends upon it. Students who change their behavior adaptively don’t adjust until they have experienced one or more surprise quizzes, which in all likelihood hurt their grades.

Diff: 3      Type: ES

Skill:  Applied

Objective:  7.3 Compare and contrast adaptive expectations and rational expectations

 

 

7.4   The Efficient Market Hypothesis: Rational Expectations in Financial Markets

 

1) The theory of rational expectations, when applied to financial markets, is known as ________.

  1. A) monetarism
  2. B) the efficient markets hypothesis
  3. C) the theory of strict liability
  4. D) the theory of impossibility

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

2) Monetary economists and financial economists developed ________ theories on expectations formations.

  1. A) parallel
  2. B) opposing
  3. C) dissimilar
  4. D) unusual

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

3) If the optimal forecast of the return on a security exceeds the equilibrium return, then ________.

  1. A) the market is inefficient
  2. B) no unexploited profit opportunities exist
  3. C) the market is in equilibrium
  4. D) the market is myopic

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

4) Another way to state the efficient markets condition is: in an efficient market, ________.

  1. A) unexploited profit opportunities will be quickly eliminated
  2. B) unexploited profit opportunities will never exist
  3. C) unexploited profit opportunities never existed
  4. D) every financial market participant must be well informed about securities

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

5) ________ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity.

  1. A) Arbitrage
  2. B) Mediation
  3. C) Asset capitalization
  4. D) Market intercession

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

6) The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market, ________.

  1. A) it will tend to go unnoticed for some time
  2. B) it will be quickly eliminated
  3. C) financial analysts are your best source of this information
  4. D) prices will reflect the unexploited profit opportunity

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

7) Financial markets quickly eliminate unexploited profit opportunities through changes in ________.

  1. A) dividend payments
  2. B) tax laws
  3. C) asset prices
  4. D) monetary policy

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

8) The elimination of unexploited profit opportunities requires that ________ market participants be well informed.

  1. A) all
  2. B) a few
  3. C) zero
  4. D) many

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

9) If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a false statement?

  1. A) A stock that has done poorly in the past is more likely to do well in the future
  2. B) One investment is as good as any other because the securities’ prices are correct
  3. C) A security’s price reflects all available information about the intrinsic value of the security
  4. D) Security prices can be used by managers to assess their cost of capital accurately

Answer:  A

Diff: 3      Type: MC

Skill:  Applied

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

10) According to the efficient markets hypothesis, purchasing the reports of financial analysts ________.

  1. A) is likely to increase one’s returns by an average of 10 percent
  2. B) is likely to increase one’s returns by about 3 to 5 percent
  3. C) is not likely to be an effective strategy for increasing financial returns
  4. D) is likely to increase one’s returns by an average of about 2 to 3 percent

Answer:  C

Diff: 3      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

 

11) You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts. The efficient markets hypothesis says that future forecasts by this advisor ________.

  1. A) may or may not be better than the other forecasts Past performance is no guarantee of the future
  2. B) will always be the best of the group
  3. C) will definitely be worse in the future What goes up must come down
  4. D) will be worse in the near future, but improve over time

Answer:  A

Diff: 3      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

12) Sometimes one observes that the price of a company’s stock falls after the announcement of favorable earnings. This phenomenon is ________.

  1. A) clearly inconsistent with the efficient markets hypothesis
  2. B) consistent with the efficient markets hypothesis if the earnings were not as high as anticipated
  3. C) consistent with the efficient markets hypothesis if the earnings were not as low as anticipated
  4. D) consistent with the efficient markets hypothesis if the favorable earnings were expected

Answer:  B

Diff: 3      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

13) According to the efficient markets hypothesis, the current price of a financial security ________.

  1. A) is the discounted net present value of future interest payments
  2. B) is determined by the highest successful bidder
  3. C) fully reflects all available relevant information
  4. D) is a result of none of the above

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

 

14) You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway’s profitability. If you decide to invest in Gateway stock, you can expect to earn ________.

  1. A) above average returns since you will share in the higher profits
  2. B) above average returns since your stock price will definitely appreciate as higher profits are earned
  3. C) below average returns since computer makers have low profit rates
  4. D) a normal return since stock prices adjust to reflect expected changes in profitability almost immediately

Answer:  D

Diff: 3      Type: MC

Skill:  Applied

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

15) The efficient markets hypothesis indicates that investors ________.

  1. A) can use the advice of technical analysts to outperform the market
  2. B) do better on average if they adopt a “buy and hold” strategy
  3. C) let too many unexploited profit opportunities go by if they adopt a “buy and hold” strategy
  4. D) do better if they purchase loaded mutual funds

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

16) The efficient markets hypothesis suggests that investors ________.

  1. A) should purchase no-load mutual funds which have low management fees
  2. B) can use the advice of technical analysts to outperform the market
  3. C) let too many unexploited profit opportunities go by if they adopt a “buy and hold” strategy
  4. D) act on all “hot tips” they hear

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

17) The advantage of a “buy-and-hold strategy” is that ________.

  1. A) net profits will tend to be higher because there will be fewer brokerage commissions
  2. B) losses will eventually be eliminated
  3. C) the longer a stock is held, the higher will be its price
  4. D) profits are guaranteed

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

18) For small investors, the best way to pursue a “buy and hold” strategy is to ________.

  1. A) buy and sell individual stocks frequently
  2. B) buy no-load mutual funds with high management fees
  3. C) buy no-load mutual funds with low management fees
  4. D) buy load mutual funds

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

19) If a corporation announces that it expects quarterly earnings to increase by 25 percent and it actually sees an increase of 22 percent, what should happen to the price of the corporation’s stock if the efficient markets hypothesis holds, everything else held constant?

Answer:  The stock’s price should fall. The price had adjusted based on the statement of expected earnings. When the actual number turned out to be lower than expected, the stock price changes to reflect the additional information.

Diff: 3      Type: ES

Skill:  Applied

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

20) Your best friend calls and gives you the latest stock market “hot tip” that he heard at the health club. Should you act on this information? Why or why not?

Answer:  No, if this information is readily available, it will already be reflected in the stock price.

Diff: 1      Type: ES

Skill:  Applied

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

21) If you your stock broker tells you that you should buy stock in Ford as it has devised a new hybrid engine system that will reduce consumption of fuel by 90 percent, would you follow this advice and buy Ford’s stock?

Answer:  The efficient market hypothesis indicates that you should be skeptical of any such information. If the market is efficient then it has already priced Ford’s stock so that its expected return will equal the equilibrium return. The tip is not valuable. But if the tip is based on new information and gives you an edge on the rest of the market, only them it can be valuable to you and you should buy the stock. In any other case Ford stock price will have already reflected the news.

Diff: 2      Type: ES

Skill:  Applied

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

 

22) What is a recommended strategy for a small investor and how it is associated with the efficient market hypothesis?

Answer:  Students should be able to explain that a recommended strategy is to purchase no-load mutual funds. EMH suggests that only “extremely clever investors” may be able top outperform a buy-and-hold strategy.

Diff: 3      Type: ES

Skill:  Recall

Objective:  7.4 Explain why arbitrage opportunities imply that the efficient market hypothesis holds

 

7.5   Why the Efficient Market Hypothesis Does Not Imply That Financial Markets are Efficient

 

1) A situation when an asset price differs from its fundamental value is ________.

  1. A) a random walk
  2. B) an inflation
  3. C) a deflation
  4. D) a bubble

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.5 Identify and explain the implications of the efficient market hypothesis for financial markets

 

2) In a rational bubble, investors can have ________ expectations that a bubble is occurring but continue to hold the asset anyway.

  1. A) irrational
  2. B) adaptive
  3. C) rational
  4. D) myopic

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.5 Identify and explain the implications of the efficient market hypothesis for financial markets

 

7.6   Behavioral Finance

 

1) ________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices.

  1. A) Behavioral finance
  2. B) Strategical finance
  3. C) Methodical finance
  4. D) Procedural finance

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.6 Summarize the reasons why behavioural finance suggests that the efficient market hypothesis may not hold

 

2) If a market participant believes that a stock price is irrationally high, they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called ________.

  1. A) short selling
  2. B) double dealing
  3. C) undermining
  4. D) long marketing

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.6 Summarize the reasons why behavioural finance suggests that the efficient market hypothesis may not hold

 

3) ________ means people are more unhappy when they suffer losses than they are happy when they achieve gains.

  1. A) Loss fundamentals
  2. B) Loss aversion
  3. C) Loss leader
  4. D) Loss cycle

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.6 Summarize the reasons why behavioural finance suggests that the efficient market hypothesis may not hold

 

 

4) Loss aversion can explain why very little ________ actually takes place in the securities market.

  1. A) short selling
  2. B) bargaining
  3. C) bartering
  4. D) negotiating

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.6 Summarize the reasons why behavioural finance suggests that the efficient market hypothesis may not hold

5) Psychologists have found that people tend to be ________ in their own judgments.

  1. A) underconfident
  2. B) overconfident
  3. C) indecisive
  4. D) insecure

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.6 Summarize the reasons why behavioural finance suggests that the efficient market hypothesis may not hold

 

6) ________ and ________ may provide an explanation for stock market bubbles.

  1. A) Overconfidence; social contagion
  2. B) Underconfidence; social contagion
  3. C) Overconfidence; social isolationism
  4. D) Underconfidence; social isolationism

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  7.6 Summarize the reasons why behavioural finance suggests that the efficient market hypothesis may not hold

 

 

7.7   Web Appendix: Evidence on the Efficient Market Hypothesis

 

1) If a mutual fund outperforms the market in one period, evidence suggests that this fund is ________.

  1. A) highly likely to consistently outperform the market in subsequent periods due to its superior investment strategy
  2. B) likely to under-perform the market in subsequent periods to average its overall returns
  3. C) not likely to consistently outperform the market in subsequent periods
  4. D) not likely to outperform the market in any subsequent period

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

2) Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually ________.

  1. A) beat the market in the next time period
  2. B) beat the market in the next two subsequent time periods
  3. C) beat the market in the next three subsequent time periods
  4. D) do not beat the market in the next time period

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

3) The number and availability of discount brokers has grown rapidly since the mid-1970s. The efficient markets hypothesis predicts that people who use discount brokers ________.

  1. A) will likely earn lower returns than those who use full-service brokers
  2. B) will likely earn about the same as those who use full-service brokers, but will net more after brokerage commissions
  3. C) are going against evidence suggesting that full-service brokers can help outperform the market
  4. D) are likely to outperform the market by a wide margin

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

 

4) When Happy Feet Corporation announces that their fourth quarter earnings are up 10 percent, their stock price falls. This is consistent with the efficient markets hypothesis ________.

  1. A) if earnings were not as high as expected
  2. B) if earnings were not as low as expected
  3. C) if a merger is anticipated
  4. D) the company just invented a new bunion product

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

5) To say that stock prices follow a “random walk” is to argue that stock prices ________.

  1. A) rise, then fall, then rise again
  2. B) rise, then fall in a predictable fashion
  3. C) tend to follow trends
  4. D) cannot be predicted based on past trends

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

6) The efficient markets hypothesis predicts that stock prices follow a “random walk.” The implication of this hypothesis for investing in stocks is ________.

  1. A) a “churning strategy” of buying and selling often to catch market swings
  2. B) turning over your stock portfolio each month, selecting stocks by throwing darts at the stock page
  3. C) a “buy and hold strategy” of holding stocks to avoid brokerage commissions
  4. D) following the advice of technical analysts

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

7) Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets hypothesis, ________.

  1. A) a waste of time
  2. B) profitably employed by all financial analysts
  3. C) the most efficient rules to employ
  4. D) consistent with the random walk hypothesis

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

 

8) Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis ________.

  1. A) outperforms the overall market
  2. B) far outperforms the overall market, suggesting that stockbrokers provide valuable services
  3. C) does not outperform the overall market
  4. D) does not outperform the overall market, suggesting that stockbrokers do not provide services of any value

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

9) Which of the following accurately summarizes the empirical evidence about technical analysis?

  1. A) Technical analysts fare no better than other financial analysis—on average they do not outperform the market.
  2. B) Technical analysts tend to outperform other financial analysis, but on average they nevertheless underperform the market.
  3. C) Technical analysts fare no better than other financial analysis, and like other financial analysts they outperform the market.
  4. D) Technical analysts fare no better than other financial analysis, and like other financial analysts they underperform the market.

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

10) Evidence in support of the efficient markets hypothesis includes ________.

  1. A) the failure of technical analysis to outperform the market
  2. B) the small-firm effect
  3. C) the January effect
  4. D) excessive volatility

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

11) Evidence against market efficiency includes ________.

  1. A) failure of technical analysis to outperform the market
  2. B) the random walk behavior of stock prices
  3. C) the inability of mutual fund managers to consistently beat the market
  4. D) the January effect

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

12) The small-firm effect refers to the ________.

  1. A) negative returns earned by small firms
  2. B) returns equal to large firms earned by small firms
  3. C) abnormally high returns earned by small firms
  4. D) low returns after adjusting for risk earned by small firms

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

13) The January effect refers to the fact that ________.

  1. A) most stock market crashes have occurred in January
  2. B) stock prices tend to fall in January
  3. C) stock prices have historically experienced abnormal price increases in January
  4. D) the football team winning the Super Bowl accurately predicts the behavior of the stock market for the next year

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

14) When a corporation announces a major decline in earnings, the stock price may initially decline significantly and then rise back to normal levels over the next few weeks. This impact is called ________.

  1. A) the January effect
  2. B) mean reversion
  3. C) market overreaction
  4. D) the small-firm effect

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

15) A phenomenon closely related to market overreaction is ________.

  1. A) the random walk
  2. B) the small-firm effect
  3. C) the January effect
  4. D) excessive volatility

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

16) Excessive volatility refers to the fact that ________.

  1. A) stock returns display mean reversion
  2. B) stock prices can be slow to react to new information
  3. C) stock price tend to rise in the month of January
  4. D) stock prices fluctuate more than is justified by dividend fluctuations

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

17) Mean reversion refers to the fact that ________.

  1. A) small firms have higher than average returns
  2. B) stocks that have had low returns in the past are more likely to do well in the future
  3. C) stock returns are high during the month of January
  4. D) stock prices fluctuate more than is justified by fundamentals

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Evidence on the Efficient Market Hypothesis

 

Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 21   The IS Curve

 

21.1   Planned Expenditure and Aggregate Demand

 

1) His analysis started with the recognition that the total quantity demanded of an economy’s output was the sum of four types of spending: consumer expenditure, planned investment spending, government spending, and net exports.

  1. A) John Maynard Keynes
  2. B) Sir John Hicks
  3. C) Milton Friedman
  4. D) Paul A. Samuelson

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.1 List the four components of aggregate demand (or planned expenditure)

 

2) Keynes’s motivation in developing the aggregate output determination model stemmed from his concern with explaining ________.

  1. A) the hyperinflations of the 1920s
  2. B) why the Great Depression occurred
  3. C) the high unemployment in Great Britain before World War I
  4. D) the high unemployment in Great Britain after World War II

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.1 List the four components of aggregate demand (or planned expenditure)

 

3) Keynes was especially interested in explaining movements of ________ because he wanted to explain why the Great Depression had occurred and how government policy could be used to increase ________ in a similar economic situation.

  1. A) aggregate output; wages
  2. B) aggregate output; employment
  3. C) wage rates; wages
  4. D) wage rates; employment

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.1 List the four components of aggregate demand (or planned expenditure)

 

 

4) Keynes was especially concerned with explaining the ________.

  1. A) recession of 1920-21
  2. B) low levels of output and employment during the Great Depression
  3. C) strong economic growth of the 1920s
  4. D) high unemployment in Great Britain during the 1920s

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.1 List the four components of aggregate demand (or planned expenditure)

5) Keynes was especially concerned with explaining the ________ level of output and employment during the ________.

  1. A) low; 1920s
  2. B) low; 1930s
  3. C) high; 1920s
  4. D) high; 1930s

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.1 List the four components of aggregate demand (or planned expenditure)

 

6) In the simple Keynesian model, equilibrium aggregate output is determined by ________.

  1. A) aggregate demand
  2. B) aggregate supply
  3. C) the national demand for labor
  4. D) the price level

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.1 List the four components of aggregate demand (or planned expenditure)

 

7) Under Keynesian analysis, aggregate demand can be written as ________.

  1. A) = C + I + G + NX
  2. B) = C + I + G – NX
  3. C) = C – I – G – NX
  4. D) = C + I – G – NX

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.1 List the four components of aggregate demand (or planned expenditure)

 

 

21.2   The Components of Aggregate Demand

 

1) Keynes reasoned that consumer expenditure is most closely related to ________.

  1. A) the level of interest rates
  2. B) the price level
  3. C) disposable income
  4. D) the marginal tax rate

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

2) In the Keynesian model of income determination, consumer expenditure includes spending by ________.

  1. A) consumers on personal computers
  2. B) businesses on personal computers
  3. C) governments on personal computers
  4. D) foreigners on domestic personal computers

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

3) The marginal propensity to consume (mpc) can be defined as the fraction of ________.

  1. A) a change in income that is spent
  2. B) a change in income that is saved
  3. C) income that is spent
  4. D) income that is saved

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

4) If the consumption function is expressed as C = a + mpc × YD, then “mpc” represents ________.

  1. A) autonomous consumer expenditure
  2. B) the marginal propensity to consume
  3. C) the expenditure multiplier
  4. D) disposable income

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

5) If the consumption function is expressed as C = a + mpc × YD, then “a” represents ________.

  1. A) autonomous consumer expenditure
  2. B) the marginal propensity to consume
  3. C) the expenditure multiplier
  4. D) disposable income

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

6) If the consumption function is C = 20 + 0.5YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by ________.

  1. A) $25
  2. B) $70
  3. C) $50
  4. D) $100

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

7) If the consumption function is C = 20 + 0.8YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by ________.

  1. A) $58
  2. B) $64
  3. C) $80
  4. D) $100

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

 

8) Assume that autonomous consumption equals $200 and that the mpc equals 0.8. If disposable income equals $1000, then total consumption equals ________.

  1. A) $80
  2. B) $200
  3. C) $800
  4. D) $1000

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

9) Assume that autonomous consumption equals $200 and disposable income equals $1000. If total consumption equal $800, then the mpc equals ________.

  1. A) 0.2
  2. B) 0.6
  3. C) 0.8
  4. D) 1.0

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

10) Assume that disposable income equals $1000 and the mpc equals 0.6. If total consumption equal $800, then autonomous consumption is equal to ________.

  1. A) $0
  2. B) $200
  3. C) $800
  4. D) $1000

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

11) Everything else held constant, if total consumption increases from $600 to $800 because of an increase of disposable income of $400, then the mpc is equal to ________.

  1. A) 0.2
  2. B) 0.4
  3. C) 0.5
  4. D) 0.6

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

12) Everything else held constant, if consumption expenditure increases by 65 for a 100 increase in disposable income, the mpc is ________.

  1. A) 0
  2. B) 0.5
  3. C) 0.65
  4. D) 1

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

13) Everything else held constant, if disposable income increases by 200 and consumption expenditure increases by 150, the mpc is ________.

  1. A) 0
  2. B) 0.15
  3. C) 0.5
  4. D) 0.75

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

14) Everything else held constant, if consumption expenditure falls by 160 when disposable income falls by 200, the mpc is ________.

  1. A) 0
  2. B) 0.2
  3. C) 0.4
  4. D) 0.8

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

 

15) Economists define investment as the purchase of ________.

  1. A) a new physical asset such as a new machine or a new house
  2. B) any physical asset, whether new or not, used by business to increase production
  3. C) any physical asset used by business to increase production and the repurchase of common stock
  4. D) business spending on capital and household spending on durable goods

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

16) Planned investment spending, a component of aggregate demand, is equal to ________.

  1. A) fixed investment plus actual inventory investment
  2. B) fixed investment plus unplanned inventory investment
  3. C) fixed investment
  4. D) fixed investment plus planned inventory investment

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

17) There are two types of investment: ________ investment—the spending by business firms on equipment and structures, and planned spending on residential houses—and ________ investment—spending by business firms on additional holdings of raw materials, parts, and finished goods.

  1. A) planned; gross
  2. B) planned; inventory
  3. C) fixed; gross
  4. D) fixed; inventory

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

18) A fall in inventories is synonymous with ________ investment.

  1. A) negative fixed
  2. B) positive fixed
  3. C) positive inventory
  4. D) negative inventory

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

19) A difference between inventory investment and fixed investment is that ________.

  1. A) fixed investment is never unplanned
  2. B) fixed investment is never planned
  3. C) inventory investment is never unplanned
  4. D) unplanned inventory investment is always zero

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

20) Keynes mentioned two factors that influenced planned investment spending. They are ________.

  1. A) interest rates and disposable income
  2. B) interest rates and business expectations about the future
  3. C) disposable income and business expectations about the future
  4. D) interest rates and business expectations about inflation

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

21) Factors that influenced planned investment spending include ________.

  1. A) real interest rates
  2. B) financial frictions
  3. C) emotional waves of optimism and pessimism
  4. D) all of the above

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

22) Planned investment spending is higher ________.

  1. A) when real interest rate is higher
  2. B) during financial frictions
  3. C) when businesses are optimistic
  4. D) A and C only

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

 

23) Aggregate demand in an economy with no government or foreign trade is ________.

  1. A) consumer expenditure plus actual investment
  2. B) consumer expenditure plus planned investment
  3. C) consumer expenditure plus inventory investment
  4. D) consumer expenditure plus fixed investment

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

24) What is the marginal propensity to consume according to Keynes’s consumption theory? provide an example.

Answer:  Marginal propensity to consume or mpc is the slope of the consumption function line or ΔC/ΔYD and reflects the change in consumer expenditure that results from an additional dollar of disposable income. Keynes assumed that mpc is constant between the values of 0 and 1. If for example mpc = 0.5, this means that when disposable income increases by $1, the consumer will increase her consumption by $0.50.

Diff: 2      Type: ES

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

25) What do economists mean by the word “investment”?

Answer:  Economists use the word investment somewhat differently from other people. When people say that they are making an investment, they are normally referring to the purchase of common stocks or bonds, purchases that do not necessarily involve newly produced goods and services. But when economists speak of investment spending, they are referring to the purchase of new physical assets such as new machines or new house—purchases that add to aggregate demand.

Diff: 2      Type: ES

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

26) What types of investment exist according to Keynes’s theory of the determination of aggregate output? what is a major difference between the two according to Keynes?

Answer:  According to Keynes there are two types of investment. The first type is fixed investment, the spending by firms on equipment and structures and spending on housing. The second type is inventory investment, spending by firms on additional holdings of raw materials, parts, and finished goods, calculated as the change in holdings of these items in a given period say a year. The main difference between the two types of investment is that according to Keynes fixed investment is always planned, while inventory investment can be unplanned.

Diff: 2      Type: ES

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

27) How is Keynes’s consumption function defined? describe the terms used in this function?

Answer:  According to Keynes the consumer expenditure is related not to aggregate income, but to disposable income, the total income available for spending, equal to aggregate income (which is equivalent to aggregate output) minus taxes: Y – T. Keynes called the relationship between disposable income YD and consumer expenditure C the consumption function and expressed it as: C = a + (mpc × YD). The term mpc is the marginal propensity to consume, the term a stands for autonomous consumer expenditure, the amount of consumer expenditure that is independent of disposable income.

Diff: 2      Type: ES

Skill:  Recall

Objective:  21.2 List and describe the factors that determine the four components of aggregate demand (or planned expenditure)

 

21.3   Goods Market Equilibrium

 

1) If unplanned investment is positive, firms will ________ production and output will ________.

  1. A) cut; rise
  2. B) cut; fall
  3. C) increase; rise
  4. D) increase; fall

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

2) If unplanned investment is negative, firms will ________ production and output will ________.

  1. A) cut; rise
  2. B) cut; fall
  3. C) increase; rise
  4. D) increase; fall

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

3) In the Keynesian framework, as long as output is below the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to ________ production.

  1. A) negative; lower
  2. B) negative; raise
  3. C) positive; lower
  4. D) positive; raise

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

4) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to raise production.

  1. A) below; negative
  2. B) above; negative
  3. C) below; positive
  4. D) above; positive

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

5) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to lower production.

  1. A) below; negative
  2. B) above; negative
  3. C) below; positive
  4. D) above; positive

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

6) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain positive and firms will continue to ________ production.

  1. A) below; lower
  2. B) above; lower
  3. C) below; raise
  4. D) above; raise

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

7) In the Keynesian framework, as long as output is above the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to ________ production.

  1. A) negative; lower
  2. B) negative; raise
  3. C) positive; lower
  4. D) positive; raise

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

8) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain negative and firms will continue to ________ production.

  1. A) below; lower
  2. B) above; lower
  3. C) below; raise
  4. D) above; raise

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

9) In the Keynesian framework, as long as output is below the equilibrium level, unplanned inventory investment will remain negative, firms will continue to ________ production, and output will continue to ________.

  1. A) lower; fall
  2. B) lower; rise
  3. C) raise; fall
  4. D) raise; rise

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

10) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________, firms will continue to raise production, and output will continue to rise.

  1. A) below; negative
  2. B) above; negative
  3. C) below; positive
  4. D) above; positive

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

11) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________, firms will continue to lower production, and output will continue to fall.

  1. A) below; negative
  2. B) above; negative
  3. C) below; positive
  4. D) above; positive

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

12) An increase in unplanned inventory investment for the entire economy equals the excess of ________.

  1. A) output over aggregate supply
  2. B) output over aggregate demand
  3. C) aggregate supply over output
  4. D) aggregate demand over output

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

13) A decrease in unplanned inventory investment for the entire economy equals the excess of ________.

  1. A) output over aggregate supply
  2. B) output over aggregate demand
  3. C) aggregate supply over output
  4. D) aggregate demand over output

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

14) If aggregate demand is less than the level of aggregate output, then ________ inventory investment will be ________.

  1. A) planned; positive
  2. B) actual; positive
  3. C) actual; negative
  4. D) planned; negative

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

15) If aggregate demand falls short of current output, business firms will ________ production to ________ inventories.

  1. A) cut; keep from accumulating
  2. B) expand; keep from accumulating
  3. C) cut; build up
  4. D) expand; build up

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

16) If aggregated demand is less than actual output, unplanned inventory ________ will cause output to ________.

  1. A) accumulation; rise
  2. B) depletion; fall
  3. C) depletion; rise
  4. D) accumulation; fall

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

17) If actual output is less than equilibrium output, firms will ________ output to keep from ________ inventories.

  1. A) increase; accumulating
  2. B) increase; depleting
  3. C) decrease; depleting
  4. D) decrease; accumulating

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

18) If actual output is greater than equilibrium output, firms will ________ output to keep from ________ inventories.

  1. A) increase; accumulating
  2. B) increase; depleting
  3. C) decrease; depleting
  4. D) decrease; accumulating

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

 

19) When the level of unplanned inventory investment is equal to zero, the economy is ________.

  1. A) in disequilibrium
  2. B) in a recession
  3. C) in equilibrium
  4. D) overheating

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

20) If aggregate demand equals output, ________.

  1. A) the economy is in a recession
  2. B) output will increase
  3. C) output will fall
  4. D) the economy is at its equilibrium level

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

Situation 20-1

 

Assume a closed economy with no government.  Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9.

 

21) Using the information in Situation 20-1, if aggregate output is equal to $10000, then unplanned inventory investment equals ________.

  1. A) -$1000
  2. B) -$100
  3. C) $0
  4. D) $100

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

22) Using the information in Situation 20-1, if aggregate output equals $8000, the unplanned inventory investment equals ________.

  1. A) -$100
  2. B) $0
  3. C) $100
  4. D) $500

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

23) Using the information in Situation 20-1, the equilibrium level of aggregate output is ________.

  1. A) $900
  2. B) $8000
  3. C) $9000
  4. D) $10000

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

24) Using the information contained in Situation 20-1, if autonomous consumption increases by $100, then equilibrium aggregate output will change by ________.

  1. A) -$1000
  2. B) -$100
  3. C) $100
  4. D) $1000

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

25) Using the information contained in Situation 20-1, if planned investment decreases by $100, the equilibrium aggregate output will change by ________.

  1. A) -$1000
  2. B) $-100
  3. C) $100
  4. D) $1000

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

26) Keynes believed that changes in autonomous spending were dominated by changes in ________.

  1. A) consumer expenditure
  2. B) autonomous consumer expenditure
  3. C) investment spending
  4. D) taxes
  5. E) none of the above

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

 

27) Keynes believed that changes in autonomous spending were dominated by unstable fluctuations in ________, which are influenced by emotional waves of optimism and pessimism—factors he referred to as “animal spirits.”

  1. A) unplanned investment spending
  2. B) actual investment spending
  3. C) planned investment spending
  4. D) autonomous consumer expenditures

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

28) In the simple Keynesian framework, declines in planned investment spending that produce high unemployment can be offset by raising ________.

  1. A) taxes
  2. B) government spending
  3. C) consumer confidence
  4. D) business confidence

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

29) The Keynesian framework indicates that government can play an important role in determining aggregate output by ________.

  1. A) changing the level of government spending or taxes
  2. B) raising consumer confidence
  3. C) raising investor confidence
  4. D) changing the money supply and interest rates

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

30) A tax cut initially ________.

  1. A) increases consumption expenditure by an amount greater than the tax cut
  2. B) increases consumption expenditure by an amount equal to the tax cut
  3. C) increases consumption expenditure by an amount that is less than the value of the tax cut
  4. D) has no effect on consumption expenditure
  5. E) reduces consumption expenditure by an amount that is less than the value of the tax cut

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

 

31) Assume equilibrium at full employment for an economy characterized by the simple Keynesian model. If the government raises taxes to eliminate a budget deficit, then ________.

  1. A) the rate of unemployment will increase
  2. B) the level of aggregate output will increase
  3. C) the price level will increase
  4. D) the rate of interest will fall

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

Situation 20-2

 

Assume a closed economy.  Suppose that autonomous consumption equals $400, planned investment equals $500, government expenditure equals $200, net taxes equals $50, and the mpc equals 0.9.

 

32) Using the information in situation 20-2, if government spending increases by $100, then the equilibrium aggregate output will change by ________.

  1. A) -$1000
  2. B) -$100
  3. C) $100
  4. D) $1000

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

33) Using the information in Situation 20-2, if taxes increase by $10, then the equilibrium aggregate output will change by ________.

  1. A) -$90
  2. B) -$10
  3. C) $10
  4. D) $90

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

 

34) Using the information in situation 20-2, if government increases their spending by $50 and increases net taxes by 50, then equilibrium aggregate output will change by ________.

  1. A) -$100
  2. B) -$50
  3. C) $50
  4. D) $100

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

35) In a closed economy, aggregate demand is the sum of ________.

  1. A) consumer expenditure, actual investment spending, and government spending
  2. B) consumer expenditure, planned investment spending, and government spending
  3. C) consumer expenditure, actual investment spending, government spending, and net exports
  4. D) consumer expenditure, planned investment spending, government spending, and net exports

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

36) In an open economy, aggregate demand is the sum of ________.

  1. A) consumer expenditure, actual investment spending, and government spending
  2. B) consumer expenditure, planned investment spending, and government spending
  3. C) consumer expenditure, actual investment spending, government spending, and net exports
  4. D) consumer expenditure, planned investment spending, government spending, and net exports

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

37) If net exports increase by 100 and the mpc is 0.75, equilibrium aggregate output increases by ________.

  1. A) 100
  2. B) 250
  3. C) 400
  4. D) 750

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

 

38) If net exports increase by 250 and the mpc is 0.75, equilibrium aggregate output increases by ________.

  1. A) 250
  2. B) 500
  3. C) 750
  4. D) 1000

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

39) If net exports decrease by 250 and the mpc is 0.75, equilibrium aggregate output ________.

  1. A) increases by 1000
  2. B) increases by 750
  3. C) decreases by 750
  4. D) decreases by 1000

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

40) Aggregate output is ________ related to autonomous consumer expenditure, and is ________ related to planned investment spending.

  1. A) negatively; negatively
  2. B) negatively; positively
  3. C) positively; negatively
  4. D) positively; positively

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

41) Aggregate output is ________ related to autonomous consumer expenditure, and is ________ related to the level of taxes.

  1. A) negatively; negatively
  2. B) negatively; positively
  3. C) positively; negatively
  4. D) positively; positively

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

 

42) Aggregate output is increased by a decrease in ________.

  1. A) autonomous consumption
  2. B) government spending
  3. C) planned investment
  4. D) net taxes

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

43) Equilibrium output is reduced by an increase in ________.

  1. A) planned investment
  2. B) taxes
  3. C) government spending
  4. D) net exports

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

44) Keynes believed that unstable investment caused the Great Depression. Using the simple Keynesian model, explain how a fall in investment affects equilibrium output.

Answer:  A fall in investment will reduce aggregate output by a greater amount that the initial fall in investment.  This happens because of the multiplier effect.

Diff: 2      Type: ES

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

45) Describe Keynes’s equilibrium condition and what it implies.

Answer:  Equilibrium occurs when the total quantity of the output equals the total amount of aggregate demand or planned expenditure.  When Y = YAD producers are able to sell all their output and have no reason to change their production because there is no unplanned inventory investment.

Diff: 2      Type: ES

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

46) Define the IS curve.

Answer:  The IS curve shows the relationship between aggregate output and the real interest rate when the goods market is in equilibrium.

Diff: 2      Type: ES

Skill:  Applied

Objective:  21.3 Solve for the goods market equilibrium

 

 

21.4   Understanding the IS Curve

 

1) If the interest rate falls, other things being equal, investment spending will ________.

  1. A) fall
  2. B) rise
  3. C) either rise, fall, or remain unchanged
  4. D) not be affected

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

2) When the interest rate rises, ________.

  1. A) planned investment falls
  2. B) planned investment rises
  3. C) planned investment will be unaffected
  4. D) equilibrium income increases

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

3) When the interest rate is ________, ________ investments in physical capital will earn more than the cost of borrowed funds, so planned investment spending is ________.

  1. A) high; few; high
  2. B) high; few; low
  3. C) low; few; high
  4. D) low; many; low
  5. E) high; many; high

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

4) When interest rates rise in the United States (with the price level fixed), the value of the dollar ________, domestic goods become ________ expensive, and net exports ________.

  1. A) falls; less; fall
  2. B) falls; more; rise
  3. C) rises; more; fall
  4. D) rises; less; fall

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

5) When interest rates fall in the United States (with the price level fixed), the value of the dollar ________, domestic goods become ________ expensive, and net exports ________.

  1. A) falls; less; fall
  2. B) falls; less; rise
  3. C) falls; more; fall
  4. D) rises; less; fall

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

6) An increase in interest rates ________.

  1. A) increases the value of the dollar, net exports, and equilibrium output
  2. B) increases the value of the dollar, reducing net exports and equilibrium output
  3. C) reduces the value of the dollar, net exports, and equilibrium output
  4. D) reduces the value of the dollar, increasing net exports and equilibrium output

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

7) A decrease in interest rates ________.

  1. A) increases the value of the dollar, net exports, and equilibrium output
  2. B) increases the value of the dollar, reducing net exports and equilibrium output
  3. C) reduces the value of the dollar, net exports, and equilibrium output
  4. D) reduces the value of the dollar, increasing net exports and equilibrium output

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

8) The negative relation between investment spending and the interest rate is what gives the ________ curve its ________ slope.

  1. A) IS; upward
  2. B) IS; downward
  3. C) LM; downward
  4. D) LM; upward

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

9) Points on the IS curve satisfy ________ market equilibrium.

  1. A) money
  2. B) goods
  3. C) stock
  4. D) bond

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

10) The ________ traces out the points for which total quantity of goods produced equals total quantity of goods demanded.

  1. A) LM curve
  2. B) IS curve
  3. C) consumption function
  4. D) investment schedule

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

11) The ________ describes points for which the goods market is in equilibrium.

  1. A) LM curve
  2. B) IS curve
  3. C) consumption function
  4. D) investment schedule

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

12) Everything else held constant, if aggregate output is to the right of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________.

  1. A) supply; fall
  2. B) supply; rise
  3. C) demand; fall
  4. D) demand; rise

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

13) Everything else held constant, if aggregate output is to the left of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________.

  1. A) supply; fall
  2. B) supply; rise
  3. C) demand; fall
  4. D) demand; rise

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

14) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess supply of goods which will cause aggregate output to ________.

  1. A) right; fall
  2. B) right; rise
  3. C) left; fall
  4. D) left; rise

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

15) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess demand of goods which will cause aggregate output to ________.

  1. A) right; fall
  2. B) right; rise
  3. C) left; fall
  4. D) left; rise

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

16) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess ________ of goods which will cause aggregate output to fall.

  1. A) right; supply
  2. B) right; demand
  3. C) left; supply
  4. D) left; demand

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

17) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess ________ of goods which will cause aggregate output to rise.

  1. A) right; supply
  2. B) right; demand
  3. C) left; supply
  4. D) left; demand

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

18) Describe how the economy heads towards equilibrium and why it has a tendency to settle there.

Answer:  When production is above the equilibrium level, output will exceed aggregate demand and firms will continue cutting production and aggregate output will decrease.  When aggregate output is below the equilibrium level of output, firms want to increase production because inventories are declining by more than they desire and aggregate output will increase.  When aggregate demand equals aggregate output there is no further tendency for output to change.

Diff: 2      Type: ES

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

 

19) The Bank of Canada increases interest rates when they want to reduce aggregate demand to fight inflation. How do increases in the interest rate reduce aggregate demand?

Answer:  Increases in interest rates reduce planned investment. The decrease in investment reduces equilibrium output by a multiple amount due to the multiplier effect. Also, increases in interest rates increase the value of the dollar, reducing net exports, which reduce aggregate demand and equilibrium output by a multiple amount.

Diff: 2      Type: ES

Skill:  Recall

Objective:  21.4 Describe why the IS curve slopes downward and why the economy heads to a goods market equilibrium

21.5   Factors That Shift the IS Curve

 

1) Other things equal, a decrease in autonomous consumption shifts the ________ curve to the ________.

  1. A) IS; right
  2. B) IS; left
  3. C) LM; left
  4. D) LM; right

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

2) In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.

  1. A) up; rise
  2. B) up; fall
  3. C) down; rise
  4. D) down; fall

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

3) An increase in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.

  1. A) up; rise
  2. B) up; fall
  3. C) down; rise
  4. D) down; fall

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

 

4) An increase in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant.

  1. A) up; left
  2. B) up; right
  3. C) down; left
  4. D) down; right

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

5) A decline in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant.

  1. A) up; left
  2. B) up; right
  3. C) down; left
  4. D) down; right

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

6) A decline in autonomous consumer expenditure causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

  1. A) rise; left
  2. B) rise; right
  3. C) fall; left
  4. D) fall; right

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

7) An increase in autonomous consumer expenditure causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

  1. A) rise; left
  2. B) rise; right
  3. C) fall; left
  4. D) fall; right

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

8) An increase in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

  1. A) rise; LM; right
  2. B) rise; IS; right
  3. C) fall; LM; left
  4. D) fall; IS; left

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

9) A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

  1. A) rise; LM; right
  2. B) rise; IS; right
  3. C) fall; IS; left
  4. D) fall; LM; left

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

10) Everything else held constant, changes in the interest rate affect planned investment spending and hence the equilibrium level of output, but this change in investment spending ________.

  1. A) merely causes a movement along the IS curve and not a shift
  2. B) is crowded out by higher taxes
  3. C) is crowded out by higher government spending
  4. D) is crowded out by lower consumer expenditures

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

 

11) A rise in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.

  1. A) rise; LM; right
  2. B) rise; IS; right
  3. C) fall; IS; left
  4. D) fall; LM; left

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

12) A decline in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.

  1. A) rise; LM; right
  2. B) rise; IS; right
  3. C) fall; IS; left
  4. D) fall; LM; left

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

13) A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.

  1. A) up; rise
  2. B) up; fall
  3. C) down; rise
  4. D) down; fall

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

14) An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.

  1. A) up; rise
  2. B) up; fall
  3. C) down; rise
  4. D) down; fall

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

15) An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant.

  1. A) up; left
  2. B) up; right
  3. C) down; left
  4. D) down; right

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

16) A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant.

  1. A) up; left
  2. B) up; right
  3. C) down; left
  4. D) down; right

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

17) A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

  1. A) rise; left
  2. B) rise; right
  3. C) fall; left
  4. D) fall; right

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

 

18) An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.

  1. A) rise; left
  2. B) rise; right
  3. C) fall; left
  4. D) fall; right

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

19) A decrease in autonomous planned investment spending, other things equal, shifts the ________ curve to the ________.

  1. A) IS; right
  2. B) IS; left
  3. C) LM; left
  4. D) LM; right

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

20) An increase in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

  1. A) rise; LM; right
  2. B) rise; IS; right
  3. C) fall; IS; left
  4. D) fall; LM; left

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

21) A reduction in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.

  1. A) rise; LM; right
  2. B) fall; IS; left
  3. C) fall; LM; left
  4. D) rise; IS; right

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

22) The IS curve shifts to the left when ________.

  1. A) taxes increase
  2. B) government spending increases
  3. C) the money supply increases
  4. D) autonomous planned investment spending increases

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

23) A decline in taxes ________ consumer expenditure and shifts the ________ curve to the ________, everything else held constant.

  1. A) raises; LM; right
  2. B) lowers; IS; left
  3. C) raises; IS; right
  4. D) lowers; LM; left

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

24) A tax increase ________ disposable income, ________ consumption expenditure, and shifts the IS curve to the ________, everything else held constant.

  1. A) increases; increases; right
  2. B) increases; decreases; left
  3. C) decreases; increases; left
  4. D) decreases; decreases; left

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

25) A tax cut ________ disposable income, ________ consumption expenditure, and shifts the IS curve to the ________, everything else held constant.

  1. A) increases; increases; right
  2. B) increases; decreases; right
  3. C) decreases; increases; left
  4. D) decreases; decreases; left

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

 

26) If Canadian university students decide that drinking Mexican-brewed beer helps one get noticed, net exports will tend to fall, causing aggregate demand to ________ and the ________ curve to shift to the left, everything else held constant.

  1. A) fall; LM
  2. B) fall; IS
  3. C) rise; LM
  4. D) rise; IS

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

27) If young business professionals in Canada suddenly decide that driving German-made cars is an important status symbol, net exports will tend to ________ causing aggregate demand to ________, everything else held constant.

  1. A) fall; fall
  2. B) fall; rise
  3. C) rise; fall
  4. D) rise; rise

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

28) An autonomous depreciation of the Canadian dollar makes Canadian goods ________ relative to foreign goods and results in a ________ in Canadian net exports, everything else held constant.

  1. A) cheaper; decline
  2. B) cheaper; rise
  3. C) more expensive; decline
  4. D) more expensive; rise

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

29) An autonomous appreciation of the Canadian dollar makes Canadian goods ________ expensive relative to foreign goods which ________ net exports in Canada.

  1. A) less; decreases
  2. B) less; increases
  3. C) more; decreases
  4. D) more; increases

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

30) A shift in tastes toward foreign goods ________ net exports in Canada and causes the quantity of aggregate output demanded to ________ in Canada, everything else held constant.

  1. A) decreases; rise
  2. B) decreases; fall
  3. C) increases; rise
  4. D) increases; fall

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

31) Everything else held constant, a shift in tastes in Canada toward Mexican goods will ________ net exports in Canada and cause the quantity of aggregate output demanded to ________ in Mexico.

  1. A) decrease; rise
  2. B) decrease; fall
  3. C) increase; rise
  4. D) increase; fall

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

32) A shift in tastes toward American goods ________ net exports in Canada. and causes the quantity of aggregate output demanded to ________ in Canada, everything else held constant.

  1. A) decreases; rise
  2. B) decreases; fall
  3. C) increases; rise
  4. D) increases; fall

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

33) Everything else held constant, a shift in tastes in Canada towards Canadian goods will ________ net exports in Canada and cause the quantity of aggregate output demanded to ________ in Mexico.

  1. A) decrease; rise
  2. B) decrease; fall
  3. C) increase; rise
  4. D) increase; fall

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

34) A shift in tastes toward Canadian goods ________ net exports in Canada and causes the IS curve to shift to the ________ in Canada, everything else held constant.

  1. A) decreases; right
  2. B) decreases; left
  3. C) increases; right
  4. D) increases; left

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

35) A shift in tastes toward foreign goods ________ net exports in Canada and causes the IS curve to shift to the ________ in Canada everything else held constant.

  1. A) decreases; right
  2. B) decreases; left
  3. C) increases; right
  4. D) increases; left

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

36) A depreciation of the Canadian dollar makes Canadian goods cheaper relative to foreign goods, resulting in a ________ in net exports in Canada and a ________ shift of the IS curve in Canada, everything else held constant.

  1. A) fall; leftward
  2. B) rise; leftward
  3. C) fall; rightward
  4. D) rise; rightward

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

37) An appreciation of the Canadian dollar makes foreign goods cheaper relative to Canadian goods, resulting in a ________ in net exports in Canada and a ________ shift of the IS curve in Canada, everything else held constant.

  1. A) fall; leftward
  2. B) rise; leftward
  3. C) fall; rightward
  4. D) rise; rightward

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

 

38) Which of the following does not shift the IS curve?

  1. A) An increase in autonomous consumption.
  2. B) An increase in government spending.
  3. C) A decline in government spending.
  4. D) A fall in the interest rate.

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

39) What are the factors that can shift the IS curve to the right?

Answer:  The factors that can shift the IS curve to the right are: an increase in autonomous consumer demand, an increase in investment spending unrelated to the interest rate, an increase in government spending, a decrease in taxes, and an increase in net exports.

Diff: 2      Type: ES

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve

 

40) What is the role of the government, according to Keynes, in stimulating the economy, raising aggregate output and reducing unemployment when the economy is in a recession?

Answer:  Keynes realized that government spending and taxes could also affect the position of the aggregate demand function and hence be manipulated to restore the economy to full employment and Yad = C + I + G + NX. Thus, government spending adds directly to aggregate demand, while taxes do not affect aggregate demand directly. This is why when there are taxes disposable income does not equal aggregate output. It equals output Y minus taxes T: YD = Y – T. According to Keynes’s analysis an equal increase in government spending and taxes in the economy that is in recession can restore full employment output as government spending leads to a multiplied change in aggregate output through the expenditure multiplier:  × G. The equal increase in taxes, only reduces consumer expenditure by mpc × T. Thus the final result is an increase in aggregate output.

Diff: 2      Type: ES

Skill:  Recall

Objective:  21.5 List the factors that shift the IS curve and describe how they shift the IS curve