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

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

Question 1

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

Accepted Answer

Aggregate demand shifts to the right, causing GDP and the price level to rise.

Question 2

Which of the following best explains why the aggregate demand curve is downward sloping?

Accepted Answer

Because higher prices reduce purchasing power, increase interest rates, and make exports less competitive.

Question 3

If the reserve ratio in the banking system is 20%, what is the maximum possible money multiplier?

Accepted Answer

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

Question 4

A country experiences a technological breakthrough that increases productivity. Which curve shifts, and in which direction?

Accepted Answer

Long-run aggregate supply shifts right.

Question 5

Which of the following is NOT a function of money?

Accepted Answer

Source of government revenue

Question 6

If the government increases its spending while all other components remain constant, what is the immediate effect on aggregate demand?

Accepted Answer

Aggregate demand shifts to the right.

Question 7

During a liquidity trap, why might monetary policy become less effective?

Accepted Answer

Because interest rates are already near zero, so lowering them further does not stimulate borrowing.

Question 8

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

Accepted Answer

An increase in expected inflation

Question 9

Suppose the Canadian dollar appreciates significantly against other currencies. What is the likely effect on aggregate demand?

Accepted Answer

Aggregate demand shifts to the left due to decreased net exports.

Question 10

A government implements a contractionary monetary policy. Which of the following is the most likely sequence of events?

Accepted Answer

Interest rates rise, aggregate demand decreases, inflation falls.

Question 11

Which of the following best describes the difference between a movement along the aggregate demand curve and a shift of the aggregate demand curve?

Accepted Answer

A movement is caused by a change in price level; a shift is caused by changes in external factors like government spending or taxes.

Question 12

If banks decide to hold more excess reserves and the public holds more cash, what happens to the actual money multiplier compared to the theoretical maximum?

Accepted Answer

The actual money multiplier decreases below the theoretical maximum.

Question 13

Which of the following is an example of fiat money?

Accepted Answer

Canadian dollar bills issued by the government

Question 14

Suppose the economy is experiencing an inflationary gap. Which policy would be most appropriate to restore equilibrium?

Accepted Answer

Contractionary monetary policy

Question 15

If the government cuts taxes and consumers become more optimistic about the future, what is the combined effect on aggregate demand?

Accepted Answer

Aggregate demand shifts to the right.

Question 16

Which of the following best describes the formula for aggregate demand?

Accepted Answer

$$AD = C + I + G + NX$$

Question 17

If the Bank of Canada buys government bonds on the open market, what is the expected effect on the money supply and interest rates?

Accepted Answer

Money supply increases, interest rates decrease.

Question 18

Which of the following would shift the long-run aggregate supply (LRAS) curve to the right?

Accepted Answer

An increase in the labour force

Question 19

If the price level rises but all other factors remain constant, what happens in the aggregate demand and supply model?

Accepted Answer

There is a movement along the aggregate demand curve.

Question 20

Which of the following is included in M1+ but NOT in M1++ in the Canadian money supply?

Accepted Answer

None; M1++ includes all components of M1+ and more.

Aggregate Demand, Aggregate Supply, and Monetary Policy: Study Guide (Ch. 9–11)

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