Changes in the Money Supply in an Open Economy, As Compared to a Closed Economy

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Changes in the money supply in an open economy, as compared to a closed economy, A) are likely to effect on AD because the secondary effect of exchange rates will offset the changes created by monetary have a smaller disturbances. B) are likely to have a greater effect on AD because of the secondary effect that exchange rates have on exports. C) are the same in either situation. D) affect investment to a greater degree because foreign investors can create new investment in an open economy. E) cannot be determined with the available information.

FIGURE 28-1

2) Refer to 28-1. Given the money demand curve, , a decrease in the quantity of money demanded from can Figure be caused by A) a decrease in the price level. B) an increase in the price level. C) an increase in real GDP. D) a decrease in the rate of interest. E) an increase in the rate of interest.

3) The "transactions demand" for money arises from the fact that A) households wish to have all their wealth in the form of money. B) there is uncertainty in the receipts of income. C) households want to keep cash on had to buy bonds if bond prices drop. D) there is uncertainty about the movement of interest rates. E) households decide to hold money in order to make purchases of goods and services..

4) If the supply of money increases, then, ceteris paribus, bond prices will A) rise as the rate of interest rises. B) fall as the rate of interest falls. C) stay the same. D) fall as the rate of interest rises. E) rise as the rate of interest falls.

5) Consider y equilibrium and the monetary transmission mechanism. A rise in the price level, with no change in the supply monetar of money, will A) increase the demand for money and decrease aggregate expenditure. B) decrease the demand for money and increase aggregate demand. C) decrease the demand for money and decrease aggregate demand. D) increase the demand for money and increase aggregate expenditure. E) decrease aggregate demand but not affect the demand for money.

6) When there is an excess supply of money, monetary equilibrium is restored through A) the price of bonds falling. B) the price level falling. C) the price of bonds increasing. D) individuals attempting to sell bonds. E) interest rates rising.

FIGURE 28-4

7) Refer to 28-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. The initial Figure effect is A) a shift of the AS curve to AS1 and a decrease in real GDP to Y2. B) a shift of the AD curve to AD1, and then a shift back to AD0 to restore equilibrium at E0. C) no change in the short-run equilibrium or level of real GDP. D) a simultaneous shift of AD to AD1 and AS to AS1, resulting in a new equilibrium at E2. E) a shift of the AD curve to AD1 and an increase in real GDP to Y1.

8) Suppose market interest rate is stable at 4 percent and we see a decline in bond prices (and thus a rise in bond yields). the One explanation for this is that A) there is a positive relationship between interest rates and bond prices. B) bond issuers are facing an excess demand for their bonds. C) there is no causal relationship between market interest rates and bond prices. D) bond purchasers perceive an increase in riskiness and thus a lower expected present value from those bonds. E) bond purchasers perceive a reduction in riskiness and thus a higher expected present value from those bonds.

9) If there are just two assets, bonds and money, then an excess demand for money implies A) nothing about conditions of demand for the other financial asset. B) equilibrium in the bond market. C) an indeterminate equilibrium in the bond market. D) an excess demand for bonds. E) an excess supply of bonds.

10) Consider promises to make coupon payments of $100 each year for three years (beginning in one year's time) and also a bond repays the face value of $2000 at the end of the third year. If the market interest rate is 4 percent, what is the that present value of this bond? A) $288.45 B) $1966.39 C) $1866.67 D) $2055.50 E) $ 1 Iio 1n 11) 2in 3th e m o n e y s u p pl y. 1 or 2 or 3 B) 1 only C) 2 only D) 3 only E) 1 o R t rate causes t t rate I ere a large d sing reserves h wages and h stimulates f and e available to e other e an persistent c the l factor l increase in t recessionar r commercial o prices to o the hy gap, an e banks. wrise, which wdemand e appropriat a e causes the e for money, r e monetary r AS curve r which e policy i to shift to i causes the could n . Real n MD curve winclude t GDP falls t to shift to e to $795 e . The r billion and r interest e the price e rate rises s level rises s to 3%. t to 102.

FIGURE 28- 5 12) reducing the Bank's target for the overnight interest rate. D) increasing the bank rate. E) the Bank of Canada selling government securities to the public.

Section Two: Problem.

Y C I G NX AE 800 640 100 120 20 900 730 100 120 -10 1000 820 100 120 -40 1100 910 100 120 -70 1200 1000 100 120 -100

Desired Investment Expenditure Rate of Interest Quantity of (ID ) (i) money demanded 20 10 90 60 9 100 100 8 110 140 7 120 180 6 130 200 5 140 240 4 150 300 3 160

i) The potential national income is 1100 ii) The SRAS is horizontal at the price level of 2.0 for all levels of national income less than potential, at which level it becomes vertical. iii) The money demand curve is not influenced by changes in the level of national income. iv) The current money supply is 110. v) The objective of the central bank is zero output gap.

a) Find each of the following: - The marginal propensity to spend - The simple multiplier - The current interest rate - Equilibrium Income - The Output Gap b) How must investment be increased/decreased from its current level in order to achieve potential national income? c) Should the money supply be increased or decreased? d) What is the value of the interest rate and money supply that exists when the output gap is zero?