The Diagrams Below Illustrate Two Alternative Approaches to Implementing Monetary

question 35

Multiple Choice

The diagrams below illustrate two alternative approaches to implementing monetary policy. The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to M0.
FIGURE 28-1
-Refer to Figure 28-1. If the Bank of Canadaʹs goal is to increase the target interest rate from 2% to 3%, then the most effective approach is to

• A) reduce the money supply to M1, as shown in part ii), and then let the interest rate adjust to 3%.
• B) increase the money supply to M1, as shown in part ii), and then let the interest rate adjust to 3%.
• C) allow the money supply to shift to M1 by market forces, which will cause the interest rate to rise to 3%.
• D) raise the interest rate to 3%, as shown in part i), and then buy government securities in financial markets to accommodate the decline in the quantity of money demanded.
• E) raise the interest rate to 3%, as shown in part i), and then sell government securities in financial markets to accommodate the decline in the quantity of money demanded.

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Definitions:

Fossilized Deposits

Organic or inorganic remains of organisms that have been preserved over geological time, usually in sedimentary rocks.

Hard Outer Shell

A protective external layer found in some animals, including crustaceans and certain insects, which offers defense against predators and environmental conditions.

Amoeboid Cells

Cells that move or feed by forming extensions of their cytoplasm, known as pseudopodia.

Rhizarians

A diverse supergroup of amoeboid cells that often have hard outer shells, called tests, through which cytoplasmic projections extend; include forams, actinopods, and certain shell-less amoebas.