According to Real Business Cycle Theory, If the Bank of Canada

question 15

Multiple Choice

According to real business cycle theory, if the Bank of Canada increases the quantity of money when real GDP decreases, real GDP

• A)will increase but only temporarily.
• B)will increase permanently.
• C)and the price level will both be unaffected.
• D)will be unaffected, but the price level will rise.
• E)will decrease due to the inefficiencies introduced into production as a result.

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Definitions:

Simple Money Multiplier

A formula used to determine the maximum amount of money that can be created by a bank's deposits under a fractional reserve banking system.

Required Reserve Ratio

The fraction of deposits that banks are legally mandated to keep as reserves and not lend out.

Excess Reserves

The reserves held by financial institutions in excess of the minimum reserve requirements set by central banks; these are not used for lending and can influence the money supply.

Commercial Banks

Financial institutions that provide services such as accepting deposits, providing business and personal loans, and offering basic investment products.