1. What would happen to each of these components of the liquidity-preference model if the Bank of Canada decides to raise the reserve requirement?

a. The money supply would: (decrease / increase).

b. The interest rates would: (decrease / increase).

c. The quantity of money in the economy would: (decrease / increase).

d. Money demand curve: (a movement upward / a movement downward).

2. For each of the following situations, identify whether the Bank of Canada is likely to pursue an expansionary or a contractionary monetary policy.

a. The unemployment rate is at 0.5 percent: (Contractionary / Expansionary)

b. The economy is experiencing record growth in GDP: (Expansionary/ Contractionary)

c. The unemployment rate is at 15 percent: (Expansionary / Contractionary)

d. Inflation has reached 10 percent, a recent high: (Contractionary / Expansionary)

e. An earthquake recently demolished a major city, causing a major recession: (Expansionary / Contractionary)

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