Question 1

According to Figure 15.5,the liquidity trap occurs at an interest rate of

Accepted Answer

A) 8 percent only. 
B) 2 percent only. 
C) 2 percent and 4 percent. 
D) 2 percent,4 percent,6 percent,and 8 percent. 
A) 8 percent only. 
B) 2 percent only. 
C) 2 percent and 4 percent. 
D) 2 percent,4 percent,6 percent,and 8 percent.

Question 2

Ceteris paribus,if the Fed sells bonds through open market operations,the money

Accepted Answer

A) Supply curve should shift rightward. 
B) Supply curve should shift leftward. 
C) Demand curve should shift rightward. 
D) Demand curve should shift leftward. 
A) Supply curve should shift rightward. 
B) Supply curve should shift leftward. 
C) Demand curve should shift rightward. 
D) Demand curve should shift leftward.

Question 3

Name and explain the three reasons for holding money balances.

Accepted Answer

One reason to hold money balances is to

Question 4

Monetary stimulus will fail if

Accepted Answer

A) Banks lend too much money. 
B) Short-term interest rates are affected but long-term interest rates are not. 
C) Consumers spend too much money,creating a shortage of money. 
D) Lower interest rates cause households to not refinance mortgages and not apply for new consumer loans. 
A) Banks lend too much money. 
B) Short-term interest rates are affected but long-term interest rates are not. 
C) Consumers spend too much money,creating a shortage of money. 
D) Lower interest rates cause households to not refinance mortgages and not apply for new consumer loans.

Question 5

According to monetarists,the aggregate supply curve is

Accepted Answer

A) Upward-sloping to the right. 
B) Vertical at the natural rate of unemployment. 
C) Flat until full employment is reached. 
D) Flat. 
A) Upward-sloping to the right. 
B) Vertical at the natural rate of unemployment. 
C) Flat until full employment is reached. 
D) Flat.

Question 6

Which shift should occur if the Fed raises the discount rate?

Accepted Answer

A) The investment demand curve should shift rightward. 
B) The aggregate supply curve should shift rightward. 
C) The aggregate demand curve should shift leftward. 
D) The aggregate demand curve should shift rightward. 
A) The investment demand curve should shift rightward. 
B) The aggregate supply curve should shift rightward. 
C) The aggregate demand curve should shift leftward. 
D) The aggregate demand curve should shift rightward.

Question 7

All of the following impact the effectiveness of Fed policy except

Accepted Answer

A) Global sources of money. 
B) The time lag between when interest rates change and when investment changes. 
C) Trade Unions. 
D) Expectations about the economy in the future. 
A) Global sources of money. 
B) The time lag between when interest rates change and when investment changes. 
C) Trade Unions. 
D) Expectations about the economy in the future.

Question 8

Refer to Figure 15.6.All of the following Fed actions are likely to increase the aggregate demand curve from AD1 to AD2 except

Accepted Answer

A) Buying bonds in the open market. 
B) Lowering the reserve requirement. 
C) Lowering the federal funds rate. 
D) Raising the discount rate. 
A) Buying bonds in the open market. 
B) Lowering the reserve requirement. 
C) Lowering the federal funds rate. 
D) Raising the discount rate.

Question 9

A horizontal aggregate supply curve causes higher inflation,rather than higher output,to result from increases in the money supply.

Accepted Answer

A) True 
 B)False

Question 10

A decrease in aggregate demand could be caused by

Accepted Answer

A) A decrease in the value of the domestic currency. 
B) A booming economy. 
C) Contractionary monetary policy. 
D) Expansionary monetary policy. 
A) A decrease in the value of the domestic currency. 
B) A booming economy. 
C) Contractionary monetary policy. 
D) Expansionary monetary policy.

Question 11

One In the News article titled "Fed to Expand Bond-Purchase Program" suggests that interest rates

Accepted Answer

A) Will rise to encourage less borrowing for home mortgages and other loans. 
B) Will rise to encourage more savings. 
C) Will fall to encourage more borrowing for home mortgages and other loans. 
D) Decrease aggregate supply. 
A) Will rise to encourage less borrowing for home mortgages and other loans. 
B) Will rise to encourage more savings. 
C) Will fall to encourage more borrowing for home mortgages and other loans. 
D) Decrease aggregate supply.

Question 12

Which of the following is true about monetary policy in the liquidity trap?

Accepted Answer

A) Monetary policy will be unable to reduce interest rates further to stimulate investment. 
B) The opportunity cost of holding money is relatively high at interest rates implied by the liquidity trap. 
C) An expansion of the money supply will have the large effect of raising interest rates when the economy is in the liquidity trap. 
D) The demand for money is interest-inelastic in the liquidity trap. 
A) Monetary policy will be unable to reduce interest rates further to stimulate investment. 
B) The opportunity cost of holding money is relatively high at interest rates implied by the liquidity trap. 
C) An expansion of the money supply will have the large effect of raising interest rates when the economy is in the liquidity trap. 
D) The demand for money is interest-inelastic in the liquidity trap.

Question 13

Regarding the equation of exchange,all of the following are true according to monetarists except

Accepted Answer

A) A reduction in M can leave real output unaffected. 
B) The velocity of money is stable. 
C) Changes in M may cause changes in P. 
D) In reality,MV does not always equal PQ but it is still incredibly useful. 
A) A reduction in M can leave real output unaffected. 
B) The velocity of money is stable. 
C) Changes in M may cause changes in P. 
D) In reality,MV does not always equal PQ but it is still incredibly useful.

Question 14

The effectiveness of monetary policy is influenced by

Accepted Answer

A) The time it takes for lower interest rates to make investment spending more profitable. 
B) The willingness of Congress to implement it. 
C) How responsive the money supply is to changes in taxes. 
D) Reports by the Congressional Budget Office. 
A) The time it takes for lower interest rates to make investment spending more profitable. 
B) The willingness of Congress to implement it. 
C) How responsive the money supply is to changes in taxes. 
D) Reports by the Congressional Budget Office.

Question 15

The Fed can change the equilibrium rate of interest by changing

Accepted Answer

A) Government spending. 
B) Taxes. 
C) Reserve requirements or the discount rate,or through open market operations. 
D) Tariffs. 
A) Government spending. 
B) Taxes. 
C) Reserve requirements or the discount rate,or through open market operations. 
D) Tariffs.

Question 16

The liquidity trap illustrated in Figure 15.5 is the result of a

Accepted Answer

A) Low opportunity cost of money. 
B) Low demand for cash at low interest rates. 
C) Fed ceiling on interest rates. 
D) Currency that is not serving its function as a store of value. 
A) Low opportunity cost of money. 
B) Low demand for cash at low interest rates. 
C) Fed ceiling on interest rates. 
D) Currency that is not serving its function as a store of value.

Question 17

The equilibrium rate of interest is determined by

Accepted Answer

A) Money demand and money supply. 
B) The U.S.Treasury. 
C) The president of the Federal Reserve Bank of New York. 
D) The Federal Closed Market Committee. 
A) Money demand and money supply. 
B) The U.S.Treasury. 
C) The president of the Federal Reserve Bank of New York. 
D) The Federal Closed Market Committee.

Question 18

Because monetarists believe that output is sensitive to changes in the money supply,they recommend that the money supply be allowed to grow at a steady and predictable rate.

Accepted Answer

A) True 
 B)False

Question 19

The choice to hold money in the form of cash

Accepted Answer

A) Has no opportunity cost. 
B) Results in forgone interest. 
C) Results in increased interest income. 
D) Results in greater outstanding debt. 
A) Has no opportunity cost. 
B) Results in forgone interest. 
C) Results in increased interest income. 
D) Results in greater outstanding debt.

Question 20

The cost of holding money in the form of cash is

Accepted Answer

A) Negative. 
B) Always considered by noneconomists when deciding how much money to hold. 
C) Equal to whatever interest you would have received at the bank or other investment alternatives. 
D) Nonexistent. 
A) Negative. 
B) Always considered by noneconomists when deciding how much money to hold. 
C) Equal to whatever interest you would have received at the bank or other investment alternatives. 
D) Nonexistent.

Exam 15: Monetary Policy

According to Figure 15.5,the liquidity trap occurs at an interest rate of

Ceteris paribus,if the Fed sells bonds through open market operations,the money

Name and explain the three reasons for holding money balances.

Monetary stimulus will fail if

According to monetarists,the aggregate supply curve is

Which shift should occur if the Fed raises the discount rate?

All of the following impact the effectiveness of Fed policy except

Refer to Figure 15.6.All of the following Fed actions are likely to increase the aggregate demand curve from AD1 to AD2 except

A horizontal aggregate supply curve causes higher inflation,rather than higher output,to result from increases in the money supply.

A decrease in aggregate demand could be caused by

One In the News article titled "Fed to Expand Bond-Purchase Program" suggests that interest rates

Which of the following is true about monetary policy in the liquidity trap?

Regarding the equation of exchange,all of the following are true according to monetarists except

The effectiveness of monetary policy is influenced by

The Fed can change the equilibrium rate of interest by changing

The liquidity trap illustrated in Figure 15.5 is the result of a

The equilibrium rate of interest is determined by

Because monetarists believe that output is sensitive to changes in the money supply,they recommend that the money supply be allowed to grow at a steady and predictable rate.

The choice to hold money in the form of cash

The cost of holding money in the form of cash is

Economics: the Core Issues

The Useconomy: a Global View

Supply and Demand

The Role of Government

National Income Accounting

Unemployment

Inflation

The Business Cycle

Aggregate Demand

Self-Adjustment or Instability

Fiscal Policy

Deficits and Debt

Money and Banks

The Federal Reserve System

Supply-Side Policy: Short-Run Options

Growth and Productivity: Long-Run Possibilities

Theory Versus Reality

Consumer Choice

Elasticity

The Costs of Production

The Competitive Firm

Competitive Markets

Monopoly

Oligopoly

Monopolistic Competition

Natural Monopolies: Deregulation

Environmental Protection

The Farm Problem

The Labor Market

Labor Unions

Financial Markets

Taxes: Equity Versus Efficiency

Transfer Payments: Welfare and Social Security

International Trade

International Finance

Global Poverty

Filters

Refer to Figure 15.6.All of the following Fed actions are likely to increase the aggregate demand curve from AD₁ to AD₂except