Question 1

If market interest rates increase,the prices of existing bonds will

Accepted Answer

A)  decrease. 
B)  not change. 
C)  increase. 
D)  decrease if Real GDP decreases and increase if Real GDP increases. 
A)  decrease. 
B)  not change. 
C)  increase. 
D)  decrease if Real GDP decreases and increase if Real GDP increases.

Question 2

The economy is in a recessionary gap,wages are inflexible downward,and investment spending is insensitive to changes in the interest rate.In this situation,a Keynesian is likely to advocate the use of __________ policy.

Accepted Answer

A)  expansionary monetary 
B)  contractionary monetary 
C)  expansionary fiscal 
D)  contractionary fiscal 
A)  expansionary monetary 
B)  contractionary monetary 
C)  expansionary fiscal 
D)  contractionary fiscal

Question 3

Which of the following statements is false?

Accepted Answer

A)  Activists are more likely to advocate fine-tuning the economy than nonactivists. 
B)  Activists believe that monetary and fiscal policies can be and should be deliberately used to smooth out the business cycle. 
C)  Nonactivists believe that monetary and fiscal policies cannot and should not be deliberately used to (try to) smooth out the business cycle. 
D)  Nonactivists favor rules-based monetary policy. 
E)  none of the above 
A)  Activists are more likely to advocate fine-tuning the economy than nonactivists. 
B)  Activists believe that monetary and fiscal policies can be and should be deliberately used to smooth out the business cycle. 
C)  Nonactivists believe that monetary and fiscal policies cannot and should not be deliberately used to (try to) smooth out the business cycle. 
D)  Nonactivists favor rules-based monetary policy. 
E)  none of the above

Question 4

The economy is in a recessionary gap and there is evidence that the economy is in a liquidity trap.In this situation,a Keynesian is likely to advocate the use of __________ policy.

Accepted Answer

A)  expansionary fiscal 
B)  contractionary fiscal 
C)  expansionary monetary 
D)  contractionary monetary 
A)  expansionary fiscal 
B)  contractionary fiscal 
C)  expansionary monetary 
D)  contractionary monetary

Question 5

If a country's rules-based monetary policy sets the annual money supply growth rate equal to the average annual growth rate of Real GDP,and velocity is a constant,then the price level

Accepted Answer

A)  is also constant. 
B)  rises in years when Real GDP rises. 
C)  rises in years when Real GDP growth is less than average. 
D)  rises in years when Real GDP growth is greater than average. 
A)  is also constant. 
B)  rises in years when Real GDP rises. 
C)  rises in years when Real GDP growth is less than average. 
D)  rises in years when Real GDP growth is greater than average.

Question 6

Assume the Keynesian transmission mechanism is operational and the economy is currently operating in the horizontal portion of the AS curve. If the money supply decreases and the demand for money curve is downward sloping and investment is interest-____________,then Real GDP will ___________________.

Accepted Answer

A)  sensitive; fall 
B)  insensitive; fall 
C)  sensitive; rise 
D)  insensitive; rise 
E)  sensitive; remain unchanged 
A)  sensitive; fall 
B)  insensitive; fall 
C)  sensitive; rise 
D)  insensitive; rise 
E)  sensitive; remain unchanged

Question 7

Exhibit 15-l
  
-Refer to Exhibit 15-l.One argument against the use of activist monetary policy claims that it can destabilize the economy.For example,suppose we are in a recessionary gap.Expansionary monetary policy is implemented,but there are so many lags that by the time it has its effect,self-regulation has already closed the gap by itself.The end result is a movement from point

Accepted Answer

A)  B to point D. 
B)  B to point C. 
C)  B to point A. 
D)  A to point C. 
E)  C to point B 
A)  B to point D. 
B)  B to point C. 
C)  B to point A. 
D)  A to point C. 
E)  C to point B

Question 8

Suppose that there is a financial crisis,and people choose to spend less. As a result,velocity drops by 5 percent. According to market monetarists,if the GDP target growth rate is 3 percent,the Fed would need to increase the money supply by ______________ percent in order to achieve their GDP target.

Accepted Answer

A)  8 
B)  2 
C)  4 
D)  5 
A)  8 
B)  2 
C)  4 
D)  5

Question 9

Suppose a constant-money-growth-rate rule of 3 percent is being considered.If it is estimated that average annual Real GDP growth is 3.5 percent and it turns out that velocity is rising by 2 percent a year on average,the rule would produce an average annual rate of inflation of __________ percent.

Accepted Answer

A)  1.5 
B)  2.5 
C)  3.0 
D)  5.5 
E)  2.0 
A)  1.5 
B)  2.5 
C)  3.0 
D)  5.5 
E)  2.0

Question 10

Suppose that one year ago you purchased a $100 bond with an interest payment of $5 per year and,at the time,the interest rate was 5 percent.One year later the interest rate has increased to 6.5 percent,and you still hold the bond.If you were to sell your bond now,the price that you could sell it for would be

Accepted Answer

A)  higher than it was when you bought it. 
B)  lower than it was when you bought it. 
C)  the same as it was when you bought it, that is, $100. 
D)  More information is necessary to answer the question. 
A)  higher than it was when you bought it. 
B)  lower than it was when you bought it. 
C)  the same as it was when you bought it, that is, $100. 
D)  More information is necessary to answer the question.

Question 11

Exhibit 15-3
  
-Refer to Exhibit 15-3.The economy is currently at point 5.If contractionary monetary policy is implemented,and prices are flexible,the economy will likely move to point ______ in the short run.

Accepted Answer

A)  1 
B)  3 
C)  2 
D)  4 
E)  none of the above 
A)  1 
B)  3 
C)  2 
D)  4 
E)  none of the above

Question 12

According to the Keynesian transmission mechanism,an increase in the money supply will __________ the interest rate,causing a __________ in investment,which then __________ Real GDP.

Accepted Answer

A)  raise; fall; raises 
B)  raise; rise; lowers 
C)  raise; fall; lowers 
D)  lower; fall; lowers 
E)  lower; rise; raises 
A)  raise; fall; raises 
B)  raise; rise; lowers 
C)  raise; fall; lowers 
D)  lower; fall; lowers 
E)  lower; rise; raises

Question 13

As the interest rate increases,the opportunity cost of holding money __________ and individuals choose to hold __________ money.

Accepted Answer

A)  rises; more 
B)  falls; less 
C)  rises; less 
D)  falls; more 
A)  rises; more 
B)  falls; less 
C)  rises; less 
D)  falls; more

Question 14

Which scenario best explains the Keynesian transmission mechanism when the investment demand curve is vertical?

Accepted Answer

A)  The interest rate falls, investment falls even more, the AD curve shifts rightward, but total expenditures do not change. 
B)  The interest rate falls, investment rises, total expenditures rise, and the AD curve shifts rightward. 
C)  The interest rate falls, investment falls instead of rising, and the AD curve ends up shifting leftward. 
D)  The interest rate falls, but investment does not respond; there is no change in total expenditures and no shift in the AD curve. 
A)  The interest rate falls, investment falls even more, the AD curve shifts rightward, but total expenditures do not change. 
B)  The interest rate falls, investment rises, total expenditures rise, and the AD curve shifts rightward. 
C)  The interest rate falls, investment falls instead of rising, and the AD curve ends up shifting leftward. 
D)  The interest rate falls, but investment does not respond; there is no change in total expenditures and no shift in the AD curve.

Question 15

From the Patterns of Sustainable Specialization and Trade (PSST)perspective,expansionary monetary and fiscal policies that are designed to boost aggregate demand

Accepted Answer

A)  will not work if the money market is in disequilibrium, and may end up making the economy worse. 
B)  will not work unless alternative sources of energy are employed. 
C)  may not work if buyers and sellers are out of sync with one another, and may end up making the economy worse. 
D)  are always successful in pushing the economy to full-employment. 
A)  will not work if the money market is in disequilibrium, and may end up making the economy worse. 
B)  will not work unless alternative sources of energy are employed. 
C)  may not work if buyers and sellers are out of sync with one another, and may end up making the economy worse. 
D)  are always successful in pushing the economy to full-employment.

Question 16

Persons who argue against the deliberate use of fiscal and monetary policies to smooth out the business cycle are referred to as

Accepted Answer

A)  nonactivists. 
B)  fine-tuners. 
C)  activists. 
D)  b and c 
E)  none of the above 
A)  nonactivists. 
B)  fine-tuners. 
C)  activists. 
D)  b and c 
E)  none of the above

Question 17

Which scenario best explains the Keynesian transmission mechanism when the money supply increases while the money market is in a liquidity trap?

Accepted Answer

A)  The interest rate and investment are not affected; there is no shift in the AD curve. 
B)  The interest rate falls, investment rises, total expenditures rise, and the AD curve shifts rightward. 
C)  The interest rate falls, investment falls instead of rising, and the AD curve ends up shifting leftward. 
D)  The interest rate falls, but investment does not respond; there is no change in total expenditures and no shift in the AD curve. 
A)  The interest rate and investment are not affected; there is no shift in the AD curve. 
B)  The interest rate falls, investment rises, total expenditures rise, and the AD curve shifts rightward. 
C)  The interest rate falls, investment falls instead of rising, and the AD curve ends up shifting leftward. 
D)  The interest rate falls, but investment does not respond; there is no change in total expenditures and no shift in the AD curve.

Question 18

As the interest rate falls,the quantity

Accepted Answer

A)  demanded of money falls. 
B)  demanded of money rises. 
C)  supplied of money rises. 
D)  supplied of money falls. 
A)  demanded of money falls. 
B)  demanded of money rises. 
C)  supplied of money rises. 
D)  supplied of money falls.

Question 19

Suppose that the bond market and the money market both start out in equilibrium,then the Federal Reserve increases the money supply. The result will be a ______________ in the money market and a _________________ in the bond market,which will push bond prices _________________ and interest rates will ___________________ until a new equilibrium is reached.

Accepted Answer

A)  surplus; shortage; up; fall 
B)  shortage; surplus; down; rise 
C)  surplus; shortage; down; rise 
D)  shortage; surplus; down; fall 
A)  surplus; shortage; up; fall 
B)  shortage; surplus; down; rise 
C)  surplus; shortage; down; rise 
D)  shortage; surplus; down; fall

Question 20

The money supply curve is usually horizontal.

Accepted Answer

A) True 
 B)False

Exam 15: Monetary Policy

If market interest rates increase,the prices of existing bonds will

The economy is in a recessionary gap,wages are inflexible downward,and investment spending is insensitive to changes in the interest rate.In this situation,a Keynesian is likely to advocate the use of __________ policy.

Which of the following statements is false?

The economy is in a recessionary gap and there is evidence that the economy is in a liquidity trap.In this situation,a Keynesian is likely to advocate the use of __________ policy.

If a country's rules-based monetary policy sets the annual money supply growth rate equal to the average annual growth rate of Real GDP,and velocity is a constant,then the price level

Suppose a constant-money-growth-rate rule of 3 percent is being considered.If it is estimated that average annual Real GDP growth is 3.5 percent and it turns out that velocity is rising by 2 percent a year on average,the rule would produce an average annual rate of inflation of __________ percent.

Exhibit 15-3 -Refer to Exhibit 15-3.The economy is currently at point 5.If contractionary monetary policy is implemented,and prices are flexible,the economy will likely move to point ______ in the short run.

According to the Keynesian transmission mechanism,an increase in the money supply will __________ the interest rate,causing a __________ in investment,which then __________ Real GDP.

As the interest rate increases,the opportunity cost of holding money __________ and individuals choose to hold __________ money.

Which scenario best explains the Keynesian transmission mechanism when the investment demand curve is vertical?

From the Patterns of Sustainable Specialization and Trade (PSST)perspective,expansionary monetary and fiscal policies that are designed to boost aggregate demand

Persons who argue against the deliberate use of fiscal and monetary policies to smooth out the business cycle are referred to as

Which scenario best explains the Keynesian transmission mechanism when the money supply increases while the money market is in a liquidity trap?

As the interest rate falls,the quantity

The money supply curve is usually horizontal.

What Economics Is About

Production Possibilities Frontier Framework

Supply and Demand: Theory

Prices: Free, Controlled, and Relative

Supply, Demand, and Price: Applications

Macroeconomic Measurements: Prices and Unemployment

Macroeconomic Measurements: GDP and Real GDP

Aggregate Demand and Aggregate Supply

Classical Macroeconomics and the Self Regulating Economy

Keynesian Macroeconomics and Economic Instability: A Critique of the Self-Regulating Economy

Fiscal Policy and the Federal Budget

Money, Banking,and the Financial System

The Federal Reserve System

Money and the Economy

Expectations Theory and the Economy

Economic Growth: Resources, Technology, Ideas, and Institutions

The Financial Crisis of 2007-2009

Debates in Macroeconomics Over the Role and Effects of Government

Elasticity

Consumer Choice: Maximizing Utility and Behavioral Economics

Production and Costs

Perfect Competition

Monopoly

Monopolistic Competition, Oligopoly, and Game Theory

Government and Product Markets: Antitrust and Regulation

Factor Markets: With Emphasis on the Labor Market

Wages,Unions,and Labor

The Distribution of Income and Poverty

Interest, Rent, and Profit

Market Failure: Externalities, Public Goods, and Asymmetric Information

Public Choice and Special-Interest-Group Politics

Building Theories to Explain Everyday Life: From Observations to Questions to Theories to Predictions

International Trade

International Finance

Globalization and International Impacts on the Economy

The Economic Case For and Against Government: Five Topics Considered

Stocks, Bonds, Futures, and Options

Agriculture: Problems, Policies, and Unintended Effects

Filters

According to the Keynesian transmission mechanism,an increase in the money supply will the interest rate,causing a in investment,which then __ Real GDP.

As the interest rate increases,the opportunity cost of holding money and individuals choose to hold money.