Question 1

Describe the monetary policy known as inflation targeting. What are the three major issues that surround this practice?

Accepted Answer

Inflation targeting requires that the Fe

Question 2

Which of the following might break the link in the Keynesian transmission mechanism between the expansionary monetary policy and the goods-and-services market?

Accepted Answer

A)  a downward-sloping investment demand curve 
B)  a vertical money supply curve 
C)  a belief on the part of individuals that bond prices are extraordinarily low 
D)  all of the above 
E)  none of the above 
A)  a downward-sloping investment demand curve 
B)  a vertical money supply curve 
C)  a belief on the part of individuals that bond prices are extraordinarily low 
D)  all of the above 
E)  none of the above

Question 3

The economy is in the horizontal portion of the AS curve,there is no liquidity trap and investment is sensitive to changes in the interest rate.According to the Keynesian transmission mechanism,if the money supply drops the interest rate will __________,investment spending will __________,the AD curve will shift to the __________,and the price level will __________.

Accepted Answer

A)  rise; fall; left; rise 
B)  fall; rise; right; rise 
C)  rise; fall; left; not change 
D)  fall; fall; left; fall 
E)  rise; rise; left; fall 
A)  rise; fall; left; rise 
B)  fall; rise; right; rise 
C)  rise; fall; left; not change 
D)  fall; fall; left; fall 
E)  rise; rise; left; fall

Question 4

The quantity demanded of money decreases as the supply of money increases.

Accepted Answer

A) True 
 B)False

Question 5

The economy is in the horizontal portion of the AS curve,there is no liquidity trap and investment is sensitive to changes in the interest rate.According to the Keynesian transmission mechanism,if the money supply increases the interest rate will __________,investment spending will __________,the AD curve will shift to the __________,and Real GDP will __________.

Accepted Answer

A)  fall; rise; right; not change 
B)  fall; rise; left; rise 
C)  rise; rise; right; rise 
D)  fall; rise; right; fall 
E)  fall; fall; left; fall 
A)  fall; rise; right; not change 
B)  fall; rise; left; rise 
C)  rise; rise; right; rise 
D)  fall; rise; right; fall 
E)  fall; fall; left; fall

Question 6

According to Keynesian economists,monetary policy is __________ effective at changing the price level and Real GDP.

Accepted Answer

A)  always 
B)  sometimes 
C)  never 
D)  There is no Keynesian position with respect to monetary policy. 
A)  always 
B)  sometimes 
C)  never 
D)  There is no Keynesian position with respect to monetary policy.

Question 7

Compared to the Keynesian transmission mechanism,the monetarist transmission mechanism is

Accepted Answer

A)  direct. 
B)  indirect. 
C)  inverse. 
D)  none of the above 
A)  direct. 
B)  indirect. 
C)  inverse. 
D)  none of the above

Question 8

If the investment demand curve is vertical,a decrease in the interest rate will __________ investment,and therefore aggregate demand will __________.

Accepted Answer

A)  increase; increase 
B)  decrease; increase 
C)  decrease; decrease 
D)  decrease; remain unchanged 
E)  not affect; remain unchanged 
A)  increase; increase 
B)  decrease; increase 
C)  decrease; decrease 
D)  decrease; remain unchanged 
E)  not affect; remain unchanged

Question 9

The economy is in the horizontal portion of the AS curve,investment spending is interest insensitive and there is no liquidity trap.According to the Keynesian transmission mechanism,if the money supply increases the interest rate will __________,investment spending will __________,the AD curve will __________,and Real GDP will __________.

Accepted Answer

A)  fall; fall; left; fall 
B)  rise; drop; left; fall 
C)  fall; remain unchanged; not shift; not change 
D)  rise; remain unchanged; not shift; not change 
E)  none of the above 
A)  fall; fall; left; fall 
B)  rise; drop; left; fall 
C)  fall; remain unchanged; not shift; not change 
D)  rise; remain unchanged; not shift; not change 
E)  none of the above

Question 10

One argument in favor of activist monetary policy is that the economy does not always equilibrate quickly enough at Natural Real GDP.

Accepted Answer

A) True 
 B)False

Question 11

If Real GDP increases at an annual rate of 4 percent and velocity increases at a rate of 1 percent per year,then rules-based monetary policy advocates who wish to maintain a stable price level would set the annual money supply growth rate at

Accepted Answer

A)  1 
B)  2 
C)  3 
D)  4 
E)  6 
A)  1 
B)  2 
C)  3 
D)  4 
E)  6

Question 12

The rules-based monetary policy reads: The money supply will increase 3 percent each year.If the average annual growth rate in Real GDP is 2 percent and velocity increases by 1 percent each year,it follows that

Accepted Answer

A)  the price level will, on average, rise 2 percent a year. 
B)  the price level will rise 2 percent this year. 
C)  in some years the price level will rise by more than in other years. 
D)  in some years the price level may not change at all. 
E)  a, c and d 
A)  the price level will, on average, rise 2 percent a year. 
B)  the price level will rise 2 percent this year. 
C)  in some years the price level will rise by more than in other years. 
D)  in some years the price level may not change at all. 
E)  a, c and d

Question 13

The demand-for-money curve illustrates the __________ relationship between the quantity demanded of money and __________.

Accepted Answer

A)  inverse; the interest rate 
B)  direct; GDP. 
C)  direct; the interest rate 
D)  inverse; GDP 
A)  inverse; the interest rate 
B)  direct; GDP. 
C)  direct; the interest rate 
D)  inverse; GDP

Question 14

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 increases and the demand for money curve is downward sloping and investment is interest ____________,then Real GDP will ___________________.

Accepted Answer

A)  sensitive; rise 
B)  insensitive; remain unchanged 
C)  sensitive; remain unchanged 
D)  insensitive; rise 
E)  a and b 
A)  sensitive; rise 
B)  insensitive; remain unchanged 
C)  sensitive; remain unchanged 
D)  insensitive; rise 
E)  a and b

Question 15

Economic fine-tuning is the (usually frequent)use of

Accepted Answer

A)  monetary policy that is based on a predetermined steady growth rate in the money supply to counteract even small undesirable movements in economic activity. 
B)  only fiscal policy to counteract even small undesirable movements in economic activity. 
C)  monetary and fiscal policies to counteract even small undesirable movements in economic activity. 
D)  fiscal policy that both balances the budget and counteracts even small undesirable movements in economic activity. 
A)  monetary policy that is based on a predetermined steady growth rate in the money supply to counteract even small undesirable movements in economic activity. 
B)  only fiscal policy to counteract even small undesirable movements in economic activity. 
C)  monetary and fiscal policies to counteract even small undesirable movements in economic activity. 
D)  fiscal policy that both balances the budget and counteracts even small undesirable movements in economic activity.

Question 16

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

Accepted Answer

A)  increases; increases; more 
B)  increases; decreases; more 
C)  increases; decreases; less 
D)  decreases; increases; more 
E)  decreases; decreases; more 
A)  increases; increases; more 
B)  increases; decreases; more 
C)  increases; decreases; less 
D)  decreases; increases; more 
E)  decreases; decreases; more

Question 17

Which of the following statements is true?

Accepted Answer

A)  In the monetarist transmission mechanism, changes in the money market directly affect aggregate demand. 
B)  In the monetarist transmission mechanism, there is no need for the money market to affect the loanable funds market or investment before aggregate demand is affected. 
C)  In the monetarist transmission mechanism, if individuals are faced with an excess supply of money, they spend that money on a wide variety of goods---not just bonds or other assets, as is the case in the Keynesian transmission mechanism. 
D)  a and b 
E)  a, b and c 
A)  In the monetarist transmission mechanism, changes in the money market directly affect aggregate demand. 
B)  In the monetarist transmission mechanism, there is no need for the money market to affect the loanable funds market or investment before aggregate demand is affected. 
C)  In the monetarist transmission mechanism, if individuals are faced with an excess supply of money, they spend that money on a wide variety of goods---not just bonds or other assets, as is the case in the Keynesian transmission mechanism. 
D)  a and b 
E)  a, b and c

Question 18

Which of the following may block the Keynesian transmission mechanism?

Accepted Answer

A)  the loanable funds market 
B)  aggregate demand 
C)  interest-insensitive investment 
D)  the liquidity trap 
E)  c and d 
A)  the loanable funds market 
B)  aggregate demand 
C)  interest-insensitive investment 
D)  the liquidity trap 
E)  c and d

Question 19

Which of the following events prompted the birth of market monetarism?

Accepted Answer

A)  the Great Depression 
B)  the Great Recession 
C)  the 1907 Bankers' Panic 
D)  the establishment of the European Union 
A)  the Great Depression 
B)  the Great Recession 
C)  the 1907 Bankers' Panic 
D)  the establishment of the European Union

Question 20

Interest rates and the price of old or existing bonds are

Accepted Answer

A)  directly related. 
B)  independent of each other. 
C)  inversely related. 
D)  sometimes directly related and sometimes inversely related. 
E)  There is not enough information to answer the question. 
A)  directly related. 
B)  independent of each other. 
C)  inversely related. 
D)  sometimes directly related and sometimes inversely related. 
E)  There is not enough information to answer the question.

Exam 15: Monetary Policy

Describe the monetary policy known as inflation targeting. What are the three major issues that surround this practice?

Which of the following might break the link in the Keynesian transmission mechanism between the expansionary monetary policy and the goods-and-services market?

The quantity demanded of money decreases as the supply of money increases.

According to Keynesian economists,monetary policy is __________ effective at changing the price level and Real GDP.

Compared to the Keynesian transmission mechanism,the monetarist transmission mechanism is

If the investment demand curve is vertical,a decrease in the interest rate will __________ investment,and therefore aggregate demand will __________.

One argument in favor of activist monetary policy is that the economy does not always equilibrate quickly enough at Natural Real GDP.

If Real GDP increases at an annual rate of 4 percent and velocity increases at a rate of 1 percent per year,then rules-based monetary policy advocates who wish to maintain a stable price level would set the annual money supply growth rate at

The rules-based monetary policy reads: The money supply will increase 3 percent each year.If the average annual growth rate in Real GDP is 2 percent and velocity increases by 1 percent each year,it follows that

The demand-for-money curve illustrates the __________ relationship between the quantity demanded of money and __________.

Economic fine-tuning is the (usually frequent)use of

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

Which of the following statements is true?

Which of the following may block the Keynesian transmission mechanism?

Which of the following events prompted the birth of market monetarism?

Interest rates and the price of old or existing bonds are

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If the investment demand curve is vertical,a decrease in the interest rate will investment,and therefore aggregate demand will .

The demand-for-money curve illustrates the relationship between the quantity demanded of money and .

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