Question 1

If the economy is in the liquidity trap,people think that

Accepted Answer

A)  the money supply will soon rise. 
B)  bond prices have nowhere to go but up. 
C)  bond prices will not change. 
D)  bond prices have nowhere to go but down. 
E)  none of the above 
A)  the money supply will soon rise. 
B)  bond prices have nowhere to go but up. 
C)  bond prices will not change. 
D)  bond prices have nowhere to go but down. 
E)  none of the above

Question 2

If the money market is in the liquidity trap,it is operating in the __________ segment of the __________ demand curve.

Accepted Answer

A)  vertical; investment 
B)  vertical; money 
C)  horizontal; investment 
D)  horizontal; money 
A)  vertical; investment 
B)  vertical; money 
C)  horizontal; investment 
D)  horizontal; money

Question 3

According to the Taylor Rule,if the inflation rate is 3 percent and the GDP gap is 2 percent,what does the federal funds rate target equal?

Accepted Answer

A)  8.5 percent 
B)  5.5 percent 
C)  3.5 percent 
D)  6.5 percent 
A)  8.5 percent 
B)  5.5 percent 
C)  3.5 percent 
D)  6.5 percent

Question 4

Economist Smith favors an activist monetary policy.He says that if the economy is going to be stabilized over time,it is necessary to fine-tune the money supply to the particular economic conditions that exist.What would economist Jones,who favors rules-based monetary policy,say to economist Smith?

Accepted Answer

A)  Because of long lags, activist monetary policy is likely to be destabilizing rather than stabilizing. 
B)  There have been times when activist monetary policy has worked well. 
C)  There have been times when a constant-money-growth-rate rule has worked poorly. 
D)  Flexibility is desirable when it comes to monetary policy. 
A)  Because of long lags, activist monetary policy is likely to be destabilizing rather than stabilizing. 
B)  There have been times when activist monetary policy has worked well. 
C)  There have been times when a constant-money-growth-rate rule has worked poorly. 
D)  Flexibility is desirable when it comes to monetary policy.

Question 5

Nonactivists argue against the use of discretionary monetary policy and rules-based monetary policy.

Accepted Answer

A) True 
 B)False

Question 6

If the money market is in the liquidity trap,then people

Accepted Answer

A)  do not want to hold money because its value is at its lowest. 
B)  want to hold bonds because the interest rate is quite high. 
C)  do not want to hold bonds because their price is likely to decrease. 
D)  want to hold bonds because their price is high. 
E)  a, b and d 
A)  do not want to hold money because its value is at its lowest. 
B)  want to hold bonds because the interest rate is quite high. 
C)  do not want to hold bonds because their price is likely to decrease. 
D)  want to hold bonds because their price is high. 
E)  a, b and d

Question 7

A general definition of the "transmission mechanism" is: the routes or channels that ripple effects created in the

Accepted Answer

A)  market for goods and the services travel to affect the money market. 
B)  money market travel to affect the market for goods and services. 
C)  labor market travel to affect the market for goods and services. 
D)  market for goods and services travel to affect the labor market. 
E)  none of the above 
A)  market for goods and the services travel to affect the money market. 
B)  money market travel to affect the market for goods and services. 
C)  labor market travel to affect the market for goods and services. 
D)  market for goods and services travel to affect the labor market. 
E)  none of the above

Question 8

Which best describes the Keynesian transmission mechanism when the money supply increases?

Accepted Answer

A)  The interest rate rises; this in turn reduces investment spending, which in turn raises total expenditures and shifts the AD curve rightward. 
B)  The interest rate falls; this in turn stimulates investment spending, which in turn raises total expenditures and shifts the AD curve leftward. 
C)  The interest rate falls; this in turn stimulates investment spending, which in turn raises total expenditures and shifts the AD curve rightward. 
D)  The interest rate falls; this in turn stimulates investment spending, which in turn lowers total expenditures and shifts the AD curve leftward. 
A)  The interest rate rises; this in turn reduces investment spending, which in turn raises total expenditures and shifts the AD curve rightward. 
B)  The interest rate falls; this in turn stimulates investment spending, which in turn raises total expenditures and shifts the AD curve leftward. 
C)  The interest rate falls; this in turn stimulates investment spending, which in turn raises total expenditures and shifts the AD curve rightward. 
D)  The interest rate falls; this in turn stimulates investment spending, which in turn lowers total expenditures and shifts the AD curve leftward.

Question 9

Which of the following statements is likely to be made by an economist who does not believe in activist monetary policy? (1)The more closely monetary policy can he designed to meet the particulars of a given economic environment,the better.(2)Because of long and uncertain time lags,activist monetary policy may be destabilizing rather than stabilizing.(3)There is sufficient flexibility in wages and prices in modern economies to allow the economy to equilibrate in reasonable speed at the natural level of Real GDP,(4)The "same-for-all-seasons" monetary policy is the way to proceed.(5)There is evidence that monetary policy in the mid-1970s caused a recession.

Accepted Answer

A)  (1), (2), and (3) 
B)  (1), (4), and (5) 
C)  (2), (3), and (4) 
D)  (3), (4), and (5) 
E)  (1) only 
A)  (1), (2), and (3) 
B)  (1), (4), and (5) 
C)  (2), (3), and (4) 
D)  (3), (4), and (5) 
E)  (1) only

Question 10

Traditional monetarists advocate for a rule for _____________ ,while market monetarists argue that monetary policy should focus on a ______________________.

Accepted Answer

A)  nominal GDP target; money supply growth 
B)  Real GDP target; nominal GDP target 
C)  money supply growth; Real GDP target 
D)  money supply growth; nominal GDP target 
A)  nominal GDP target; money supply growth 
B)  Real GDP target; nominal GDP target 
C)  money supply growth; Real GDP target 
D)  money supply growth; nominal GDP target

Question 11

To eliminate a recessionary gap the Fed typically uses __________ monetary policy,and to eliminate an inflationary gap the Fed typically uses __________ monetary policy.

Accepted Answer

A)  expansionary; expansionary 
B)  expansionary; contractionary 
C)  contractionary; contractionary 
D)  contractionary; expansionary 
A)  expansionary; expansionary 
B)  expansionary; contractionary 
C)  contractionary; contractionary 
D)  contractionary; expansionary

Question 12

Which of the following is true?

Accepted Answer

A)  The demand curve for money balances represents a direct relationship between the quantity demanded of money balances and the price of holding money balances. 
B)  In the United States, the position of the money supply curve is determined exclusively by the Fed. 
C)  The "money market" discussed in this chapter refers to the market for short-term securities. 
D)  If, at a given interest rate, individuals want to hold less money than is supplied, this will put downward pressure on the interest rate. 
E)  none of the above 
A)  The demand curve for money balances represents a direct relationship between the quantity demanded of money balances and the price of holding money balances. 
B)  In the United States, the position of the money supply curve is determined exclusively by the Fed. 
C)  The "money market" discussed in this chapter refers to the market for short-term securities. 
D)  If, at a given interest rate, individuals want to hold less money than is supplied, this will put downward pressure on the interest rate. 
E)  none of the above

Question 13

Describe the Keynesian transmission mechanism for a decrease in the money supply.Assuming that no liquidity trap exists,that investment is interest-sensitive,and that the economy is in the horizontal portion of the AS curve,what happens to Real GDP and the price level? How can you tell if this is a direct transmission mechanism or an indirect one?

Accepted Answer

When the money supply decreases,interest

Question 14

Equilibrium in the money market exists when the quantity demanded of money equals the quantity supplied of money.

Accepted Answer

A) True 
 B)False

Question 15

The economy is in the horizontal portion of the AS curve,there is a liquidity trap,and investment spending is sensitive to changes in the interest rate.According to the Keynesian transmission mechanism,if the money supply increases the interest rate __________,investment spending __________,the AD curve __________ and the price level __________.

Accepted Answer

A)  falls; rises; shifts to the right; rises 
B)  falls; rises; shifts to the right; remains unchanged 
C)  does not change; does not change; does not change; does not change 
D)  does not change; shifts to the left; does not change; rises 
E)  rises; falls; left; falls 
A)  falls; rises; shifts to the right; rises 
B)  falls; rises; shifts to the right; remains unchanged 
C)  does not change; does not change; does not change; does not change 
D)  does not change; shifts to the left; does not change; rises 
E)  rises; falls; left; falls

Question 16

In the liquidity trap,the demand curve for investment is horizontal.

Accepted Answer

A) True 
 B)False

Question 17

The liquidity trap refers to the

Accepted Answer

A)  assumption that the money supply curve is vertical as a result of the Fed's control. 
B)  problem that occurs when interest rates reach such high levels that no individuals want to hold their wealth in the form of money. 
C)  situation that occurs when an excess supply of money results in people holding more money than they desire. 
D)  possibility that interest rates drop so low that people willingly hold all the additions to the money supply, rather than use it to buy bonds. 
A)  assumption that the money supply curve is vertical as a result of the Fed's control. 
B)  problem that occurs when interest rates reach such high levels that no individuals want to hold their wealth in the form of money. 
C)  situation that occurs when an excess supply of money results in people holding more money than they desire. 
D)  possibility that interest rates drop so low that people willingly hold all the additions to the money supply, rather than use it to buy bonds.

Question 18

As the interest rate __________,the quantity supplied of money __________ and the quantity demanded of money __________.

Accepted Answer

A)  falls; rises; falls 
B)  rises; remains unchanged; falls 
C)  falls; remains unchanged; falls 
D)  rises; rises; rises 
E)  none of the above 
A)  falls; rises; falls 
B)  rises; remains unchanged; falls 
C)  falls; remains unchanged; falls 
D)  rises; rises; rises 
E)  none of the above

Question 19

According to the Keynesian transmission mechanism,an increase in the money supply causes a(n)__________ in the interest rate and a(n)__________ in investment,which in turn causes a(n)__________ in total expenditures and aggregate demand.

Accepted Answer

A)  increase; decrease; decrease 
B)  increase; increase; decrease 
C)  decrease; increase; increase 
D)  decrease; decrease; increase 
A)  increase; decrease; decrease 
B)  increase; increase; decrease 
C)  decrease; increase; increase 
D)  decrease; decrease; increase

Question 20

One criticism of monetary policy based on a predetermined steady growth rate in money supply is that

Accepted Answer

A)  wages and prices are sufficiently flexible to allow the economy to restore the natural level of Real GDP on its own. 
B)  the total lag in monetary policy may be too long to allow for effective monetary policy. 
C)  changes in velocity, if not accounted for, can then be a source of price instability. 
D)  a and b 
E)  all of the above 
A)  wages and prices are sufficiently flexible to allow the economy to restore the natural level of Real GDP on its own. 
B)  the total lag in monetary policy may be too long to allow for effective monetary policy. 
C)  changes in velocity, if not accounted for, can then be a source of price instability. 
D)  a and b 
E)  all of the above

Exam 15: Monetary Policy

If the economy is in the liquidity trap,people think that

If the money market is in the liquidity trap,it is operating in the __________ segment of the __________ demand curve.

According to the Taylor Rule,if the inflation rate is 3 percent and the GDP gap is 2 percent,what does the federal funds rate target equal?

Economist Smith favors an activist monetary policy.He says that if the economy is going to be stabilized over time,it is necessary to fine-tune the money supply to the particular economic conditions that exist.What would economist Jones,who favors rules-based monetary policy,say to economist Smith?

Nonactivists argue against the use of discretionary monetary policy and rules-based monetary policy.

If the money market is in the liquidity trap,then people

A general definition of the "transmission mechanism" is: the routes or channels that ripple effects created in the

Which best describes the Keynesian transmission mechanism when the money supply increases?

Traditional monetarists advocate for a rule for _____________ ,while market monetarists argue that monetary policy should focus on a ______________________.

To eliminate a recessionary gap the Fed typically uses __________ monetary policy,and to eliminate an inflationary gap the Fed typically uses __________ monetary policy.

Which of the following is true?

Equilibrium in the money market exists when the quantity demanded of money equals the quantity supplied of money.

In the liquidity trap,the demand curve for investment is horizontal.

The liquidity trap refers to the

As the interest rate __________,the quantity supplied of money __________ and the quantity demanded of money __________.

According to the Keynesian transmission mechanism,an increase in the money supply causes a(n)__________ in the interest rate and a(n)__________ in investment,which in turn causes a(n)__________ in total expenditures and aggregate demand.

One criticism of monetary policy based on a predetermined steady growth rate in money supply is that

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If the money market is in the liquidity trap,it is operating in the segment of the demand curve.

Traditional monetarists advocate for a rule for _ ,while market monetarists argue that monetary policy should focus on a __________.

To eliminate a recessionary gap the Fed typically uses monetary policy,and to eliminate an inflationary gap the Fed typically uses monetary policy.

As the interest rate ,the quantity supplied of money and the quantity demanded of money __.

According to the Keynesian transmission mechanism,an increase in the money supply causes a(n) in the interest rate and a(n) in investment,which in turn causes a(n)__ in total expenditures and aggregate demand.