Question 1

What do Keynesians mean when they say that "you can't push on a string"?

Accepted Answer

A)  An increase in the supply of goods does not really create its own demand. 
B)  If the government reduces taxes in an attempt to increase household consumption, it will not always work. 
C)  An increase in the money supply will not always stimulate the economy. 
D)  If the government wants to get something done, the best way is not to force the issue, but to offer incentives. 
E)  If the government puts too much expansionary pressure on the economy, it will probably "overheat." 
A)  An increase in the supply of goods does not really create its own demand. 
B)  If the government reduces taxes in an attempt to increase household consumption, it will not always work. 
C)  An increase in the money supply will not always stimulate the economy. 
D)  If the government wants to get something done, the best way is not to force the issue, but to offer incentives. 
E)  If the government puts too much expansionary pressure on the economy, it will probably "overheat."

Question 2

Nonactivists favor

Accepted Answer

A)  the use of fiscal policies to manage the economy. 
B)  the use of monetary polices to manage the economy. 
C)  fine-tuning. 
D)  rules for conducting monetary and fiscal policies. 
A)  the use of fiscal policies to manage the economy. 
B)  the use of monetary polices to manage the economy. 
C)  fine-tuning. 
D)  rules for conducting monetary and fiscal policies.

Question 3

The quantity supplied of money is assumed (in the textbook)to be

Accepted Answer

A)  inversely related to the interest rate. 
B)  directly related to the interest rate. 
C)  independent of the interest rate. 
D)  determined exclusively by banks. 
E)  c and d 
A)  inversely related to the interest rate. 
B)  directly related to the interest rate. 
C)  independent of the interest rate. 
D)  determined exclusively by banks. 
E)  c and d

Question 4

In the Keynesian transmission mechanism,if investment is completely interest-insensitive,then an increase in the money supply will

Accepted Answer

A)  cause total expenditures and aggregate demand to increase. 
B)  cause total expenditures and aggregate demand to decrease. 
C)  have no impact on total expenditures and aggregate demand. 
D)  cause total expenditures to increase and aggregate demand to decrease. 
E)  cause total expenditures to decrease and aggregate demand to increase. 
A)  cause total expenditures and aggregate demand to increase. 
B)  cause total expenditures and aggregate demand to decrease. 
C)  have no impact on total expenditures and aggregate demand. 
D)  cause total expenditures to increase and aggregate demand to decrease. 
E)  cause total expenditures to decrease and aggregate demand to increase.

Question 5

Under conditions of a liquidity trap and interest-insensitive investment,Keynesians would be most likely to propose __________ policy to eliminate a recessionary gap.

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 6

Exhibit 15-l
  
-Refer to Exhibit 15-l.A monetarist would claim that in a recessionary gap,the economy would move on its own from point

Accepted Answer

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

Question 7

Suppose the money market is in the liquidity trap and that the economy is experiencing a recessionary gap.A Keynesian economist would most likely advocate

Accepted Answer

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

Question 8

Exhibit 15-2
  
-Refer to Exhibit 15-2.A(n)__________ in the money supply from S1 to S2 would have a tendency to __________ the amount of investment,assuming investment is sensitive to changes in the interest rate.

Accepted Answer

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

Question 9

The monetary policy most likely to be favored by monetarists is

Accepted Answer

A)  a constant (nongrowing) money supply. 
B)  frequent discretionary changes in the money growth rate. 
C)  a constant and slow rate of monetary growth. 
D)  vigorous monetary expansion during recessions. 
E)  a steadily increasing rate of monetary growth. 
A)  a constant (nongrowing) money supply. 
B)  frequent discretionary changes in the money growth rate. 
C)  a constant and slow rate of monetary growth. 
D)  vigorous monetary expansion during recessions. 
E)  a steadily increasing rate of monetary growth.

Question 10

To try to eliminate a recessionary gap the Fed typically__________ the money supply,and to try to eliminate an inflationary gap the Fed typically __________ the money supply.

Accepted Answer

A)  increases; decreases 
B)  increases; increases 
C)  decreases; increases 
D)  decreases; decreases 
A)  increases; decreases 
B)  increases; increases 
C)  decreases; increases 
D)  decreases; decreases

Question 11

Exhibit 15-4
   
Assume that people have only two choices when it comes to holding their wealth: in money or in bonds.
-Refer to Exhibit 15-4. Identify the appropriate state of the bond market that would fill in blanks (A),(B),and (C),respectively.

Accepted Answer

A)  surplus; shortage; equilibrium 
B)  shortage; surplus; equilibrium 
C)  surplus; surplus; equilibrium 
D)  shortage; shortage; equilibrium 
A)  surplus; shortage; equilibrium 
B)  shortage; surplus; equilibrium 
C)  surplus; surplus; equilibrium 
D)  shortage; shortage; equilibrium

Question 12

The routes or channels that ripple effects created in the money market travel to impact the goods-and-services market are known as

Accepted Answer

A)  the transmission lag. 
B)  monetary policy. 
C)  the liquidity trap. 
D)  the transmission mechanism. 
A)  the transmission lag. 
B)  monetary policy. 
C)  the liquidity trap. 
D)  the transmission mechanism.

Question 13

Equilibrium in the money market exists when

Accepted Answer

A)  at a given interest rate, excess supply of money is equal to the quantity demanded of money. 
B)  at a given interest rate, excess demand for money is equal to the quantity demanded of money. 
C)  the supply of money curve intersects the demand for money curve at the prevailing interest rate. 
D)  b and c 
A)  at a given interest rate, excess supply of money is equal to the quantity demanded of money. 
B)  at a given interest rate, excess demand for money is equal to the quantity demanded of money. 
C)  the supply of money curve intersects the demand for money curve at the prevailing interest rate. 
D)  b and c

Question 14

Exhibit 15-3
  
-Refer to Exhibit 15-3.The economy is currently at point 4.The Fed increases the money supply and the economy ends up at point 8.Has monetary policy been effective at moderating the business cycle?

Accepted Answer

A)  Yes, since it eliminated the recessionary gap. 
B)  Yes, since it decreased the unemployment rate. 
C)  Yes, since it increased Real GDP. 
D)  No, since it has moved the economy from a recessionary gap to an inflationary gap. 
E)  a, b and c 
A)  Yes, since it eliminated the recessionary gap. 
B)  Yes, since it decreased the unemployment rate. 
C)  Yes, since it increased Real GDP. 
D)  No, since it has moved the economy from a recessionary gap to an inflationary gap. 
E)  a, b and c

Question 15

If you believe the economy is self-regulating,you are more likely to be a(an)__________ than a(an)__________.

Accepted Answer

A)  nonactivist; activist 
B)  Keynesian; monetarist 
C)  activist; nonactivist 
D)  advocate of fiscal policy; advocate of monetary policy 
E)  b and d 
A)  nonactivist; activist 
B)  Keynesian; monetarist 
C)  activist; nonactivist 
D)  advocate of fiscal policy; advocate of monetary policy 
E)  b and d

Question 16

If the interest rate is below the equilibrium interest rate,then the quantity __________ of money exceeds the quantity __________ of money,and there is a __________ of money.

Accepted Answer

A)  supplied; demanded; shortage 
B)  supplied; demanded; surplus 
C)  demanded; supplied; shortage 
D)  demanded; supplied; surplus 
A)  supplied; demanded; shortage 
B)  supplied; demanded; surplus 
C)  demanded; supplied; shortage 
D)  demanded; supplied; surplus

Question 17

Exhibit 15-4
   
Assume that people have only two choices when it comes to holding their wealth: in money or in bonds.
-Refer to Exhibit 15-4. In the row of this table containing blank (C),people are holding ______________ of their wealth in bonds and ________________ of their wealth in money.

Accepted Answer

A)  too much; too little 
B)  too little; too much 
C)  just the right amount; too little 
D)  just the right amount; too much 
E)  just the right amount; just the right amount 
A)  too much; too little 
B)  too little; too much 
C)  just the right amount; too little 
D)  just the right amount; too much 
E)  just the right amount; just the right amount

Question 18

Investment spending is insensitive to changes in the interest rate and the SRAS curve is upward sloping.According to a monetarist,an increase in the money supply will __________ Real GDP.According to a Keynesian,an increase in the money supply will __________ Real GDP.

Accepted Answer

A)  raise; not change 
B)  not change; raise 
C)  lower; lower 
D)  raise; lower 
E)  none of the above 
A)  raise; not change 
B)  not change; raise 
C)  lower; lower 
D)  raise; lower 
E)  none of the above

Question 19

If a liquidity trap exists,people are likely to be thinking that

Accepted Answer

A)  bond prices are so low that they have nowhere to go but up; given this, now is a good time to be holding bonds. 
B)  bond prices are so high that they have nowhere to go but down; given this, it is better not to be holding bonds. 
C)  bond prices will soon rise so it is better to get out of bonds now. 
D)  interest rates will soon fall. 
A)  bond prices are so low that they have nowhere to go but up; given this, now is a good time to be holding bonds. 
B)  bond prices are so high that they have nowhere to go but down; given this, it is better not to be holding bonds. 
C)  bond prices will soon rise so it is better to get out of bonds now. 
D)  interest rates will soon fall.

Question 20

There is an increase in the money supply and the interest rate does not change.This is what happens if

Accepted Answer

A)  investment is interest-insensitive. 
B)  a liquidity trap exists. 
C)  activist monetary policy is used instead of nonactivist monetary policy. 
D)  wages and prices are flexible. 
E)  none of the above 
A)  investment is interest-insensitive. 
B)  a liquidity trap exists. 
C)  activist monetary policy is used instead of nonactivist monetary policy. 
D)  wages and prices are flexible. 
E)  none of the above

Exam 15: Monetary Policy

What do Keynesians mean when they say that "you can't push on a string"?

Nonactivists favor

The quantity supplied of money is assumed (in the textbook)to be

In the Keynesian transmission mechanism,if investment is completely interest-insensitive,then an increase in the money supply will

Under conditions of a liquidity trap and interest-insensitive investment,Keynesians would be most likely to propose __________ policy to eliminate a recessionary gap.

Exhibit 15-l -Refer to Exhibit 15-l.A monetarist would claim that in a recessionary gap,the economy would move on its own from point

Suppose the money market is in the liquidity trap and that the economy is experiencing a recessionary gap.A Keynesian economist would most likely advocate

Exhibit 15-2 -Refer to Exhibit 15-2.A(n)__________ in the money supply from S1 to S2 would have a tendency to __________ the amount of investment,assuming investment is sensitive to changes in the interest rate.

The monetary policy most likely to be favored by monetarists is

To try to eliminate a recessionary gap the Fed typically__________ the money supply,and to try to eliminate an inflationary gap the Fed typically __________ the money supply.

Exhibit 15-4 Assume that people have only two choices when it comes to holding their wealth: in money or in bonds. -Refer to Exhibit 15-4. Identify the appropriate state of the bond market that would fill in blanks (A),(B),and (C),respectively.

The routes or channels that ripple effects created in the money market travel to impact the goods-and-services market are known as

Equilibrium in the money market exists when

Exhibit 15-3 -Refer to Exhibit 15-3.The economy is currently at point 4.The Fed increases the money supply and the economy ends up at point 8.Has monetary policy been effective at moderating the business cycle?

If you believe the economy is self-regulating,you are more likely to be a(an)__________ than a(an)__________.

If the interest rate is below the equilibrium interest rate,then the quantity __________ of money exceeds the quantity __________ of money,and there is a __________ of money.

Exhibit 15-4 Assume that people have only two choices when it comes to holding their wealth: in money or in bonds. -Refer to Exhibit 15-4. In the row of this table containing blank (C),people are holding ______________ of their wealth in bonds and ________________ of their wealth in money.

Investment spending is insensitive to changes in the interest rate and the SRAS curve is upward sloping.According to a monetarist,an increase in the money supply will __________ Real GDP.According to a Keynesian,an increase in the money supply will __________ Real GDP.

If a liquidity trap exists,people are likely to be thinking that

There is an increase in the money supply and the interest rate does not change.This is what happens if

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Exhibit 15-2 -Refer to Exhibit 15-2.A(n) in the money supply from S₁ to S₂ would have a tendency to the amount of investment,assuming investment is sensitive to changes in the interest rate.

To try to eliminate a recessionary gap the Fed typically the money supply,and to try to eliminate an inflationary gap the Fed typically the money supply.

If you believe the economy is self-regulating,you are more likely to be a(an) than a(an).

If the interest rate is below the equilibrium interest rate,then the quantity of money exceeds the quantity of money,and there is a __ of money.

Exhibit 15-4 Assume that people have only two choices when it comes to holding their wealth: in money or in bonds. -Refer to Exhibit 15-4. In the row of this table containing blank (C),people are holding of their wealth in bonds and __ of their wealth in money.

Investment spending is insensitive to changes in the interest rate and the SRAS curve is upward sloping.According to a monetarist,an increase in the money supply will Real GDP.According to a Keynesian,an increase in the money supply will Real GDP.