Question 1

When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand because

Accepted Answer

A) lower interest rates will stimulate business investment and consumer purchases. 
B) real interest rates will fall, causing the dollar to depreciate and net exports to rise. 
C) lower interest rates will cause the value of assets (for example, stocks) to rise. 
D) all of the above are correct. 
A) lower interest rates will stimulate business investment and consumer purchases. 
B) real interest rates will fall, causing the dollar to depreciate and net exports to rise. 
C) lower interest rates will cause the value of assets (for example, stocks) to rise. 
D) all of the above are correct.

Question 2

As the Fed maintained interest rates at near zero during 2008-2012,

Accepted Answer

A) the economy recovered and the unemployment rate fell to normal levels. 
B) households and businesses held larger money balances and the velocity of money fell substantially. 
C) stock prices declined during 2010-2012, causing the economy to remain weak. 
D) the earnings senior citizens derived from saving deposits and other forms of savings rose substantially, leading to higher incomes and a strong increase in aggregate demand. 
A) the economy recovered and the unemployment rate fell to normal levels. 
B) households and businesses held larger money balances and the velocity of money fell substantially. 
C) stock prices declined during 2010-2012, causing the economy to remain weak. 
D) the earnings senior citizens derived from saving deposits and other forms of savings rose substantially, leading to higher incomes and a strong increase in aggregate demand.

Question 3

During 2008-2013, the Fed initiated several rounds of "quantitative easing." Under this policy, the Fed

Accepted Answer

A) increased its purchases of financial assets and thereby injected additional reserves into the banking system. 
B) increased its purchases of financial assets, which reduced the reserves available to the banking system. 
C) reduced its purchases of financial assets and thereby injected additional reserves into the banking system. 
D) reduced its purchases of financial assets and thereby reduced the quantity of reserves available to the banking system. 
A) increased its purchases of financial assets and thereby injected additional reserves into the banking system. 
B) increased its purchases of financial assets, which reduced the reserves available to the banking system. 
C) reduced its purchases of financial assets and thereby injected additional reserves into the banking system. 
D) reduced its purchases of financial assets and thereby reduced the quantity of reserves available to the banking system.

Question 4

A study of countries with high inflation rates indicates that the inflation is generally

Accepted Answer

A) caused by strong labor unions. 
B) the result of restrictive macroeconomic policy, which pushes up interest rates. 
C) caused by supply shocks. 
D) the result of rapid growth in the money supply. 
A) caused by strong labor unions. 
B) the result of restrictive macroeconomic policy, which pushes up interest rates. 
C) caused by supply shocks. 
D) the result of rapid growth in the money supply.

Question 5

In the short run, which of the following is the most likely effect of an unanticipated move to expansionary monetary policy?

Accepted Answer

A) an increase in real output 
B) a decrease in real output 
C) an improvement in technology, which will stimulate growth in the long run 
D) an increase in prices proportional to the increase in the money supply 
A) an increase in real output 
B) a decrease in real output 
C) an improvement in technology, which will stimulate growth in the long run 
D) an increase in prices proportional to the increase in the money supply

Question 6

Suppose the economy is in long-run equilibrium at the level of potential output. What will be the long-run effect of an expansionary monetary policy?

Accepted Answer

A) a higher price level 
B) a higher level of real output 
C) both a higher price level and a higher level of real output 
D) a lower price level 
E) a lower level of real output 
A) a higher price level 
B) a higher level of real output 
C) both a higher price level and a higher level of real output 
D) a lower price level 
E) a lower level of real output

Question 7

Monetarists reject using discretionary monetary policy as an effective stabilization tool because

Accepted Answer

A) it would require the money supply to grow at a rate equal to the economy's long-run rate of economic growth. 
B) they do not believe that changes in the money stock affect output or prices. 
C) they believe that there are lengthy and variable time lags between when a change in monetary policy is instituted and when the change exerts its primary impact on output and prices. 
D) they believe monetary policy can stimulate aggregate demand, but it cannot control inflation. 
A) it would require the money supply to grow at a rate equal to the economy's long-run rate of economic growth. 
B) they do not believe that changes in the money stock affect output or prices. 
C) they believe that there are lengthy and variable time lags between when a change in monetary policy is instituted and when the change exerts its primary impact on output and prices. 
D) they believe monetary policy can stimulate aggregate demand, but it cannot control inflation.

Question 8

The short run sequence of events following an unanticipated shift to a more expansionary monetary policy would be

Accepted Answer

A) lower interest rates, decrease in aggregate demand, and a reduction in output. 
B) lower interest rates, increase in aggregate demand, and an expansion in output. 
C) higher interest rates, decrease in aggregate demand, and a reduction in output. 
D) higher interest rates, increase in aggregate demand, and an expansion in output. 
A) lower interest rates, decrease in aggregate demand, and a reduction in output. 
B) lower interest rates, increase in aggregate demand, and an expansion in output. 
C) higher interest rates, decrease in aggregate demand, and a reduction in output. 
D) higher interest rates, increase in aggregate demand, and an expansion in output.

Question 9

The Fed's purchase of U.S. government securities constitutes

Accepted Answer

A) a restrictive policy because it lowers the amount of total reserves in the banking system. 
B) a restrictive policy because it lowers the amount of excess reserves in the banking system. 
C) an expansionary policy because it raises the amount of total reserves in the banking system. 
D) an expansionary policy because it lowers the amount of required reserves in the banking system. 
A) a restrictive policy because it lowers the amount of total reserves in the banking system. 
B) a restrictive policy because it lowers the amount of excess reserves in the banking system. 
C) an expansionary policy because it raises the amount of total reserves in the banking system. 
D) an expansionary policy because it lowers the amount of required reserves in the banking system.

Question 10

When the Fed conducts expansionary monetary policy, lower short-term interest rates will tend to stimulate the economy. How will the change in the velocity of money affect this result?

Accepted Answer

A) Velocity will decline, enhancing the stimulus effect. 
B) Velocity will increase, somewhat dampening the stimulus effect. 
C) Velocity will increase, enhancing the stimulus effect. 
D) Velocity will decline, somewhat dampening the stimulus effect. 
A) Velocity will decline, enhancing the stimulus effect. 
B) Velocity will increase, somewhat dampening the stimulus effect. 
C) Velocity will increase, enhancing the stimulus effect. 
D) Velocity will decline, somewhat dampening the stimulus effect.

Question 11

If there is a "long and variable time lag" between when a change in monetary policy is instituted and when it impacts aggregate demand and output, this will

Accepted Answer

A) make it easier for the Fed to properly time changes in monetary policy. 
B) make it more difficult for the Fed to properly time changes in monetary policy. 
C) not affect the Fed's ability to time monetary policy changes correctly. 
D) make it easier for the Fed to control inflation and achieve price stability. 
A) make it easier for the Fed to properly time changes in monetary policy. 
B) make it more difficult for the Fed to properly time changes in monetary policy. 
C) not affect the Fed's ability to time monetary policy changes correctly. 
D) make it easier for the Fed to control inflation and achieve price stability.

Question 12

If the economy is in an inflationary boom, the Fed would most likely

Accepted Answer

A) encourage banks to provide loans by buying government securities. 
B) encourage banks to provide loans by raising the discount rate. 
C) encourage banks to provide loans by selling government securities. 
D) restrict bank lending by selling government securities. 
E) restrict bank lending by lowering the federal funds rate. 
A) encourage banks to provide loans by buying government securities. 
B) encourage banks to provide loans by raising the discount rate. 
C) encourage banks to provide loans by selling government securities. 
D) restrict bank lending by selling government securities. 
E) restrict bank lending by lowering the federal funds rate.

Question 13

If the Fed unexpectedly increases the money supply, real GDP

Accepted Answer

A) increases because the resulting increase in the interest rate leads to a decrease in investment. 
B) increases because the resulting decrease in the interest rate leads to an increase in investment. 
C) decreases because the resulting increase in the interest rate leads to a decrease in investment. 
D) decreases because the resulting increase in the interest rate leads to an increase in investment. 
E) decreases because the resulting decrease in the interest rate leads to an increase in investment. 
A) increases because the resulting increase in the interest rate leads to a decrease in investment. 
B) increases because the resulting decrease in the interest rate leads to an increase in investment. 
C) decreases because the resulting increase in the interest rate leads to a decrease in investment. 
D) decreases because the resulting increase in the interest rate leads to an increase in investment. 
E) decreases because the resulting decrease in the interest rate leads to an increase in investment.

Question 14

Which of the following correctly indicates a potential path for the transmission of expansionary monetary policy to the goods and services market?

Accepted Answer

A) Higher real interest rates will lead to a decrease in both business investment and consumer purchases of durable items, causing a decrease in aggregate demand. 
B) Lower interest rates lead to a depreciation in the foreign exchange value of the dollar, an increase in net exports, and an expansion in aggregate demand. 
C) Higher interest rates will tend to increase asset prices, leading to a decrease in wealth that will decrease consumer spending and aggregate demand. 
D) A reduction in the general level of prices will increase the disposable income of households and aggregate demand. 
A) Higher real interest rates will lead to a decrease in both business investment and consumer purchases of durable items, causing a decrease in aggregate demand. 
B) Lower interest rates lead to a depreciation in the foreign exchange value of the dollar, an increase in net exports, and an expansion in aggregate demand. 
C) Higher interest rates will tend to increase asset prices, leading to a decrease in wealth that will decrease consumer spending and aggregate demand. 
D) A reduction in the general level of prices will increase the disposable income of households and aggregate demand.

Question 15

Starting from an initial long-run equilibrium, an unanticipated shift to a more expansionary monetary policy would tend to increase

Accepted Answer

A) prices and unemployment in the long run. 
B) real output in the short run but not in the long run. 
C) real output in the long run but not in the short run. 
D) real output in both the long run and the short run. 
A) prices and unemployment in the long run. 
B) real output in the short run but not in the long run. 
C) real output in the long run but not in the short run. 
D) real output in both the long run and the short run.

Question 16

Which of the following would be most indicative of a shift to a more expansionary monetary policy?

Accepted Answer

A) Rapid expansion in the monetary base, higher short-term interest rates, and a decline in the growth rate of the M1 money supply 
B) Rapid expansion in the monetary base, declining short-term interest rates, and an increase in the growth rate of the M2 money supply 
C) A reduction in the monetary base, higher short-term interest rates, and a decline in the growth rate of the M1 money supply 
D) A reduction in the monetary base, lower short-term interest rates, and a decline in the growth rate of the M2 money supply 
A) Rapid expansion in the monetary base, higher short-term interest rates, and a decline in the growth rate of the M1 money supply 
B) Rapid expansion in the monetary base, declining short-term interest rates, and an increase in the growth rate of the M2 money supply 
C) A reduction in the monetary base, higher short-term interest rates, and a decline in the growth rate of the M1 money supply 
D) A reduction in the monetary base, lower short-term interest rates, and a decline in the growth rate of the M2 money supply

Question 17

When the Fed unexpectedly increases the money supply,

Accepted Answer

A) real interest rates will tend to decline. 
B) the exchange rate value of the dollar will tend to appreciate. 
C) aggregate demand will tend to increase. 
D) all of the above are correct. 
E) both a and c are correct. 
A) real interest rates will tend to decline. 
B) the exchange rate value of the dollar will tend to appreciate. 
C) aggregate demand will tend to increase. 
D) all of the above are correct. 
E) both a and c are correct.

Question 18

Use the figure below to answer the following question(s).
Figure 14-5  
-In Figure 14-5, AD1 and SRAS1 indicate an economy initially operating at full-employment output level, Y1. The short-run impact of the Fed unexpectedly shifting to a more restrictive monetary policy will be

Accepted Answer

A) a decrease in aggregate demand to AD2 and a decrease in real output to Y2. 
B) a decrease in aggregate demand to AD2 but real output would remain at Y1. 
C) a decrease in aggregate demand to AD2 and an increase in short-run aggregate supply to SRAS2, causing the price level to fall to P3 and real output to remain unchanged at Y1. 
D) no change; AD and SRAS will stay at AD1 and SRAS1. 
A) a decrease in aggregate demand to AD2 and a decrease in real output to Y2. 
B) a decrease in aggregate demand to AD2 but real output would remain at Y1. 
C) a decrease in aggregate demand to AD2 and an increase in short-run aggregate supply to SRAS2, causing the price level to fall to P3 and real output to remain unchanged at Y1. 
D) no change; AD and SRAS will stay at AD1 and SRAS1.

Question 19

The Fed pushed interest rates to artificially low levels during 2002-2004. The Austrian view predicts that this policy will lead to

Accepted Answer

A) excessive investment in long-lasting assets like housing that will eventually prove to be unprofitable and result in recession. 
B) an increase in sound investments that will propel future economic growth. 
C) a reduction in the general level of prices that will throw the economy into a recession. 
D) an increase in aggregate demand that will generate sustainable expansion in both real output and employment. 
A) excessive investment in long-lasting assets like housing that will eventually prove to be unprofitable and result in recession. 
B) an increase in sound investments that will propel future economic growth. 
C) a reduction in the general level of prices that will throw the economy into a recession. 
D) an increase in aggregate demand that will generate sustainable expansion in both real output and employment.

Question 20

A decrease in the money supply

Accepted Answer

A) lowers the interest rate, causing a decrease in investment and a decrease in GDP. 
B) lowers the interest rate, causing a decrease in investment and an increase in GDP. 
C) raises the interest rate, causing an increase in investment and a decrease in GDP. 
D) raises the interest rate, causing an increase in investment and an increase in GDP. 
E) raises the interest rate, causing a decrease in investment and a decrease in GDP. 
A) lowers the interest rate, causing a decrease in investment and a decrease in GDP. 
B) lowers the interest rate, causing a decrease in investment and an increase in GDP. 
C) raises the interest rate, causing an increase in investment and a decrease in GDP. 
D) raises the interest rate, causing an increase in investment and an increase in GDP. 
E) raises the interest rate, causing a decrease in investment and a decrease in GDP.

When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand because

As the Fed maintained interest rates at near zero during 2008-2012,

During 2008-2013, the Fed initiated several rounds of "quantitative easing." Under this policy, the Fed

A study of countries with high inflation rates indicates that the inflation is generally

In the short run, which of the following is the most likely effect of an unanticipated move to expansionary monetary policy?

Suppose the economy is in long-run equilibrium at the level of potential output. What will be the long-run effect of an expansionary monetary policy?

Monetarists reject using discretionary monetary policy as an effective stabilization tool because

The short run sequence of events following an unanticipated shift to a more expansionary monetary policy would be

The Fed's purchase of U.S. government securities constitutes

When the Fed conducts expansionary monetary policy, lower short-term interest rates will tend to stimulate the economy. How will the change in the velocity of money affect this result?

If there is a "long and variable time lag" between when a change in monetary policy is instituted and when it impacts aggregate demand and output, this will

If the economy is in an inflationary boom, the Fed would most likely

If the Fed unexpectedly increases the money supply, real GDP

Which of the following correctly indicates a potential path for the transmission of expansionary monetary policy to the goods and services market?

Starting from an initial long-run equilibrium, an unanticipated shift to a more expansionary monetary policy would tend to increase

Which of the following would be most indicative of a shift to a more expansionary monetary policy?

When the Fed unexpectedly increases the money supply,

Use the figure below to answer the following question(s). Figure 14-5 -In Figure 14-5, AD₁ and SRAS₁ indicate an economy initially operating at full-employment output level, Y₁. The short-run impact of the Fed unexpectedly shifting to a more restrictive monetary policy will be

The Fed pushed interest rates to artificially low levels during 2002-2004. The Austrian view predicts that this policy will lead to

A decrease in the money supply

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

Difficult Cases for the Market, and the Role of Government

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad-As Model

Fiscal Policy: the Keynesian View and the Historical Development of Macroeconomics

Fiscal Policy, Incentives, and Secondary Effects

Money and the Banking System

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Filters

Exam 14: Modern Macroeconomics and Monetary Policy

When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand because

As the Fed maintained interest rates at near zero during 2008-2012,

During 2008-2013, the Fed initiated several rounds of "quantitative easing." Under this policy, the Fed

A study of countries with high inflation rates indicates that the inflation is generally

In the short run, which of the following is the most likely effect of an unanticipated move to expansionary monetary policy?

Suppose the economy is in long-run equilibrium at the level of potential output. What will be the long-run effect of an expansionary monetary policy?

Monetarists reject using discretionary monetary policy as an effective stabilization tool because

The short run sequence of events following an unanticipated shift to a more expansionary monetary policy would be

The Fed's purchase of U.S. government securities constitutes

When the Fed conducts expansionary monetary policy, lower short-term interest rates will tend to stimulate the economy. How will the change in the velocity of money affect this result?

If there is a "long and variable time lag" between when a change in monetary policy is instituted and when it impacts aggregate demand and output, this will

If the economy is in an inflationary boom, the Fed would most likely

If the Fed unexpectedly increases the money supply, real GDP

Which of the following correctly indicates a potential path for the transmission of expansionary monetary policy to the goods and services market?

Starting from an initial long-run equilibrium, an unanticipated shift to a more expansionary monetary policy would tend to increase

Which of the following would be most indicative of a shift to a more expansionary monetary policy?

When the Fed unexpectedly increases the money supply,

Use the figure below to answer the following question(s). Figure 14-5 -In Figure 14-5, AD1 and SRAS1 indicate an economy initially operating at full-employment output level, Y1. The short-run impact of the Fed unexpectedly shifting to a more restrictive monetary policy will be

The Fed pushed interest rates to artificially low levels during 2002-2004. The Austrian view predicts that this policy will lead to

A decrease in the money supply

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

Difficult Cases for the Market, and the Role of Government

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad-As Model

Fiscal Policy: the Keynesian View and the Historical Development of Macroeconomics

Fiscal Policy, Incentives, and Secondary Effects

Money and the Banking System

Stabilization Policy, Output, and Employment

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Filters

Use the figure below to answer the following question(s). Figure 14-5 -In Figure 14-5, AD₁ and SRAS₁ indicate an economy initially operating at full-employment output level, Y₁. The short-run impact of the Fed unexpectedly shifting to a more restrictive monetary policy will be