Question 1

According to the monetarist transmission mechanism, a decrease in the money supply __________ aggregate demand.

Accepted Answer

A) directly increases 
B) indirectly increases 
C) directly decreases 
D) indirectly decreases 
E) equals the increase in 
A) directly increases 
B) indirectly increases 
C) directly decreases 
D) indirectly decreases 
E) equals the increase in

Question 2

The money supply decreased and the AD curve shifted to the left. This is consistent with the

Accepted Answer

A) Keynesian transmission mechanism when there is neither a liquidity trap nor interest-insensitive investment. 
B) monetarist transmission mechanism. 
C) Keynesian transmission mechanism when there is a liquidity trap. 
D) Keynesian transmission mechanism with interest-insensitive investment. 
E) a and b 
A) Keynesian transmission mechanism when there is neither a liquidity trap nor interest-insensitive investment. 
B) monetarist transmission mechanism. 
C) Keynesian transmission mechanism when there is a liquidity trap. 
D) Keynesian transmission mechanism with interest-insensitive investment. 
E) a and b

Question 3

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 4

Exhibit 15-6​
​
  
-Refer to Exhibit 15-6. Assume that the economy starts out producing Q1. An economist who believes that the economy is not self-regulating would assert that the government should use _________________ fiscal policy to close the existing ___________________ gap.

Accepted Answer

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

Question 5

According to Keynesians, __________ monetary policy will not remove the economy from a(an) __________ gap if __________.

Accepted Answer

A) contractionary; recessionary; investment is interest-insensitive 
B) expansionary; recessionary; the economy is in the liquidity trap 
C) expansionary; inflationary; investment is interest-insensitive 
D) contractionary; inflationary; the economy has been in the inflationary gap for more than one year 
E) none of the above 
A) contractionary; recessionary; investment is interest-insensitive 
B) expansionary; recessionary; the economy is in the liquidity trap 
C) expansionary; inflationary; investment is interest-insensitive 
D) contractionary; inflationary; the economy has been in the inflationary gap for more than one year 
E) none of the above

Question 6

The liquidity trap is the

Accepted Answer

A) vertical portion of the demand curve for money. 
B) horizontal portion of the demand curve for money. 
C) vertical portion of the supply curve of money. 
D) horizontal portion of the supply curve of money. 
E) vertical portion of the demand curve for investment. 
A) vertical portion of the demand curve for money. 
B) horizontal portion of the demand curve for money. 
C) vertical portion of the supply curve of money. 
D) horizontal portion of the supply curve of money. 
E) vertical portion of the demand curve for investment.

Question 7

Exhibit 15-5​
  
-Refer to Exhibit 15-5. Assume that the economy starts out in short-run equilibrium. An economist who believes that the economy is not self-regulating would assert that the government should use _________________ fiscal policy to close the existing ___________________ gap.

Accepted Answer

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

Question 8

Economists who believe that the economy is self-regulating are more likely to be nonactivists than activists.

Accepted Answer

A) True 
 B)False

Question 9

The Taylor Rule specifies that the federal funds rate target should be equal to

Accepted Answer

A) 0.5 ( inflation rate) + 1.5 (GDP gap) + 1 
B) 1.5 (inflation rate) + 0.5 (GDP gap) + 1. 
C) interest rate - expected inflation rate. 
D) equilibrium federal funds rate + inflation rate +1 
A) 0.5 ( inflation rate) + 1.5 (GDP gap) + 1 
B) 1.5 (inflation rate) + 0.5 (GDP gap) + 1. 
C) interest rate - expected inflation rate. 
D) equilibrium federal funds rate + inflation rate +1

Question 10

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 11

Economists who favor activist monetary policy argue that

Accepted Answer

A) the economy does not always equilibrate quickly enough at the Natural Real GDP or full-employment output and therefore needs help. 
B) activist monetary policy is effective at smoothing out the business cycle. 
C) activist monetary policy is flexible and flexibility is a desirable quality in monetary policy. 
D) a and b 
E) a, b and c 
A) the economy does not always equilibrate quickly enough at the Natural Real GDP or full-employment output and therefore needs help. 
B) activist monetary policy is effective at smoothing out the business cycle. 
C) activist monetary policy is flexible and flexibility is a desirable quality in monetary policy. 
D) a and b 
E) a, b and c

Question 12

If people have only two ways of holding their wealth, money or bonds, a surplus in the money market implies a surplus in the bond market.

Accepted Answer

A) True 
 B)False

Question 13

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 14

The SRAS curve is upward sloping, there is a liquidity trap, and investment spending is sensitive to changes in the interest rate. According to the monetarist transmission mechanism, if the money supply increases the AD curve __________ and the price level __________.

Accepted Answer

A) does not change; does not change 
B) shifts to the left; falls 
C) shifts to the right; rises 
D) does not change; rises 
E) none of the above 
A) does not change; does not change 
B) shifts to the left; falls 
C) shifts to the right; rises 
D) does not change; rises 
E) none of the above

Question 15

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

Accepted Answer

A) indirect and long. 
B) direct and long. 
C) direct and short. 
D) indirect and short. 
A) indirect and long. 
B) direct and long. 
C) direct and short. 
D) indirect and short.

Question 16

An individual buys a bond for $1,000 and sells it one year later for $1,070. What is the annual interest rate return that this individual has received on this bond?

Accepted Answer

A) 7.0 percent 
B) 70.0 percent 
C) 0.5 percent 
D) 4.0 percent 
E) 0.07 percent 
A) 7.0 percent 
B) 70.0 percent 
C) 0.5 percent 
D) 4.0 percent 
E) 0.07 percent

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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 19

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 20

Assume that because of a long policy lag, the Fed starts implementing expansionary monetary policy too late, i.e., at a time when the economy is already healing itself. As a result, the economy will probably move from an initial

Accepted Answer

A) recessionary gap to an even deeper recessionary gap. 
B) recessionary gap to an inflationary gap. 
C) inflationary gap to the natural level of Real GDP. 
D) inflationary gap to a recessionary gap. 
A) recessionary gap to an even deeper recessionary gap. 
B) recessionary gap to an inflationary gap. 
C) inflationary gap to the natural level of Real GDP. 
D) inflationary gap to a recessionary gap.

Exam 15: Monetary Policy

According to the monetarist transmission mechanism, a decrease in the money supply __________ aggregate demand.

The money supply decreased and the AD curve shifted to the left. This is consistent with the

Which of the following statements is true?

Exhibit 15-6​ ​ -Refer to Exhibit 15-6. Assume that the economy starts out producing Q1. An economist who believes that the economy is not self-regulating would assert that the government should use _________________ fiscal policy to close the existing ___________________ gap.

According to Keynesians, __________ monetary policy will not remove the economy from a(an) __________ gap if __________.

The liquidity trap is the

Exhibit 15-5​ -Refer to Exhibit 15-5. Assume that the economy starts out in short-run equilibrium. An economist who believes that the economy is not self-regulating would assert that the government should use _________________ fiscal policy to close the existing ___________________ gap.

Economists who believe that the economy is self-regulating are more likely to be nonactivists than activists.

The Taylor Rule specifies that the federal funds rate target should be equal to

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

Economists who favor activist monetary policy argue that

If people have only two ways of holding their wealth, money or bonds, a surplus in the money market implies a surplus in the bond market.

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 SRAS curve is upward sloping, there is a liquidity trap, and investment spending is sensitive to changes in the interest rate. According to the monetarist transmission mechanism, if the money supply increases the AD curve __________ and the price level __________.

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

An individual buys a bond for $1,000 and sells it one year later for $1,070. What is the annual interest rate return that this individual has received on this bond?

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

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

Assume that because of a long policy lag, the Fed starts implementing expansionary monetary policy too late, i.e., at a time when the economy is already healing itself. As a result, the economy will probably move from an initial

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Exhibit 15-6 -Refer to Exhibit 15-6. Assume that the economy starts out producing Q₁. An economist who believes that the economy is not self-regulating would assert that the government should use _ fiscal policy to close the existing ___ gap.

According to Keynesians, monetary policy will not remove the economy from a(an) gap if __.

Exhibit 15-5 -Refer to Exhibit 15-5. Assume that the economy starts out in short-run equilibrium. An economist who believes that the economy is not self-regulating would assert that the government should use _ fiscal policy to close the existing ___ gap.

The SRAS curve is upward sloping, there is a liquidity trap, and investment spending is sensitive to changes in the interest rate. According to the monetarist transmission mechanism, if the money supply increases the AD curve and the price level .