Question 1

Exhibit 15-1
  
-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 2

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

Accepted Answer

A) 9.5 percent 
B) 7.5 percent 
C) 5.5 percent 
D) 8.5 percent 
A) 9.5 percent 
B) 7.5 percent 
C) 5.5 percent 
D) 8.5 percent

Question 3

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 4

According to the Keynesian transmission mechanism, an increase in the money supply will __________ the interest rate, causing a __________ in investment, which then __________ Real GDP.

Accepted Answer

A) raise; fall; raises 
B) raise; rise; lowers 
C) raise; fall; lowers 
D) lower; fall; lowers 
E) lower; rise; raises 
A) raise; fall; raises 
B) raise; rise; lowers 
C) raise; fall; lowers 
D) lower; fall; lowers 
E) lower; rise; raises

Question 5

Suppose that the bond market and the money market both start out in equilibrium, then the Federal Reserve increases the money supply. The result will be a ______________ in the money market and a _________________ in the bond market, which will push bond prices _________________ and interest rates will ___________________ until a new equilibrium is reached.

Accepted Answer

A) surplus; shortage; up; fall 
B) shortage; surplus; down; rise 
C) surplus; shortage; down; rise 
D) shortage; surplus; down; fall 
A) surplus; shortage; up; fall 
B) shortage; surplus; down; rise 
C) surplus; shortage; down; rise 
D) shortage; surplus; down; fall

Question 6

The Keynesian transmission mechanism might get blocked if

Accepted Answer

A) investment is insensitive to changes in interest rates. 
B) the goods market is not in equilibrium. 
C) the money supply increases too quickly. 
D) interest rates are too high before they fall. 
A) investment is insensitive to changes in interest rates. 
B) the goods market is not in equilibrium. 
C) the money supply increases too quickly. 
D) interest rates are too high before they fall.

Question 7

Monetary policy refers to

Accepted Answer

A) actions taken by banks and other financial institutions regarding their approaches to lending, account management, etc. 
B) changes in the money supply to achieve particular economic goals. 
C) changes in government expenditures and taxation to achieve particular economic goals. 
D) the change in private expenditures that occurs as a consequence of changes in the money supply. 
A) actions taken by banks and other financial institutions regarding their approaches to lending, account management, etc. 
B) changes in the money supply to achieve particular economic goals. 
C) changes in government expenditures and taxation to achieve particular economic goals. 
D) the change in private expenditures that occurs as a consequence of changes in the money supply.

Question 8

Exhibit 15-1
  
-Refer to Exhibit 15-1. Keynesians are often accused of having an "inflationary bias." This is due at least in part to their advocacy of expansionary monetary policy when they believe it is needed to take the economy from point

Accepted Answer

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

Question 9

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 10

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 11

Suppose a constant-money-growth-rate rule of 3 percent is being considered. If it is estimated that average annual Real GDP growth is 3.5 percent and it turns out that velocity is rising by 2 percent a year on average, the rule would produce an average annual rate of inflation of __________ percent.

Accepted Answer

A) 1.5 
B) 2.5 
C) 3.0 
D) 5.5 
E) 2.0 
A) 1.5 
B) 2.5 
C) 3.0 
D) 5.5 
E) 2.0

Question 12

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 13

A decrease in the money supply will shift the aggregate __________ curve to the __________.

Accepted Answer

A) supply; left 
B) supply; right 
C) demand; left 
D) demand; right 
A) supply; left 
B) supply; right 
C) demand; left 
D) demand; right

Question 14

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 15

The Keynesian link between the money market and the goods and services market is __________. Changes in the money market must affect the __________ market before the goods and services market is affected.

Accepted Answer

A) direct; credit 
B) indirect; labor 
C) indirect; investment goods 
D) direct; stock 
E) none of the above 
A) direct; credit 
B) indirect; labor 
C) indirect; investment goods 
D) direct; stock 
E) none of the above

Question 16

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 17

In the Keynesian transmission mechanism, if the money market is in the liquidity trap, 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 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 market interest rates increase, the prices of existing bonds will

Accepted Answer

A) decrease. 
B) not change. 
C) increase. 
D) decrease if Real GDP decreases and increase if Real GDP increases. 
A) decrease. 
B) not change. 
C) increase. 
D) decrease if Real GDP decreases and increase if Real GDP increases.

Question 20

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

Exam 15: Monetary Policy

Exhibit 15-1 -Refer to Exhibit 15-l. A monetarist would claim that in a recessionary gap, the economy would move on its own from point

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

According to the Keynesian transmission mechanism, an increase in the money supply will __________ the interest rate, causing a __________ in investment, which then __________ Real GDP.

The Keynesian transmission mechanism might get blocked if

Monetary policy refers to

Exhibit 15-1 -Refer to Exhibit 15-1. Keynesians are often accused of having an "inflationary bias." This is due at least in part to their advocacy of expansionary monetary policy when they believe it is needed to take the economy from point

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

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

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

A decrease in the money supply will shift the aggregate __________ curve to the __________.

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

The Keynesian link between the money market and the goods and services market is __________. Changes in the money market must affect the __________ market before the goods and services market is affected.

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

In the Keynesian transmission mechanism, if the money market is in the liquidity trap, an increase in the money supply will

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 market interest rates increase, the prices of existing bonds will

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

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According to the Keynesian transmission mechanism, an increase in the money supply will the interest rate, causing a in investment, which then __ Real GDP.

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

A decrease in the money supply will shift the aggregate curve to the .

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

The Keynesian link between the money market and the goods and services market is . Changes in the money market must affect the market before the goods and services market is affected.

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.