Question 1

Which of the following falls when bond prices rise?

Accepted Answer

A) Stock prices. 
B) Interest rates. 
C) Money demand. 
D) Money supply. 
A) Stock prices. 
B) Interest rates. 
C) Money demand. 
D) Money supply. B

Question 2

When a household takes extra (unbudgeted)money on a trip, economists would classify this money as held for a(n):

Accepted Answer

A) speculative demand. 
B) transactions demand. 
C) emergency motive. 
D) precautionary demand. 
E) inflationary motive. 
A) speculative demand. 
B) transactions demand. 
C) emergency motive. 
D) precautionary demand. 
E) inflationary motive. D

Question 3

Adam Smith listed three types of motives for people holding money ¾ transaction, precautionary, and speculative.

Accepted Answer

A) True 
 B)False  False

Question 4

Exhibit 16-5 Money, investment and product markets   In Exhibit 16-5, a shift in aggregate demand from AD2 to AD3:

Accepted Answer

A) increases real GDP, and lowers the price level. 
B) decreases real GDP, and lowers the price level. 
C) increases real GDP, and raises the price level. 
D) decreases real GDP, and raises the price level. 
E) has no effect on real GDP and the price level because the economy can never reach full employment. 
A) increases real GDP, and lowers the price level. 
B) decreases real GDP, and lowers the price level. 
C) increases real GDP, and raises the price level. 
D) decreases real GDP, and raises the price level. 
E) has no effect on real GDP and the price level because the economy can never reach full employment.

Question 5

A decrease in the supply of money, other things being equal, will raise the equilibrium interest rate.

Accepted Answer

A) True 
 B)False

Question 6

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.

Question 7

According to the quantity theory of money, if an economy produces 100 units of output and has a money supply equal to $500, then if the money supply doubles while velocity remains constant, the new price level will:

Accepted Answer

A) fall to half its initial level. 
B) fall, but it will not fall all the way to half its initial level. 
C) increase, but it will not double. 
D) double. 
E) more than double. 
A) fall to half its initial level. 
B) fall, but it will not fall all the way to half its initial level. 
C) increase, but it will not double. 
D) double. 
E) more than double.

Question 8

Exhibit 16-4 Aggregate demand and supply model   In Exhibit 16-4, which one of the following actions could the Fed use to shift the AD curve from AD1 to AD2?

Accepted Answer

A) Raise the legal reserve requirement. 
B) Lower the discount rate. 
C) Lower the federal funds rate. 
D) Sell government securities. 
E) Raise the federal funds rate. 
A) Raise the legal reserve requirement. 
B) Lower the discount rate. 
C) Lower the federal funds rate. 
D) Sell government securities. 
E) Raise the federal funds rate.

Question 9

Exhibit 16-6 Money, investment and product markets   In Exhibit 16-6, if the interest rate falls from i1 to i2, then:

Accepted Answer

A) the quantity demanded of investment increases from I1 to I2 and investment spending shifts the aggregate demand curve from AD2 to AD1, decreasing the level of real GDP. 
B) the quantity demanded of investment increases from I1 to I2 and investment spending shifts the aggregate demand curve from AD1 to AD2, increasing the level of real GDP. 
C) the quantity demanded of investment decreases from I2 to I1 and investment spending shifts the aggregate demand curve from AD1 to AD2, decreasing the level of real GDP. 
D) the quantity demanded of investment decreases from I2 to I1 and investment spending shifts the aggregate demand curve from AD2 to AD1, increasing the level of real GDP. 
E) the quantity demanded of investment stays the same causing the aggregate demand curve to shift from AD2 to AD1 decreasing the level of real GDP. 
A) the quantity demanded of investment increases from I1 to I2 and investment spending shifts the aggregate demand curve from AD2 to AD1, decreasing the level of real GDP. 
B) the quantity demanded of investment increases from I1 to I2 and investment spending shifts the aggregate demand curve from AD1 to AD2, increasing the level of real GDP. 
C) the quantity demanded of investment decreases from I2 to I1 and investment spending shifts the aggregate demand curve from AD1 to AD2, decreasing the level of real GDP. 
D) the quantity demanded of investment decreases from I2 to I1 and investment spending shifts the aggregate demand curve from AD2 to AD1, increasing the level of real GDP. 
E) the quantity demanded of investment stays the same causing the aggregate demand curve to shift from AD2 to AD1 decreasing the level of real GDP.

Question 10

The demand curve for money:

Accepted Answer

A) shows the amount of money balances that individuals and businesses wish to hold at various levels of private investment. 
B) reflects the open market operations policy of the Federal Reserve. 
C) shows the amount of money that households and businesses wish to hold at various rates of interest. 
D) indicates the amount that consumers wish to borrow at a given interest rate. 
A) shows the amount of money balances that individuals and businesses wish to hold at various levels of private investment. 
B) reflects the open market operations policy of the Federal Reserve. 
C) shows the amount of money that households and businesses wish to hold at various rates of interest. 
D) indicates the amount that consumers wish to borrow at a given interest rate.

Question 11

People react to an excess supply of money by:

Accepted Answer

A) selling bonds, thus driving up the interest rate. 
B) selling bonds, thus driving down the interest rate. 
C) buying bonds, thus driving up the interest rate. 
D) buying bonds, thus driving down the interest rate. 
A) selling bonds, thus driving up the interest rate. 
B) selling bonds, thus driving down the interest rate. 
C) buying bonds, thus driving up the interest rate. 
D) buying bonds, thus driving down the interest rate.

Question 12

Exhibit 16-3 Money market demand and supply curves   In Exhibit 16-3, assume an equilibrium with an interest rate of 15 percent and the money supply at $100 billion. The Fed uses its policy tools to move the economy to a new equilibrium at E2 with money supply of $150 billion and an interest rate of 10 percent. This change could be the result of a(n):

Accepted Answer

A) open market sale of securities by the Fed. 
B) higher discount rate set by the Fed. 
C) higher required-reserve ratio set by the Fed. 
D) open market purchase of securities by the Fed. 
A) open market sale of securities by the Fed. 
B) higher discount rate set by the Fed. 
C) higher required-reserve ratio set by the Fed. 
D) open market purchase of securities by the Fed.

Question 13

As the interest rate decreases, the quantity of money people will hold:

Accepted Answer

A) decreases. 
B) increases. 
C) stays the same. 
D) rises and then falls. 
E) falls and then rises. 
A) decreases. 
B) increases. 
C) stays the same. 
D) rises and then falls. 
E) falls and then rises.

Question 14

The speculative demand for money is the stock of money that people hold to:

Accepted Answer

A) pay their predictable, everyday expenses. 
B) pay for any unexpected expenses that may occur. 
C) buy stocks, bonds, and other financial assets. 
D) buy the foreign currencies needed to purchase imports. 
A) pay their predictable, everyday expenses. 
B) pay for any unexpected expenses that may occur. 
C) buy stocks, bonds, and other financial assets. 
D) buy the foreign currencies needed to purchase imports.

Question 15

The Keynesian cause-and-effect sequence predicts that a decrease in the money supply will cause interest rates to:

Accepted Answer

A) fall, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
B) fall, boosting investment and shifting the AD curve rightward, leading to a decrease in real GDP. 
C) rise, cutting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
D) rise, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
E) rise, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP. 
A) fall, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
B) fall, boosting investment and shifting the AD curve rightward, leading to a decrease in real GDP. 
C) rise, cutting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
D) rise, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
E) rise, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP.

Question 16

The V in the equation of exchange represents the:

Accepted Answer

A) variation in the GDP. 
B) variation in the CPI. 
C) variation in real GDP. 
D) average number of times per year a dollar is spent on final goods and services. 
A) variation in the GDP. 
B) variation in the CPI. 
C) variation in real GDP. 
D) average number of times per year a dollar is spent on final goods and services.

Question 17

The opportunity cost of holding money balances increases when:

Accepted Answer

A) the inflation rate decreases. 
B) the interest rate increases. 
C) the interest rate decreases. 
D) GDP is far from full employment. 
A) the inflation rate decreases. 
B) the interest rate increases. 
C) the interest rate decreases. 
D) GDP is far from full employment.

Question 18

According to the quantity theory of money, if an economy produces 5,000 units of output, its money supply equals $40,000 and the velocity of money equals one, then the price level will equal:

Accepted Answer

A) $0.13. 
B) $1.25. 
C) $8. 
D) $200. 
E) $8,000. 
A) $0.13. 
B) $1.25. 
C) $8. 
D) $200. 
E) $8,000.

Question 19

Exhibit 16-1 Money market demand and supply curves   As shown in Exhibit 16-1, assume the money supply curve shifts leftward from MS1 to MS2 and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a:

Accepted Answer

A) higher investment, lower real GDP, and lower price level. 
B) lower investment, lower real GDP, and lower price level. 
C) higher investment, higher real GDP, and higher price level. 
D) higher interest rate and no effect on real GDP or the price level. 
A) higher investment, lower real GDP, and lower price level. 
B) lower investment, lower real GDP, and lower price level. 
C) higher investment, higher real GDP, and higher price level. 
D) higher interest rate and no effect on real GDP or the price level.

Question 20

According to Keynesians, for monetary policy to have a stimulative effect on GDP, a(n):

Accepted Answer

A) increase in the money supply lowers the interest rate in order to stimulate higher levels of investment. 
B) increase in the money supply lowers the interest rate in order to lower levels of investment. 
C) decrease in the money supply lowers interest rate in order to stimulate higher levels of investment 
D) decrease in the money supply causes the interest rate to rise in order to stimulate higher levels of investment. 
E) increase in the money supply causes the interest rate to rise in order to stimulate higher levels of investment. 
A) increase in the money supply lowers the interest rate in order to stimulate higher levels of investment. 
B) increase in the money supply lowers the interest rate in order to lower levels of investment. 
C) decrease in the money supply lowers interest rate in order to stimulate higher levels of investment 
D) decrease in the money supply causes the interest rate to rise in order to stimulate higher levels of investment. 
E) increase in the money supply causes the interest rate to rise in order to stimulate higher levels of investment.

Exam 16: Monetary Policy

Which of the following falls when bond prices rise?

When a household takes extra (unbudgeted)money on a trip, economists would classify this money as held for a(n):

Adam Smith listed three types of motives for people holding money ¾ transaction, precautionary, and speculative.

Exhibit 16-5 Money, investment and product markets In Exhibit 16-5, a shift in aggregate demand from AD2 to AD3:

A decrease in the supply of money, other things being equal, will raise the equilibrium interest rate.

A decrease in the money supply:

According to the quantity theory of money, if an economy produces 100 units of output and has a money supply equal to $500, then if the money supply doubles while velocity remains constant, the new price level will:

Exhibit 16-4 Aggregate demand and supply model In Exhibit 16-4, which one of the following actions could the Fed use to shift the AD curve from AD1 to AD2?

Exhibit 16-6 Money, investment and product markets In Exhibit 16-6, if the interest rate falls from i1 to i2, then:

The demand curve for money:

People react to an excess supply of money by:

As the interest rate decreases, the quantity of money people will hold:

The speculative demand for money is the stock of money that people hold to:

The Keynesian cause-and-effect sequence predicts that a decrease in the money supply will cause interest rates to:

The V in the equation of exchange represents the:

The opportunity cost of holding money balances increases when:

According to the quantity theory of money, if an economy produces 5,000 units of output, its money supply equals $40,000 and the velocity of money equals one, then the price level will equal:

Exhibit 16-1 Money market demand and supply curves As shown in Exhibit 16-1, assume the money supply curve shifts leftward from MS1 to MS2 and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a:

According to Keynesians, for monetary policy to have a stimulative effect on GDP, a(n):

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Gross Domestic Product

Business Cycles and Unemployment

Inflation

The Keynesian Model

The Keynesian Model in Action

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Money Creation

The Phillips Curve and Expectations Theory

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Applying Graphs to Economics

Consumer Surplus, Producer Surplus, and Market Efficiency

the Self-Correcting Aggregate Demand and Supply Model

Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

Filters

Exhibit 16-5 Money, investment and product markets In Exhibit 16-5, a shift in aggregate demand from AD₂to AD₃:

Exhibit 16-4 Aggregate demand and supply model In Exhibit 16-4, which one of the following actions could the Fed use to shift the AD curve from AD₁ to AD₂?

Exhibit 16-6 Money, investment and product markets In Exhibit 16-6, if the interest rate falls from i₁ to i₂, then:

Exhibit 16-1 Money market demand and supply curves As shown in Exhibit 16-1, assume the money supply curve shifts leftward from MS₁ to MS₂ and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a: