Question 1

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

Question 2

The downward slope of the demand for money curve is created by the:

Accepted Answer

A) transactions demand for money. 
B) precautionary demand for money. 
C) speculative demand for money. 
D) all of these. 
A) transactions demand for money. 
B) precautionary demand for money. 
C) speculative demand for money. 
D) all of these.

Question 3

Classical economists traditionally believed that:

Accepted Answer

A) there are three motives for demanding money. 
B) a change in the money supply can affect real GDP. 
C) the transactions demand for money influences the velocity of money. 
D) the velocity of money is constant. 
E) the economy does not always operate at full employment. 
A) there are three motives for demanding money. 
B) a change in the money supply can affect real GDP. 
C) the transactions demand for money influences the velocity of money. 
D) the velocity of money is constant. 
E) the economy does not always operate at full employment.

Question 4

If people attempt to sell bonds because of excess money demand, then the interest rate will:

Accepted Answer

A) rise. 
B) fall. 
C) remain unchanged 
D) react unpredictably. 
A) rise. 
B) fall. 
C) remain unchanged 
D) react unpredictably.

Question 5

The transmission mechanism is the effect of changes in monetary policy on prices, real GDP, and employment.

Accepted Answer

A) True 
 B)False

Question 6

In a two-asset economy with money and T-bills, the quantity of money that people will want to hold, other things being equal, can be expected to:

Accepted Answer

A) increase as the real GDP interest rate increases. 
B) decrease as the real GDP interest rate increases. 
C) decrease as real GDP increases. 
D) none of these. 
A) increase as the real GDP interest rate increases. 
B) decrease as the real GDP interest rate increases. 
C) decrease as real GDP increases. 
D) none of these.

Question 7

The transmission mechanism is the effect of changes in monetary policy on the stock market.

Accepted Answer

A) True 
 B)False

Question 8

Other things being equal, the quantity of money that people wish to hold in currency and their checking accounts can be expected to:

Accepted Answer

A) increase as the interest rate increases. 
B) decrease as the interest rate increases. 
C) decrease as real GDP increases. 
D) none of these. 
A) increase as the interest rate increases. 
B) decrease as the interest rate increases. 
C) decrease as real GDP increases. 
D) none of these.

Question 9

Suppose that the current money market equilibrium features an interest rate of 5 percent and a quantity of $2 trillion. If the Fed raises the discount rate, which of the following is most likely to be the new money market equilibrium?

Accepted Answer

A) An interest rate of 6 percent and a quantity of $1.5 trillion. 
B) An interest rate of 5 percent and a quantity of $2 trillion. 
C) An interest rate of 4 percent and a quantity of $2.5 trillion. 
D) None of the above. 
A) An interest rate of 6 percent and a quantity of $1.5 trillion. 
B) An interest rate of 5 percent and a quantity of $2 trillion. 
C) An interest rate of 4 percent and a quantity of $2.5 trillion. 
D) None of the above.

Question 10

The velocity of money is:

Accepted Answer

A) money supply divided by prices. 
B) spending divided by output. 
C) required monetary reserves divided by income. 
D) GDP divided by the money supply. 
A) money supply divided by prices. 
B) spending divided by output. 
C) required monetary reserves divided by income. 
D) GDP divided by the money supply.

Question 11

Since classical economists believe that both V and Q are constants for an economy in short-run equilibrium, the equation of exchange becomes a theory in which:

Accepted Answer

A) the quantity of money explains prices. 
B) the quantity of money explains velocity. 
C) the quantity of money explains real GDP. 
D) changes in M cause changes in V. 
E) prices are never flexible 
A) the quantity of money explains prices. 
B) the quantity of money explains velocity. 
C) the quantity of money explains real GDP. 
D) changes in M cause changes in V. 
E) prices are never flexible

Question 12

If the Fed wants to raise interest rates, then it can use its open market operations to:

Accepted Answer

A) increase the money supply. 
B) decrease the money supply. 
C) increase money demand. 
D) decrease money demand. 
A) increase the money supply. 
B) decrease the money supply. 
C) increase money demand. 
D) decrease money demand.

Question 13

The monetarists totally reject the importance of changes in the money stock as determinants of changes in real GDP, the price level, and employment.

Accepted Answer

A) True 
 B)False

Question 14

The precautionary demand for holding money is when people hold money:

Accepted Answer

A) instead of near money. 
B) to transact purchases they expect to make. 
C) as insurance against unexpected needs. 
D) to speculate in the stock market. 
E) to take advantage of changes in interest rates. 
A) instead of near money. 
B) to transact purchases they expect to make. 
C) as insurance against unexpected needs. 
D) to speculate in the stock market. 
E) to take advantage of changes in interest rates.

Question 15

The Keynesian viewpoint is that the investment curve is highly responsive to the changes in the rate of interest.

Accepted Answer

A) True 
 B)False

Question 16

A decrease in the interest rate, other things being equal, causes a(n):

Accepted Answer

A) upward movement along the demand curve for money. 
B) downward movement along the demand curve for money. 
C) rightward shift of the demand curve for money. 
D) leftward shift of the demand curve for money. 
A) upward movement along the demand curve for money. 
B) downward movement along the demand curve for money. 
C) rightward shift of the demand curve for money. 
D) leftward shift of the demand curve for money.

Question 17

According to monetarists, which of the following would be most important for the control of inflation?

Accepted Answer

A) a steady increase in federal expenditures 
B) the imposition of price controls 
C) keeping the growth rate of the money supply low and steady 
D) a steady increase in the size of the budget deficit 
A) a steady increase in federal expenditures 
B) the imposition of price controls 
C) keeping the growth rate of the money supply low and steady 
D) a steady increase in the size of the budget deficit

Question 18

The precautionary demand for money is the demand for money:

Accepted Answer

A) for normal transactions purposes. 
B) for normal investment purposes. 
C) for special stock purchases. 
D) to protect against inflation. 
E) to cover unexpected events. 
A) for normal transactions purposes. 
B) for normal investment purposes. 
C) for special stock purchases. 
D) to protect against inflation. 
E) to cover unexpected events.

Question 19

The quantity theory of money of the Classical economists says that a change in the money supply will produce a:

Accepted Answer

A) proportional change in the price level. 
B) greater than proportional change in the price level. 
C) less than proportional change in the price level. 
D) wide variation in the velocity of money. 
A) proportional change in the price level. 
B) greater than proportional change in the price level. 
C) less than proportional change in the price level. 
D) wide variation in the velocity of money.

Question 20

The average number of times per year each dollar is used to transact an exchange is known as the:

Accepted Answer

A) liquidity of money. 
B) velocity of money. 
C) quantity theory of money. 
D) equation of exchange 
E) rapidity index 
A) liquidity of money. 
B) velocity of money. 
C) quantity theory of money. 
D) equation of exchange 
E) rapidity index

Exam 16: Monetary Policy

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?

The downward slope of the demand for money curve is created by the:

Classical economists traditionally believed that:

If people attempt to sell bonds because of excess money demand, then the interest rate will:

The transmission mechanism is the effect of changes in monetary policy on prices, real GDP, and employment.

In a two-asset economy with money and T-bills, the quantity of money that people will want to hold, other things being equal, can be expected to:

The transmission mechanism is the effect of changes in monetary policy on the stock market.

Other things being equal, the quantity of money that people wish to hold in currency and their checking accounts can be expected to:

Suppose that the current money market equilibrium features an interest rate of 5 percent and a quantity of $2 trillion. If the Fed raises the discount rate, which of the following is most likely to be the new money market equilibrium?

The velocity of money is:

Since classical economists believe that both V and Q are constants for an economy in short-run equilibrium, the equation of exchange becomes a theory in which:

If the Fed wants to raise interest rates, then it can use its open market operations to:

The monetarists totally reject the importance of changes in the money stock as determinants of changes in real GDP, the price level, and employment.

The precautionary demand for holding money is when people hold money:

The Keynesian viewpoint is that the investment curve is highly responsive to the changes in the rate of interest.

A decrease in the interest rate, other things being equal, causes a(n):

According to monetarists, which of the following would be most important for the control of inflation?

The precautionary demand for money is the demand for money:

The quantity theory of money of the Classical economists says that a change in the money supply will produce a:

The average number of times per year each dollar is used to transact an exchange is known as the:

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 16-4 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?