Question 1

Given the strict quantity theory of money, if the quantity of money were decreased by 50 percent, prices would:

Accepted Answer

A) fall by 50 percent. 
B) rise by 50 percent. 
C) increase by 100 percent. 
D) decrease by 100 percent. 
A) fall by 50 percent. 
B) rise by 50 percent. 
C) increase by 100 percent. 
D) decrease by 100 percent.

Question 2

Monetarists argue that the Treasury's conduct of fiscal policy is the most important factor affecting real GDP and interest rates.

Accepted Answer

A) True 
 B)False

Question 3

Keynes argued that the downward slope of the demand for money curve depends on the:

Accepted Answer

A) equation of exchange. 
B) rate of interest. 
C) federal funds rate. 
D) discount rate. 
A) equation of exchange. 
B) rate of interest. 
C) federal funds rate. 
D) discount rate.

Question 4

Which type of demand for money causes the demand for money curve to slope downward?

Accepted Answer

A) Speculative demand. 
B) Precautionary demand. 
C) Transactions demand. 
D) Foreign-exchange demand. 
A) Speculative demand. 
B) Precautionary demand. 
C) Transactions demand. 
D) Foreign-exchange demand.

Question 5

Exhibit 16-5 Money, investment and product markets   In Exhibit 16-5, when the money supply increases from MS1 to MS2, the equilibrium interest rate:

Accepted Answer

A) remains unchanged. 
B) increases from i2 to i1, increasing investment spending from I1 to I2. 
C) increases from i2 to i1, decreasing investment spending from I2 to I1. 
D) decreases from i1 to i2, increasing investment spending from I1 to I2. 
E) decreases from i1 to i2, decreasing investment spending from I2 to I1. 
A) remains unchanged. 
B) increases from i2 to i1, increasing investment spending from I1 to I2. 
C) increases from i2 to i1, decreasing investment spending from I2 to I1. 
D) decreases from i1 to i2, increasing investment spending from I1 to I2. 
E) decreases from i1 to i2, decreasing investment spending from I2 to I1.

Question 6

The demand for money that households keep for emergency purposes is known as the:

Accepted Answer

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

Question 7

Keynes called the money people hold in order to pay unforeseen or unexpected expenses the:

Accepted Answer

A) transactions demand for holding money. 
B) precautionary demand for holding money. 
C) speculative demand for holding money. 
D) store of value demand for holding money. 
A) transactions demand for holding money. 
B) precautionary demand for holding money. 
C) speculative demand for holding money. 
D) store of value demand for holding money.

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 AD3 to AD2?

Accepted Answer

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

Question 9

The stock of money people hold to pay everyday predictable expenses is the:

Accepted Answer

A) transactions demand for holding money. 
B) precautionary demand for holding money. 
C) speculative demand for holding money. 
D) store of value demand for holding money. 
A) transactions demand for holding money. 
B) precautionary demand for holding money. 
C) speculative demand for holding money. 
D) store of value demand for holding money.

Question 10

The speculative demand curve for money is:

Accepted Answer

A) downward sloping. 
B) upward sloping. 
C) vertical. 
D) horizontal. 
E) spiral. 
A) downward sloping. 
B) upward sloping. 
C) vertical. 
D) horizontal. 
E) spiral.

Question 11

Exhibit 16-6 Money, investment and product markets   In Exhibit 16-6, an increase in the money supply from MS1 to MS2 causes:

Accepted Answer

A) interest rates to fall from i1 to i2 and the quantity demanded of investment to decrease from I2 to I1. 
B) interest rates to fall from i1 to i2 and aggregate demand to shift from AD2 to AD1. 
C) interest rates to fall from i1 to i2 and the quantity demanded of investment to increase from I1 to I2. 
D) interest rates to rise from i2 to i1 and the quantity demanded of investment to remain the same. 
E) interest rates to rise from i2 to i1 and aggregate demand to shift from AD1 to AD2. 
A) interest rates to fall from i1 to i2 and the quantity demanded of investment to decrease from I2 to I1. 
B) interest rates to fall from i1 to i2 and aggregate demand to shift from AD2 to AD1. 
C) interest rates to fall from i1 to i2 and the quantity demanded of investment to increase from I1 to I2. 
D) interest rates to rise from i2 to i1 and the quantity demanded of investment to remain the same. 
E) interest rates to rise from i2 to i1 and aggregate demand to shift from AD1 to AD2.

Question 12

Which of the following explains why the demand for money curve has an inverse relationship between the interest rates and the quantity of money demanded?

Accepted Answer

A) As the interest rate rises, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments. 
B)       As the interest rate rises, people find it advantageous to borrow money, which increases the quantity of money demanded. 
C) As the interest rate falls, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments. 
D) As the interest rate rises, the demand for money curve shifts outward to the right. 
A) As the interest rate rises, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments. 
B)       As the interest rate rises, people find it advantageous to borrow money, which increases the quantity of money demanded. 
C) As the interest rate falls, the opportunity cost of holding money rises, and people respond by converting cash or checking account balances into interest-bearing financial investments. 
D) As the interest rate rises, the demand for money curve shifts outward to the right.

Question 13

According to Keynesians, an increase in the money supply will:

Accepted Answer

A) decrease the interest rate, and increase investment, aggregate demand, prices, real GDP, and employment. 
B) decrease the interest rate, and decrease investment, aggregate demand, prices, real GDP, and employment. 
C) increase the interest rate, and decrease investment, aggregate demand, prices, real GDP, and employment. 
D) only increase prices. 
A) decrease the interest rate, and increase investment, aggregate demand, prices, real GDP, and employment. 
B) decrease the interest rate, and decrease investment, aggregate demand, prices, real GDP, and employment. 
C) increase the interest rate, and decrease investment, aggregate demand, prices, real GDP, and employment. 
D) only increase prices.

Question 14

Starting from equilibrium in the money market, suppose the money supply increases. Other things being equal, this will cause an excess supply of money, leading people to buy bonds.

Accepted Answer

A) True 
 B)False

Question 15

When the Fed reduces the money supply, it will cause a decrease in aggregate demand because:

Accepted Answer

A) real rates will rise, lowering business investment and consumer spending. 
B) the dollar will depreciate on the foreign exchange market, leading to an increase in net exports. 
C) lower interest rates will cause the value of assets (for example, stocks)to rise. 
D) the national debt will increase, causing consumers to reduce their spending. 
A) real rates will rise, lowering business investment and consumer spending. 
B) the dollar will depreciate on the foreign exchange market, leading to an increase in net exports. 
C) lower interest rates will cause the value of assets (for example, stocks)to rise. 
D) the national debt will increase, causing consumers to reduce their spending.

Question 16

Which of the following policies could the Fed use to lower the interest rate?

Accepted Answer

A) A tax cut. 
B) Selling government securities. 
C) Raising the discount rate. 
D) Reducing the required reserve ratio. 
A) A tax cut. 
B) Selling government securities. 
C) Raising the discount rate. 
D) Reducing the required reserve ratio.

Question 17

Which of the following is a reason for the Keynesian view that monetary policy plays a minor role in affecting the economy?

Accepted Answer

A) The money demand curve is vertical. 
B) The investment curve is very steep. 
C) The money demand curve is horizontal at any interest rate. 
D) The monetary rule. 
A) The money demand curve is vertical. 
B) The investment curve is very steep. 
C) The money demand curve is horizontal at any interest rate. 
D) The monetary rule.

Question 18

According to the quantity theory of money, if M's growth is lower than Q's, then:

Accepted Answer

A) V falls. 
B) V rises. 
C) P stays the same 
D) P falls. 
E) P rises 
A) V falls. 
B) V rises. 
C) P stays the same 
D) P falls. 
E) P rises

Question 19

The speculative 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 20

Suppose that the Fed makes a $100 billion open-market sale of Treasury bonds, and the money multiplier is 6. Which of the following impacts are most likely to result?

Accepted Answer

A) The money supply shifts inward, and the equilibrium interest rate rises in the money market. 
B) The money supply shifts outward, and the equilibrium interest rate falls in the money market. 
C) Investment declines, causing the aggregate demand curve to shift leftward, reducing equilibrium real GDP and thus slowing the economy. 
D) Both a. and c. are correct. 
E) Both b. and c. above are correct. 
A) The money supply shifts inward, and the equilibrium interest rate rises in the money market. 
B) The money supply shifts outward, and the equilibrium interest rate falls in the money market. 
C) Investment declines, causing the aggregate demand curve to shift leftward, reducing equilibrium real GDP and thus slowing the economy. 
D) Both a. and c. are correct. 
E) Both b. and c. above are correct.

Exam 16: Monetary Policy

Given the strict quantity theory of money, if the quantity of money were decreased by 50 percent, prices would:

Monetarists argue that the Treasury's conduct of fiscal policy is the most important factor affecting real GDP and interest rates.

Keynes argued that the downward slope of the demand for money curve depends on the:

Which type of demand for money causes the demand for money curve to slope downward?

Exhibit 16-5 Money, investment and product markets In Exhibit 16-5, when the money supply increases from MS1 to MS2, the equilibrium interest rate:

The demand for money that households keep for emergency purposes is known as the:

Keynes called the money people hold in order to pay unforeseen or unexpected expenses the:

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 AD3 to AD2?

The stock of money people hold to pay everyday predictable expenses is the:

The speculative demand curve for money is:

Exhibit 16-6 Money, investment and product markets In Exhibit 16-6, an increase in the money supply from MS1 to MS2 causes:

Which of the following explains why the demand for money curve has an inverse relationship between the interest rates and the quantity of money demanded?

According to Keynesians, an increase in the money supply will:

Starting from equilibrium in the money market, suppose the money supply increases. Other things being equal, this will cause an excess supply of money, leading people to buy bonds.

When the Fed reduces the money supply, it will cause a decrease in aggregate demand because:

Which of the following policies could the Fed use to lower the interest rate?

Which of the following is a reason for the Keynesian view that monetary policy plays a minor role in affecting the economy?

According to the quantity theory of money, if M's growth is lower than Q's, then:

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

Suppose that the Fed makes a $100 billion open-market sale of Treasury bonds, and the money multiplier is 6. Which of the following impacts are most likely to result?

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, when the money supply increases from MS₁ to MS₂, the equilibrium interest rate:

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 AD₃ to AD₂?

Exhibit 16-6 Money, investment and product markets In Exhibit 16-6, an increase in the money supply from MS₁ to MS₂ causes: