Question 1

Assume the Fed decreases the money supply and the demand for money curve is fixed. In response, people will:

Accepted Answer

A) sell bonds, thus driving up the interest rate. 
B) buy bonds, thus driving down the interest rate. 
C) buy bonds, thus driving up the interest rate. 
D) sell bonds, thus driving down the interest rate. 
A) sell bonds, thus driving up the interest rate. 
B) buy bonds, thus driving down the interest rate. 
C) buy bonds, thus driving up the interest rate. 
D) sell bonds, thus driving down the interest rate.

Question 2

Since classical economists and monetarists believe that the economy operates at full employment, real GDP, that is, along the vertical segment of aggregate supply:

Accepted Answer

A) any increase in the money supply can only end up raising the price level. 
B) any increase in the money supply can only end up lowering the price level. 
C) any decrease in the money supply can only end up raising the price level. 
D) changes in the money supply will not affect the price level. 
E) any increase in the money supply will cause both nominal and real GDP to increase. 
A) any increase in the money supply can only end up raising the price level. 
B) any increase in the money supply can only end up lowering the price level. 
C) any decrease in the money supply can only end up raising the price level. 
D) changes in the money supply will not affect the price level. 
E) any increase in the money supply will cause both nominal and real GDP to increase.

Question 3

If V = 5, P = 100, and Q = 10, then M is:

Accepted Answer

A) 20. 
B) 10. 
C) 500. 
D) 1,000. 
E) 200. 
A) 20. 
B) 10. 
C) 500. 
D) 1,000. 
E) 200.

Question 4

According to the quantity theory of money:

Accepted Answer

A) the velocity of money is highly variable. 
B) the money supply directly affects real GDP. 
C) the money supply inversely affects velocity. 
D) real GDP increases as the price level increases. 
E) P = MV\Q. 
A) the velocity of money is highly variable. 
B) the money supply directly affects real GDP. 
C) the money supply inversely affects velocity. 
D) real GDP increases as the price level increases. 
E) P = MV\Q.

Question 5

Exhibit 16-6 Money, investment and product markets   In Exhibit 16-6, if the Fed believes the economy is at AD3, how might it engineer a decline in the price level?

Accepted Answer

A) By decreasing the money supply, the interest rate falls, investment rises, and aggregate demand falls, causing the price level to fall. 
B) By decreasing the money supply, the interest rate rises, investment rises, and aggregate demand rises, causing the price level to fall. 
C) By decreasing the money supply, the interest rate rises, investment falls, and aggregate demand falls, causing the price level to fall. 
D) By increasing the money supply, the interest rate rises, investment rises, and aggregate demand falls, causing the price level to fall. 
E) By increasing the money supply, the interest rate rises, investment falls, and aggregate demand rises, causing the price level to fall. 
A) By decreasing the money supply, the interest rate falls, investment rises, and aggregate demand falls, causing the price level to fall. 
B) By decreasing the money supply, the interest rate rises, investment rises, and aggregate demand rises, causing the price level to fall. 
C) By decreasing the money supply, the interest rate rises, investment falls, and aggregate demand falls, causing the price level to fall. 
D) By increasing the money supply, the interest rate rises, investment rises, and aggregate demand falls, causing the price level to fall. 
E) By increasing the money supply, the interest rate rises, investment falls, and aggregate demand rises, causing the price level to fall.

Question 6

Monetarists argue that the Federal Reserve should allow the money supply to grow:

Accepted Answer

A) counter to the business cycles. 
B) faster than 10 percent annually. 
C) only during recessions. 
D) at a constant rate. 
A) counter to the business cycles. 
B) faster than 10 percent annually. 
C) only during recessions. 
D) at a constant rate.

Question 7

If the investment curve is relatively flat, the Keynesian conclusion is that the transmission mechanism has little effect on the economy.

Accepted Answer

A) True 
 B)False

Question 8

Exhibit 16-5 Money, investment and product markets   In Exhibit 16-5, if the interest rate falls from i1 to i2, investment spending will:

Accepted Answer

A) increase, and aggregate demand will shift from AD1 to AD2. 
B) decrease, and aggregate demand will shift from AD2 to AD1. 
C) remain the same, and aggregate demand will shift from AD2 to AD3. 
D) increase, and aggregate demand will shift from AD2 to AD1. 
E) decrease, and aggregate demand will shift from AD1 to AD2. 
A) increase, and aggregate demand will shift from AD1 to AD2. 
B) decrease, and aggregate demand will shift from AD2 to AD1. 
C) remain the same, and aggregate demand will shift from AD2 to AD3. 
D) increase, and aggregate demand will shift from AD2 to AD1. 
E) decrease, and aggregate demand will shift from AD1 to AD2.

Question 9

Most monetarists favor:

Accepted Answer

A) frequent changes in the growth rate of the money supply to avoid inflation. 
B) placing the Federal Reserve under the Treasury. 
C) a steady, gradual shrinkage of the money supply. 
D) a constant increase in the money supply year after year equal to the potential annual growth rate in real GDP. 
A) frequent changes in the growth rate of the money supply to avoid inflation. 
B) placing the Federal Reserve under the Treasury. 
C) a steady, gradual shrinkage of the money supply. 
D) a constant increase in the money supply year after year equal to the potential annual growth rate in real GDP.

Question 10

Exhibit 16-2 Money market demand and supply curves   Beginning from an equilibrium at E1 in Exhibit 16-2, an increase in the money supply from $400 billion to $600 billion causes people to:

Accepted Answer

A) sell bonds and drive the price of bonds down. 
B) buy bonds and drive the price of bonds up. 
C) buy bonds and drive the price of bonds down. 
D) sell bonds and drive the price of bonds up. 
A) sell bonds and drive the price of bonds down. 
B) buy bonds and drive the price of bonds up. 
C) buy bonds and drive the price of bonds down. 
D) sell bonds and drive the price of bonds up.

Question 11

An increase in the supply of money will lead to ____ in equilibrium real GDP and ____ in equilibrium price level.

Accepted Answer

A) an increase; an increase 
B) an increase; a decrease 
C) a decreases; an increase 
D) a decrease; a decrease 
A) an increase; an increase 
B) an increase; a decrease 
C) a decreases; an increase 
D) a decrease; a decrease

Question 12

When the Fed increases the money supply, interest rates:

Accepted Answer

A) rise. 
B) fall. 
C) are unaffected. 
D) rise and then fall. 
E) fall and then rise. 
A) rise. 
B) fall. 
C) are unaffected. 
D) rise and then fall. 
E) fall and then rise.

Question 13

Which of the following is the objective of expansionary monetary policy?

Accepted Answer

A) An increase in employment. 
B) A decrease in employment. 
C) An increase in the velocity of money. 
D) An increase in prices proportional to the rise in the money supply. 
A) An increase in employment. 
B) A decrease in employment. 
C) An increase in the velocity of money. 
D) An increase in prices proportional to the rise in the money supply.

Question 14

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

Question 15

Monetarists and classical economists:

Accepted Answer

A) assume that stimulative monetary policy will create high levels of GDP without inflation. 
B) assume that stimulative monetary policy will create high levels of GDP and slightly high prices. 
C) assume the economy operates at full employment and stimulative monetary policy will only cause the price level to rise. 
D) assume that the economy operates at full employment and stimulative monetary policy will increase both aggregate supply and aggregate demand. 
E) assume that the Keynesian description of monetary policy underestimates the true stimulative effect of an increase in the money supply. 
A) assume that stimulative monetary policy will create high levels of GDP without inflation. 
B) assume that stimulative monetary policy will create high levels of GDP and slightly high prices. 
C) assume the economy operates at full employment and stimulative monetary policy will only cause the price level to rise. 
D) assume that the economy operates at full employment and stimulative monetary policy will increase both aggregate supply and aggregate demand. 
E) assume that the Keynesian description of monetary policy underestimates the true stimulative effect of an increase in the money supply.

Question 16

Which of the following is true ?

Accepted Answer

A) Keynesians advocate increasing the money supply during economic recessions but decreasing the money supply during economic expansions. 
B) Monetarists advocate increasing the money supply by a constant rate year after year. 
C) Keynesians argue that the crowding-out effect is rather insignificant. 
D) Monetarists argue that the crowding-out effect is rather large. 
E) All of these. 
A) Keynesians advocate increasing the money supply during economic recessions but decreasing the money supply during economic expansions. 
B) Monetarists advocate increasing the money supply by a constant rate year after year. 
C) Keynesians argue that the crowding-out effect is rather insignificant. 
D) Monetarists argue that the crowding-out effect is rather large. 
E) All of these.

Question 17

Suppose nominal GDP equaled $10,988 billion while the M2 money supply was $6,063 billion. What was the velocity of the M2 money stock?

Accepted Answer

A) 0.45 
B) 0.55 
C) 1.81 
D) 2.36 
A) 0.45 
B) 0.55 
C) 1.81 
D) 2.36

Question 18

The impact of an increase in the money supply is a(n):

Accepted Answer

A) increase in the interest rate, which in turn stimulates investment and GDP. 
B) decrease in the interest rate, which in turn stimulates investment and GDP. 
C) reduction in the general level of prices, which will increase the disposable income of households. 
D) improvement in technology, which will stimulate both output and employment. 
A) increase in the interest rate, which in turn stimulates investment and GDP. 
B) decrease in the interest rate, which in turn stimulates investment and GDP. 
C) reduction in the general level of prices, which will increase the disposable income of households. 
D) improvement in technology, which will stimulate both output and employment.

Question 19

Which of the following is a belief of the monetarists?

Accepted Answer

A) They think the Great Depression was made worse by poor conduct of monetary policy. 
B) They do not believe monetary policy is transmitted to the economy only through its effect on interest rates and planned investment. 
C) They believe that the interest-investment curve is vertical. 
D) All of these. 
A) They think the Great Depression was made worse by poor conduct of monetary policy. 
B) They do not believe monetary policy is transmitted to the economy only through its effect on interest rates and planned investment. 
C) They believe that the interest-investment curve is vertical. 
D) All of these.

Question 20

Why do people hold money (currency and checking account balances), and thereby forgo earning interest or dividends from a financial investment?

Accepted Answer

A) Some money is demanded for everyday transactions like parking fees, lunch, and buying groceries. 
B) Some money is demanded as a precaution against unexpected costs such as automobile repairs, speeding tickets, or temporary loss of a job. 
C) Some money is demanded for speculative purchases of stocks, bonds, or collectibles in case they become available at a particularly low price. 
D) All of the above are correct. 
A) Some money is demanded for everyday transactions like parking fees, lunch, and buying groceries. 
B) Some money is demanded as a precaution against unexpected costs such as automobile repairs, speeding tickets, or temporary loss of a job. 
C) Some money is demanded for speculative purchases of stocks, bonds, or collectibles in case they become available at a particularly low price. 
D) All of the above are correct.

Exam 16: Monetary Policy

Assume the Fed decreases the money supply and the demand for money curve is fixed. In response, people will:

Since classical economists and monetarists believe that the economy operates at full employment, real GDP, that is, along the vertical segment of aggregate supply:

If V = 5, P = 100, and Q = 10, then M is:

According to the quantity theory of money:

Exhibit 16-6 Money, investment and product markets In Exhibit 16-6, if the Fed believes the economy is at AD3, how might it engineer a decline in the price level?

Monetarists argue that the Federal Reserve should allow the money supply to grow:

If the investment curve is relatively flat, the Keynesian conclusion is that the transmission mechanism has little effect on the economy.

Exhibit 16-5 Money, investment and product markets In Exhibit 16-5, if the interest rate falls from i1 to i2, investment spending will:

Most monetarists favor:

Exhibit 16-2 Money market demand and supply curves Beginning from an equilibrium at E1 in Exhibit 16-2, an increase in the money supply from $400 billion to $600 billion causes people to:

An increase in the supply of money will lead to ____ in equilibrium real GDP and ____ in equilibrium price level.

When the Fed increases the money supply, interest rates:

Which of the following is the objective of expansionary 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?

Monetarists and classical economists:

Which of the following is true ?

Suppose nominal GDP equaled $10,988 billion while the M2 money supply was $6,063 billion. What was the velocity of the M2 money stock?

The impact of an increase in the money supply is a(n):

Which of the following is a belief of the monetarists?

Why do people hold money (currency and checking account balances), and thereby forgo earning interest or dividends from a financial investment?

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 16-6 Money, investment and product markets In Exhibit 16-6, if the Fed believes the economy is at AD₃, how might it engineer a decline in the price level?

Exhibit 16-5 Money, investment and product markets In Exhibit 16-5, if the interest rate falls from i₁ to i₂, investment spending will:

Exhibit 16-2 Money market demand and supply curves Beginning from an equilibrium at E₁ in Exhibit 16-2, an increase in the money supply from $400 billion to $600 billion causes people to:

An increase in the supply of money will lead to in equilibrium real GDP and in equilibrium price level.

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?