Question 1

An increase in the supply of money will:

Accepted Answer

A) reduce the rate of interest and, thereby, trigger an increase in current spending by households and businesses. 
B) reduce aggregate demand and real output. 
C) increase only the general level of prices. 
D) lead to a higher rate of unemployment. 
A) reduce the rate of interest and, thereby, trigger an increase in current spending by households and businesses. 
B) reduce aggregate demand and real output. 
C) increase only the general level of prices. 
D) lead to a higher rate of unemployment.

Question 2

The speculative demand for money shows the relationship between money demand and:

Accepted Answer

A) income levels. 
B) interest rates. 
C) prices 
D) investment. 
E) consumption. 
A) income levels. 
B) interest rates. 
C) prices 
D) investment. 
E) consumption.

Question 3

Exhibit 16-3 Money market demand and supply curves   As shown in Exhibit 16-3, assume the money supply curve shifts rightward 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 4

When interest rates rise, the quantity demanded of money held for the:

Accepted Answer

A) speculative motive rises. 
B) precautionary motive rises. 
C) transactions motive falls. 
D) precautionary motive falls. 
E) speculative motive falls. 
A) speculative motive rises. 
B) precautionary motive rises. 
C) transactions motive falls. 
D) precautionary motive falls. 
E) speculative motive falls.

Question 5

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

Accepted Answer

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

Question 6

Keynesians identify three principal motives for demanding money. They are the:

Accepted Answer

A) transactions demand, precautionary demand, and liquidity motive. 
B) transactions demand, precautionary demand, and convertibility motive. 
C) transactions demand, speculative demand, and volatility motive. 
D) transactions demand, speculative demand, and liquidity motive. 
E) transactions demand, speculative demand, and precautionary demand. 
A) transactions demand, precautionary demand, and liquidity motive. 
B) transactions demand, precautionary demand, and convertibility motive. 
C) transactions demand, speculative demand, and volatility motive. 
D) transactions demand, speculative demand, and liquidity motive. 
E) transactions demand, speculative demand, and precautionary demand.

Question 7

Which of the following is the velocity of money?

Accepted Answer

A) How quickly the average worker gets paid after his or her work is done. 
B) The average speed of ATM machines. 
C) The average number of times per year that a given dollar of the money supply is spent. 
D) None of the above. 
A) How quickly the average worker gets paid after his or her work is done. 
B) The average speed of ATM machines. 
C) The average number of times per year that a given dollar of the money supply is spent. 
D) None of the above.

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

Question 9

According to the quantity theory of money, which one of the following economic variables would change in response to an increase in the money supply?

Accepted Answer

A) prices 
B) real income 
C) velocity 
D) employment 
A) prices 
B) real income 
C) velocity 
D) employment

Question 10

An increase in the money supply:

Accepted Answer

A) lowers the interest rate, causing a decrease in investment and an increase in GDP. 
B) lowers the interest rate, causing an increase in investment and a decrease in GDP. 
C) lowers the interest rate, causing an increase in investment and an increase 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 an increase in GDP. 
B) lowers the interest rate, causing an increase in investment and a decrease in GDP. 
C) lowers the interest rate, causing an increase in investment and an increase 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 11

The Keynesian cause-and-effect sequence predicts that an increase 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) fall, 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) fall, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP.

Question 12

The opportunity cost of holding money is properly measured by the rate of interest on financial assets such as bonds.

Accepted Answer

A) True 
 B)False

Question 13

The precautionary demand for money:

Accepted Answer

A) varies inversely with the income level. 
B) varies inversely with the price level. 
C) is used as an insurance agent against unexpected needs. 
D) states that nominal income must exceed real income. 
E) is a classical concept in monetary theory. 
A) varies inversely with the income level. 
B) varies inversely with the price level. 
C) is used as an insurance agent against unexpected needs. 
D) states that nominal income must exceed real income. 
E) is a classical concept in monetary theory.

Question 14

According to the equation of exchange, if V = 5, P = 100, and Q = 10, the 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 15

If the Fed reduces the discount rate, which of the following are most likely to result?

Accepted Answer

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

Question 16

According to Keynesians, an increase in the money supply will have its greatest impact on GDP when the aggregate demand curve intersects:

Accepted Answer

A) the vertical portion of the aggregate supply curve. 
B) the upward sloping portion of the aggregate supply curve. 
C) the horizontal portion of the aggregate supply curve. 
D) either the upward sloping or the vertical portions of the aggregate supply curve. 
E) either the horizontal or vertical portions of the aggregate supply curve. 
A) the vertical portion of the aggregate supply curve. 
B) the upward sloping portion of the aggregate supply curve. 
C) the horizontal portion of the aggregate supply curve. 
D) either the upward sloping or the vertical portions of the aggregate supply curve. 
E) either the horizontal or vertical portions of the aggregate supply curve.

Question 17

One reason that people hold money is to pay for unexpected car repairs and other unpredictable expenses. This motive for holding money is called:

Accepted Answer

A) transactions demand. 
B) precautionary demand. 
C) speculative demand. 
D) noncyclical demand. 
A) transactions demand. 
B) precautionary demand. 
C) speculative demand. 
D) noncyclical demand.

Question 18

According to classical economists,

Accepted Answer

A) prices are rigid. 
B) both V and Q are variable for an economy in short-run equilibrium. 
C) changes in M cause changes in V. 
D) the velocity of money is constant. 
A) prices are rigid. 
B) both V and Q are variable for an economy in short-run equilibrium. 
C) changes in M cause changes in V. 
D) the velocity of money is constant.

Question 19

According to the quantity theory of money, a 10 percent increase in the money supply leads to a 10 percent increase in:

Accepted Answer

A) velocity. 
B) unemployment. 
C) the price level. 
D) real GDP. 
A) velocity. 
B) unemployment. 
C) the price level. 
D) real GDP.

Question 20

Exhibit 16-1 Money market demand and supply curves   Starting from an equilibrium at E1 in Exhibit 16-1, a leftward shift of the money supply curve from MS1 to MS2 would cause an excess:

Accepted Answer

A) demand for money, leading people to sell bonds. 
B) demand for money, leading people to buy bonds. 
C) supply of money, leading people to sell bonds. 
D) supply of money, leading people to buy bonds. 
A) demand for money, leading people to sell bonds. 
B) demand for money, leading people to buy bonds. 
C) supply of money, leading people to sell bonds. 
D) supply of money, leading people to buy bonds.

Exam 16: Monetary Policy

An increase in the supply of money will:

The speculative demand for money shows the relationship between money demand and:

Exhibit 16-3 Money market demand and supply curves As shown in Exhibit 16-3, assume the money supply curve shifts rightward from MS1 to MS2 and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a:

When interest rates rise, the quantity demanded of money held for the:

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

Keynesians identify three principal motives for demanding money. They are the:

Which of the following is the velocity of money?

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?

According to the quantity theory of money, which one of the following economic variables would change in response to an increase in the money supply?

An increase in the money supply:

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

The opportunity cost of holding money is properly measured by the rate of interest on financial assets such as bonds.

The precautionary demand for money:

According to the equation of exchange, if V = 5, P = 100, and Q = 10, the M is:

If the Fed reduces the discount rate, which of the following are most likely to result?

According to Keynesians, an increase in the money supply will have its greatest impact on GDP when the aggregate demand curve intersects:

One reason that people hold money is to pay for unexpected car repairs and other unpredictable expenses. This motive for holding money is called:

According to classical economists,

According to the quantity theory of money, a 10 percent increase in the money supply leads to a 10 percent increase in:

Exhibit 16-1 Money market demand and supply curves Starting from an equilibrium at E1 in Exhibit 16-1, a leftward shift of the money supply curve from MS1 to MS2 would cause an excess:

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 16-3 Money market demand and supply curves As shown in Exhibit 16-3, assume the money supply curve shifts rightward from MS₁ to MS₂ and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a:

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 16-1 Money market demand and supply curves Starting from an equilibrium at E₁ in Exhibit 16-1, a leftward shift of the money supply curve from MS₁ to MS₂ would cause an excess: