Question 1

The Monetarist transmission mechanism through which monetary policy affects the price level, real GDP, and employment depends on the:

Accepted Answer

A)  indirect impact of changes on the interest rate. 
B)  indirect impact of changes on profit expectations. 
C)  direct impact of changes in fiscal policy on aggregate demand. 
D)  direct impact of changes in the money supply on aggregate demand. 
A)  indirect impact of changes on the interest rate. 
B)  indirect impact of changes on profit expectations. 
C)  direct impact of changes in fiscal policy on aggregate demand. 
D)  direct impact of changes in the money supply on aggregate demand. D

Question 2

According to the classical view,

Accepted Answer

A)  velocity is constant, which means changes in price will cause changes in price or quantity. 
B)  quantity is constant, which means changes in the money supply could cause either changes in velocity or changes in prices. 
C)  velocity and price are constant so that changes in the money supply causes changes in quantity. 
D)  velocity and quantity are constant so that changes in the money supply cause changes in prices. 
A)  velocity is constant, which means changes in price will cause changes in price or quantity. 
B)  quantity is constant, which means changes in the money supply could cause either changes in velocity or changes in prices. 
C)  velocity and price are constant so that changes in the money supply causes changes in quantity. 
D)  velocity and quantity are constant so that changes in the money supply cause changes in prices. D

Question 3

According to the equation of exchange, if M = 200, P = 100, and Q = 10, the V is:

Accepted Answer

A)  20. 
B)  2. 
C)  10. 
D)  5. 
A)  20. 
B)  2. 
C)  10. 
D)  5. D

Question 4

Monetarists believe:

Accepted Answer

A)  the cause-and-effect relationship hypothesized by the Keynesians understates the impact of stimulative monetary policy. 
B)  the cause-and-effect relationship hypothesized by the Keynesians is an accurate description of how monetary policy works. 
C)  since the economy is operating at full employment, any stimulative monetary policy will cause the inflation rate to rise. 
D)  the cause-and-effect relationship hypothesized by the Keynesians is backwards, and decreases in the money supply actually stimulate economic activity. 
A)  the cause-and-effect relationship hypothesized by the Keynesians understates the impact of stimulative monetary policy. 
B)  the cause-and-effect relationship hypothesized by the Keynesians is an accurate description of how monetary policy works. 
C)  since the economy is operating at full employment, any stimulative monetary policy will cause the inflation rate to rise. 
D)  the cause-and-effect relationship hypothesized by the Keynesians is backwards, and decreases in the money supply actually stimulate economic activity.

Question 5

Which of the following is not an important issue in the Keynesian-Monetarist debate?

Accepted Answer

A)  the relative importance of monetary and fiscal policy 
B)  the nature of the transmission mechanism through which a change in the money supply affects the economy 
C)  the shape of the investment-demand curve 
D)  the shape of the money supply curve 
A)  the relative importance of monetary and fiscal policy 
B)  the nature of the transmission mechanism through which a change in the money supply affects the economy 
C)  the shape of the investment-demand curve 
D)  the shape of the money supply curve

Question 6

An increase in the money supply is represented by a(n):

Accepted Answer

A)  rightward shift of the downward-sloping money supply curve. 
B)  upward shift of the money supply curve. 
C)  rightward shift of the money supply curve. 
D)  increase in the rate of interest. 
A)  rightward shift of the downward-sloping money supply curve. 
B)  upward shift of the money supply curve. 
C)  rightward shift of the money supply curve. 
D)  increase in the rate of interest.

Question 7

Which of the following statements is true ?

Accepted Answer

A)  The speculative demand for money at possible interest rates gives the demand for money curve its upward slope. 
B)  There is an inverse relationship between the quantity of money demanded and the interest rate. 
C)  According to the quantity theory of money, any change in the money supply will have no effect on the price level. 
D)  The transactions demand for money is used as an insurance agent against unexpected needs. 
A)  The speculative demand for money at possible interest rates gives the demand for money curve its upward slope. 
B)  There is an inverse relationship between the quantity of money demanded and the interest rate. 
C)  According to the quantity theory of money, any change in the money supply will have no effect on the price level. 
D)  The transactions demand for money is used as an insurance agent against unexpected needs.

Question 8

Contrast the Keynesian and Monetarist views on how a change in the money supply impacts the economy.

Accepted Answer

According to Keynesian economists, an in

Question 9

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 10

Exhibit 16-1 Money market demand and supply curves
 
Beginning from an equilibrium at E1 in Exhibit 16-1, a decrease in the money supply from $150 billion to $100 billion causes people to:

Accepted Answer

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

Question 11

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. 
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.

Question 12

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 leftward, leading to a decrease in real GDP. 
D)  rise, boosting investment and shifting the AD curve rightward, leading to an increase 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 leftward, leading to a decrease in real GDP. 
D)  rise, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP.

Question 13

Keynes called the money people hold in order to buy bonds, stocks, or other nonmoney financial assets the:

Accepted Answer

A)  transactions demand for holding money. 
B)  precautionary demand for holding money. 
C)  speculative demand for holding money. 
D)  unit of account demand for holding money. 
A)  transactions demand for holding money. 
B)  precautionary demand for holding money. 
C)  speculative demand for holding money. 
D)  unit of account demand for holding money.

Question 14

Suppose that the current money market equilibrium has an interest rate of 5 percent and a quantity of $2 trillion. Suppose that at a 6 percent interest rate, the quantity of money demanded is $1.5 trillion, while at a 4 percent interest rate it is $2.5 trillion. If the Fed makes an open-market purchase of $50 billion, and the money multiplier is 10, what will 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)  The new money market equilibrium cannot be determined from the information given. 
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)  The new money market equilibrium cannot be determined from the information given.

Question 15

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

Accepted Answer

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

Question 16

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, cutting investment and shifting the AD curve leftward, 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. 
A)  fall, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
B)  fall, cutting investment and shifting the AD curve leftward, 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.

Question 17

In Keynes's view, an excess quantity of money supplied causes people to:

Accepted Answer

A)  sell bonds and the interest rate rises. 
B)  buy bonds and the interest rate falls. 
C)  buy bonds and the interest rate rises. 
D)  increase speculative balances. 
A)  sell bonds and the interest rate rises. 
B)  buy bonds and the interest rate falls. 
C)  buy bonds and the interest rate rises. 
D)  increase speculative balances.

Question 18

Monetarists argue that fiscal policy is ineffective because:

Accepted Answer

A)  the velocity of money is predictable. 
B)  the crowding-out effect reduces investment. 
C)  prices and wages are sticky in the short run. 
D)  it causes the value of the dollar to depreciate. 
A)  the velocity of money is predictable. 
B)  the crowding-out effect reduces investment. 
C)  prices and wages are sticky in the short run. 
D)  it causes the value of the dollar to depreciate.

Question 19

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. 
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.

Question 20

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.

Exam 26: Monetary Policy

The Monetarist transmission mechanism through which monetary policy affects the price level, real GDP, and employment depends on the:

According to the classical view,

According to the equation of exchange, if M = 200, P = 100, and Q = 10, the V is:

Monetarists believe:

Which of the following is not an important issue in the Keynesian-Monetarist debate?

An increase in the money supply is represented by a(n):

Which of the following statements is true ?

Contrast the Keynesian and Monetarist views on how a change in the money supply impacts the economy.

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

Exhibit 16-1 Money market demand and supply curves Beginning from an equilibrium at E1 in Exhibit 16-1, a decrease in the money supply from $150 billion to $100 billion causes people to:

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

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

Keynes called the money people hold in order to buy bonds, stocks, or other nonmoney financial assets the:

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

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

In Keynes's view, an excess quantity of money supplied causes people to:

Monetarists argue that fiscal policy is ineffective because:

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

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

Introducing the Economic Way of Thinking

Production Possibilities Opportunity Cost and Economic Growth

Market Demand and Supply

Markets in Action

Price Elasticity of Demand and Supply

Consumer Choice Theory

Production Costs

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets

Income Distribution Poverty and Discrimination

Antitrust and Regulation

Environmental Economics

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

Understanding Direct and Inverse Relationships between Variables

Filters

Exhibit 16-1 Money market demand and supply curves Beginning from an equilibrium at E₁ in Exhibit 16-1, a decrease in the money supply from $150 billion to $100 billion causes people to:

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