Question 1

The belief that the velocity of money is not constant but highly predictable is associated with the:

Accepted Answer

A)  classical school. 
B)  Keynesian school. 
C)  monetarist school. 
D)  rational expectations school 
A)  classical school. 
B)  Keynesian school. 
C)  monetarist school. 
D)  rational expectations school

Question 2

Exhibit 16-3 Money market demand and supply curves
 
In Exhibit 16-3, assume an equilibrium with an interest rate of 15 percent and the money supply at $100 billion. The Fed uses its policy tools to move the economy to a new equilibrium at E2 with money supply of $150 billion and an interest rate of 10 percent. This change could be the result of a(n):

Accepted Answer

A)  open market sale of securities by the Fed. 
B)  higher discount rate set by the Fed. 
C)  higher required-reserve ratio set by the Fed. 
D)  open market purchase of securities by the Fed. 
A)  open market sale of securities by the Fed. 
B)  higher discount rate set by the Fed. 
C)  higher required-reserve ratio set by the Fed. 
D)  open market purchase of securities by the Fed.

Question 3

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.

Question 4

Given the strict quantity theory of money, if the quantity of money doubled, prices would:

Accepted Answer

A)  fall by half. 
B)  double. 
C)  remain constant. 
D)  increase somewhat but less than double. 
A)  fall by half. 
B)  double. 
C)  remain constant. 
D)  increase somewhat but less than double.

Question 5

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. 
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.

Question 6

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 7

The monetary rule is the view of the:

Accepted Answer

A)  Keynesians that monetary policy is most important. 
B)  Monetarists that monetary policy is most important. 
C)  Classical economists that monetary policy is most important. 
D)  Monetarists that the Fed should expand the money supply at a constant rate. 
A)  Keynesians that monetary policy is most important. 
B)  Monetarists that monetary policy is most important. 
C)  Classical economists that monetary policy is most important. 
D)  Monetarists that the Fed should expand the money supply at a constant rate.

Question 8

If nominal GDP is $7 trillion, and the money supply is $2 trillion, then what is the velocity of money?

Accepted Answer

A)  14. 
B)  7. 
C)  3.5. 
D)  2. 
A)  14. 
B)  7. 
C)  3.5. 
D)  2.

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

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 11

Exhibit 16-5 Money, investment and product markets
 
In Exhibit 16-5, a shift in aggregate demand from AD1 to AD2:

Accepted Answer

A)  cannot raise real GDP because the economy is at full employment. 
B)  cannot raise real GDP because the aggregate supply curve is upward sloping at GDP2. 
C)  will raise real GDP because the economy is operating below the full-employment level. 
D)  will cause the interest rate to increase from i2 to i1. 
A)  cannot raise real GDP because the economy is at full employment. 
B)  cannot raise real GDP because the aggregate supply curve is upward sloping at GDP2. 
C)  will raise real GDP because the economy is operating below the full-employment level. 
D)  will cause the interest rate to increase from i2 to i1.

Question 12

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)  lower the discount rate 
C)  lower the federal funds rate 
D)  sell government securities 
A)  raise the legal reserve requirement 
B)  lower the discount rate 
C)  lower the federal funds rate 
D)  sell government securities

Question 13

"Monetary instability has been the major cause of economic instability in this country. Expansion in the money supply has been the source of every major inflation. Every major recession has been either caused or perpetuated by monetary contraction." Who among the following would most likely adhere to this view?

Accepted Answer

A)  Monetarists. 
B)  Keynesians. 
C)  Demand-side economists. 
D)  Quantity theorists. 
A)  Monetarists. 
B)  Keynesians. 
C)  Demand-side economists. 
D)  Quantity theorists.

Question 14

While the classicists believed that both velocity and output are stable, Keynesians believe:

Accepted Answer

A)  velocity is stable and output is variable. 
B)  velocity and output are both variable. 
C)  output is stable and velocity is variable 
D)  the same as the classical economists that both output and velocity are stable 
A)  velocity is stable and output is variable. 
B)  velocity and output are both variable. 
C)  output is stable and velocity is variable 
D)  the same as the classical economists that both output and velocity are stable

Question 15

Assume a fixed demand for money curve and the Fed increases the money supply. The result is a temporary:

Accepted Answer

A)  excess quantity of money demanded. 
B)  excess quantity of money supplied. 
C)  new equilibrium interest rate. 
D)  decrease in the demand for loans. 
A)  excess quantity of money demanded. 
B)  excess quantity of money supplied. 
C)  new equilibrium interest rate. 
D)  decrease in the demand for loans.

Question 16

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 17

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 18

When the Fed decreases the money supply, interest rates:

Accepted Answer

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

Question 19

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 20

The Keynesian mechanism through which monetary policy affects the price level, real GDP, and employment depends on the impact of the:

Accepted Answer

A)  interest rate on savings. 
B)  inflation on investment. 
C)  interest rate on investment. 
D)  interest rate on bond prices. 
A)  interest rate on savings. 
B)  inflation on investment. 
C)  interest rate on investment. 
D)  interest rate on bond prices.

Exam 26: Monetary Policy

The belief that the velocity of money is not constant but highly predictable is associated with the:

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:

Given the strict quantity theory of money, if the quantity of money doubled, prices would:

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:

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

The monetary rule is the view of the:

If nominal GDP is $7 trillion, and the money supply is $2 trillion, then what is the velocity of money?

Most monetarists favor:

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

Exhibit 16-5 Money, investment and product markets In Exhibit 16-5, a shift in aggregate demand from AD1 to AD2:

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?

While the classicists believed that both velocity and output are stable, Keynesians believe:

Assume a fixed demand for money curve and the Fed increases the money supply. The result is a temporary:

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

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

When the Fed decreases the money supply, interest rates:

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

The Keynesian mechanism through which monetary policy affects the price level, real GDP, and employment depends on the impact of the:

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 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:

Exhibit 16-5 Money, investment and product markets In Exhibit 16-5, a shift in aggregate demand from AD₁ to AD₂:

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?

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