Question 1

In the quantity theory of money:

Accepted Answer

A)  the price level is a function of the supply of money. 
B)  the supply of money is a function of the price level. 
C)  the money supply and the price level are inversely related. 
D)  the money supply is controlled by the government. 
A)  the price level is a function of the supply of money. 
B)  the supply of money is a function of the price level. 
C)  the money supply and the price level are inversely related. 
D)  the money supply is controlled by the government.

Question 2

When the Fed increases 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 3

Classical economists believe that:

Accepted Answer

A)  velocity is not constant. 
B)  changes in the money supply affect real GDP. 
C)  the quantity of money explains prices. 
D)  the money supply affects velocity. 
A)  velocity is not constant. 
B)  changes in the money supply affect real GDP. 
C)  the quantity of money explains prices. 
D)  the money supply affects velocity.

Question 4

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 5

Speculative demand for money is a(n):

Accepted Answer

A)  positive function of prices. 
B)  inverse function of prices. 
C)  positive function of interest rates. 
D)  inverse function of interest rates. 
A)  positive function of prices. 
B)  inverse function of prices. 
C)  positive function of interest rates. 
D)  inverse function of interest rates.

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 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 precautionary demand.

Question 7

According to Keynesian economists, which of the following is not a consequence of increasing the money supply?

Accepted Answer

A)  a lower interest rate 
B)  greater investment 
C)  lower real GDP 
D)  higher real GDP 
A)  a lower interest rate 
B)  greater investment 
C)  lower real GDP 
D)  higher real GDP

Question 8

A decrease in the interest rate, other things being equal, causes a(n):

Accepted Answer

A)  upward movement along the demand curve for money. 
B)  downward movement along the demand curve for money. 
C)  rightward shift of the demand curve for money. 
D)  leftward shift of the demand curve for money. 
A)  upward movement along the demand curve for money. 
B)  downward movement along the demand curve for money. 
C)  rightward shift of the demand curve for money. 
D)  leftward shift of the demand curve for money.

Question 9

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. 
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.

Question 10

The equation of exchange states that:

Accepted Answer

A)  money supply multiplied by real output equals velocity. 
B)  velocity multiplied by money supply equals the selling price times the quantity of actual output. 
C)  money supply divided by velocity equals nominal GDP. 
D)  money supply divided by velocity equals real GDP. 
A)  money supply multiplied by real output equals velocity. 
B)  velocity multiplied by money supply equals the selling price times the quantity of actual output. 
C)  money supply divided by velocity equals nominal GDP. 
D)  money supply divided by velocity equals real GDP.

Question 11

Which of the following policies would be most likely to reduce the rate of inflation?

Accepted Answer

A)  sale of government bonds by the Federal Reserve 
B)  a reduction in the discount rate 
C)  an increase in the size of the federal budget deficit 
D)  a reduction in the required reserves imposed on the banking system 
A)  sale of government bonds by the Federal Reserve 
B)  a reduction in the discount rate 
C)  an increase in the size of the federal budget deficit 
D)  a reduction in the required reserves imposed on the banking system

Question 12

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 13

Monetarists reject using discretionary monetary policy as an effective stabilization tool because they believe:

Accepted Answer

A)  if the money supply grows at a rate equal to the economy's long-run rate of economic growth, then the economy will be unstable. 
B)  that changes in the money stock do not affect output or prices. 
C)  the Fed will miss its money supply targets and make the economy worse. 
D)  monetary policy can stimulate aggregate demand, but it cannot affect inflation. 
A)  if the money supply grows at a rate equal to the economy's long-run rate of economic growth, then the economy will be unstable. 
B)  that changes in the money stock do not affect output or prices. 
C)  the Fed will miss its money supply targets and make the economy worse. 
D)  monetary policy can stimulate aggregate demand, but it cannot affect inflation.

Question 14

If at the prevailing interest rate the quantity of money demanded is $2 trillion, and the supply of money is $1.5 trillion, then which of the following is true ?

Accepted Answer

A)  There is a shortage of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
B)  There is a surplus of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
C)  There is shortage of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market. 
D)  There is a surplus of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market. 
A)  There is a shortage of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
B)  There is a surplus of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
C)  There is shortage of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market. 
D)  There is a surplus of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market.

Question 15

Which economic theory argues that changes in velocity are predictable and the crowding-out effect is substantial?

Accepted Answer

A)  classical theory 
B)  Keynesian theory 
C)  monetarist theory 
D)  Marxist theory 
A)  classical theory 
B)  Keynesian theory 
C)  monetarist theory 
D)  Marxist theory

Question 16

The quantity theory of money assumes that the velocity of money:

Accepted Answer

A)  is constant. 
B)  will rise if the money supply rises and fall if the money supply falls. 
C)  will rise if the money supply rises, but it will not change if the money supply falls. 
D)  will fall if the money supply rises, and it will rise if the money supply falls. 
A)  is constant. 
B)  will rise if the money supply rises and fall if the money supply falls. 
C)  will rise if the money supply rises, but it will not change if the money supply falls. 
D)  will fall if the money supply rises, and it will rise if the money supply falls.

Question 17

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)  decreases from i1 to i2, decreasing investment spending from I2 to I1. 
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. 
A)  decreases from i1 to i2, decreasing investment spending from I2 to I1. 
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.

Question 18

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 19

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 20

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.

Exam 26: Monetary Policy

In the quantity theory of money:

When the Fed increases the money supply, interest rates:

Classical economists believe that:

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

Speculative demand for money is a(n):

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

According to Keynesian economists, which of the following is not a consequence of increasing the money supply?

A decrease in the interest rate, other things being equal, causes a(n):

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?

The equation of exchange states that:

Which of the following policies would be most likely to reduce the rate of inflation?

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

Monetarists reject using discretionary monetary policy as an effective stabilization tool because they believe:

If at the prevailing interest rate the quantity of money demanded is $2 trillion, and the supply of money is $1.5 trillion, then which of the following is true ?

Which economic theory argues that changes in velocity are predictable and the crowding-out effect is substantial?

The quantity theory of money assumes that the velocity of money:

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:

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

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?

Keynes called the money people hold in order to pay unforeseen or unexpected expenses 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 16-6 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, when the money supply increases from MS₁ to MS₂, the equilibrium interest rate: