Question 1

According to the quantity theory of money, if M's growth is lower than Q's, then:

Accepted Answer

A)  V falls. 
B)  V rises. 
C)  P rises. 
D)  P falls. 
A)  V falls. 
B)  V rises. 
C)  P rises. 
D)  P falls.

Question 2

The opportunity cost of holding money balances increases when:

Accepted Answer

A)  the inflation rate decreases. 
B)  the interest rate increases. 
C)  the interest rate decreases. 
D)  GDP is far from full employment. 
A)  the inflation rate decreases. 
B)  the interest rate increases. 
C)  the interest rate decreases. 
D)  GDP is far from full employment.

Question 3

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 4

Other things being equal, an increase in the rate of interest causes a(n):

Accepted Answer

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

Question 5

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 6

Monetarists accept the idea that velocity is not constant; nonetheless, they believe that it is highly:

Accepted Answer

A)  variable. 
B)  unpredictable, ill-behaved, and independent of money supply. 
C)  unpredictable, well-behaved, and dependent of money supply. 
D)  predictable. 
A)  variable. 
B)  unpredictable, ill-behaved, and independent of money supply. 
C)  unpredictable, well-behaved, and dependent of money supply. 
D)  predictable.

Question 7

The demand curve for money:

Accepted Answer

A)  shows the amount of money balances that individuals and businesses wish to hold at various levels of private investment. 
B)  reflects the open market operations policy of the Federal Reserve. 
C)  shows the amount of money that households and businesses wish to hold at various rates of interest. 
D)  indicates the amount that consumers wish to borrow at a given interest rate. 
A)  shows the amount of money balances that individuals and businesses wish to hold at various levels of private investment. 
B)  reflects the open market operations policy of the Federal Reserve. 
C)  shows the amount of money that households and businesses wish to hold at various rates of interest. 
D)  indicates the amount that consumers wish to borrow at a given interest rate.

Question 8

According to monetarists, which of the following would be most important for the control of inflation?

Accepted Answer

A)  a steady increase in federal expenditures 
B)  the imposition of price controls 
C)  keeping the growth rate of the money supply low and steady 
D)  a steady increase in the size of the budget deficit 
A)  a steady increase in federal expenditures 
B)  the imposition of price controls 
C)  keeping the growth rate of the money supply low and steady 
D)  a steady increase in the size of the budget deficit

Question 9

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

Question 10

Discuss the determinants of the equilibrium interest rate. What can the Fed do to change the interest rate?

Accepted Answer

The interest rate is determined through

Question 11

Since classical economists and monetarists believe that the economy operates at full employment 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. 
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.

Question 12

In Keynes's view, an excess quantity of money demanded 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 13

Causality is clear and mechanical with the quantity theory of money. If M increases because:

Accepted Answer

A)  V and Q are variable, the price level, P, increases. 
B)  V and Q are variable, the price level, P, decreases. 
C)  V and Q are constant, the price level, P, increases. 
D)  V and Q are constant, the price level, P, decreases. 
A)  V and Q are variable, the price level, P, increases. 
B)  V and Q are variable, the price level, P, decreases. 
C)  V and Q are constant, the price level, P, increases. 
D)  V and Q are constant, the price level, P, decreases.

Question 14

If the economy is inflationary, the Fed would most likely:

Accepted Answer

A)  encourage banks to provide loans by buying government securities. 
B)  encourage banks to provide loans by raising the discount rate. 
C)  encourage banks to provide loans by selling government securities. 
D)  restrict bank lending by selling government securities. 
A)  encourage banks to provide loans by buying government securities. 
B)  encourage banks to provide loans by raising the discount rate. 
C)  encourage banks to provide loans by selling government securities. 
D)  restrict bank lending by selling government securities.

Question 15

According to the monetarists, which of the following is true?

Accepted Answer

A)  Instability in the money supply is the primary cause of economic instability. 
B)  A reduction in the money supply will cause consumers to increase spending. 
C)  A reduction in the money supply will cause a proportional reduction in wages and prices, leaving output unchanged. 
D)  A rapid growth rate of the money supply will lead to a rapid growth rate of real GDP. 
A)  Instability in the money supply is the primary cause of economic instability. 
B)  A reduction in the money supply will cause consumers to increase spending. 
C)  A reduction in the money supply will cause a proportional reduction in wages and prices, leaving output unchanged. 
D)  A rapid growth rate of the money supply will lead to a rapid growth rate of real GDP.

Question 16

Suppose that the current money market equilibrium features an interest rate of 5 percent and a quantity of $2 trillion. If the Fed raises the discount rate, which of the following is most likely to 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)  An interest rate of 3 percent and a quantity of $3 trillion. 
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)  An interest rate of 3 percent and a quantity of $3 trillion.

Question 17

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. 
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.

Question 18

Keynesians reject the influence of monetary policy on the economy. One argument supporting this Keynesian view is that the:

Accepted Answer

A)  money demand curve is horizontal at any interest rate. 
B)  aggregate demand curve is nearly flat. 
C)  investment demand curve is nearly vertical. 
D)  money demand curve is vertical. 
A)  money demand curve is horizontal at any interest rate. 
B)  aggregate demand curve is nearly flat. 
C)  investment demand curve is nearly vertical. 
D)  money demand curve is vertical.

Question 19

The assumption that the velocity of money and the quantity being produced is constant is held by the:

Accepted Answer

A)  Keynesian school. 
B)  supply-side school. 
C)  classical school. 
D)  rational expectations school. 
A)  Keynesian school. 
B)  supply-side school. 
C)  classical school. 
D)  rational expectations school.

Question 20

People learn to hold a specific quantity of money for the groceries, theater tickets, gasoline, clothes, film, and other items they habitually purchase. This behavior is representative of the:

Accepted Answer

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

Exam 26: Monetary Policy

According to the quantity theory of money, if M's growth is lower than Q's, then:

The opportunity cost of holding money balances increases when:

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?

Other things being equal, an increase in the rate of interest causes a(n):

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:

Monetarists accept the idea that velocity is not constant; nonetheless, they believe that it is highly:

The demand curve for money:

According to monetarists, which of the following would be most important for the control of inflation?

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?

Discuss the determinants of the equilibrium interest rate. What can the Fed do to change the interest rate?

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

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

Causality is clear and mechanical with the quantity theory of money. If M increases because:

If the economy is inflationary, the Fed would most likely:

According to the monetarists, which of the following is true?

Suppose that the current money market equilibrium features an interest rate of 5 percent and a quantity of $2 trillion. If the Fed raises the discount rate, which of the following is most likely to be the new money market equilibrium?

Monetarists and classical economists:

Keynesians reject the influence of monetary policy on the economy. One argument supporting this Keynesian view is that the:

The assumption that the velocity of money and the quantity being produced is constant is held by the:

People learn to hold a specific quantity of money for the groceries, theater tickets, gasoline, clothes, film, and other items they habitually purchase. This behavior is representative 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 16-3 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 AD₁ to AD₂?