Question 1

If the velocity of circulation is seven and the money supply declines by 10 percent,nominal GDP declines by ________ percent.

Accepted Answer

A)  0 
B)  3 
C)  7 
D)  10 
E)  70 
A)  0 
B)  3 
C)  7 
D)  10 
E)  70 D

Question 2

In deciding on a policy,the Fed is faced with two difficult problems: The inability of experts to agree on the best measure of the degree of tightness of monetary policy and

Accepted Answer

A)  a lack of data on financial markets. 
B)  a need for approval from Congress and the president. 
C)  the long lag between an action taken by the Fed and its effect on the economy. 
D)  an inability to decide on a proper definition of the monetary base. 
E)  the lack of an adequate research staff. 
A)  a lack of data on financial markets. 
B)  a need for approval from Congress and the president. 
C)  the long lag between an action taken by the Fed and its effect on the economy. 
D)  an inability to decide on a proper definition of the monetary base. 
E)  the lack of an adequate research staff. C

Question 3

Our money has value because

Accepted Answer

A)  it is backed by gold. 
B)  its supply is unlimited. 
C)  it is guaranteed by banks. 
D)  people accept it in payment for goods and services. 
E)  it is the result of public and private debt. 
A)  it is backed by gold. 
B)  its supply is unlimited. 
C)  it is guaranteed by banks. 
D)  people accept it in payment for goods and services. 
E)  it is the result of public and private debt. D

Question 4

The monetary base is defined as

Accepted Answer

A)  total demand deposits. 
B)  total demand deposits minus free reserves. 
C)  bank reserves plus currency outside member banks. 
D)  the interest rate on federal funds. 
E)  M1. 
A)  total demand deposits. 
B)  total demand deposits minus free reserves. 
C)  bank reserves plus currency outside member banks. 
D)  the interest rate on federal funds. 
E)  M1.

Question 5

According to the more sophisticated quantity theory of money,if the money supply is increased

Accepted Answer

A)  the velocity of circulation will fall. 
B)  both nominal and real GDP will rise if the economy is at less than full employment. 
C)  nominal GDP will fall. 
D)  nominal GDP will rise, but real GDP will fall if the economy is below full employment. 
E)  nominal GDP will remain the same. 
A)  the velocity of circulation will fall. 
B)  both nominal and real GDP will rise if the economy is at less than full employment. 
C)  nominal GDP will fall. 
D)  nominal GDP will rise, but real GDP will fall if the economy is below full employment. 
E)  nominal GDP will remain the same.

Question 6

If the price level were to rise,people would find that to purchase the same goods and services as before,they would need

Accepted Answer

A)  higher interest rates. 
B)  consumer surpluses. 
C)  greater money balances. 
D)  functional finance. 
E)  special drawing rights. 
A)  higher interest rates. 
B)  consumer surpluses. 
C)  greater money balances. 
D)  functional finance. 
E)  special drawing rights.

Question 7

The opportunity cost of holding idle money balances

Accepted Answer

A)  increases as bond prices rise. 
B)  increases as interest rates rise. 
C)  decreases as profit rates rise. 
D)  allows individuals to benefit from rapid inflation. 
E)  is nonexistent for most high-income households. 
A)  increases as bond prices rise. 
B)  increases as interest rates rise. 
C)  decreases as profit rates rise. 
D)  allows individuals to benefit from rapid inflation. 
E)  is nonexistent for most high-income households.

Question 8

Under which of the following aggregate supply conditions does an increase in the money supply have the LEAST impact on real GDP?

Accepted Answer

A)  an aggregate supply curve shifting to the right 
B)  a vertical aggregate supply curve 
C)  an upward-sloping aggregate supply curve 
D)  a horizontal aggregate supply curve 
E)  an aggregate supply curve shifting up 
A)  an aggregate supply curve shifting to the right 
B)  a vertical aggregate supply curve 
C)  an upward-sloping aggregate supply curve 
D)  a horizontal aggregate supply curve 
E)  an aggregate supply curve shifting up

Question 9

The more sophisticated version of the quantity theory of money concludes

Accepted Answer

A)  nominal GDP is proportional to the money supply. 
B)  real GDP is proportional to the money supply. 
C)  the money supply should be kept constant to ensure steady growth in GDP with declining prices. 
D)  investment expenditures are quantitatively more important than consumption expenditures. 
E)  the circulation velocity of money is extremely volatile. 
A)  nominal GDP is proportional to the money supply. 
B)  real GDP is proportional to the money supply. 
C)  the money supply should be kept constant to ensure steady growth in GDP with declining prices. 
D)  investment expenditures are quantitatively more important than consumption expenditures. 
E)  the circulation velocity of money is extremely volatile.

Question 10

Economists who favor the use of interest rates as an indicator of monetary tightness argue that an increase in the demand curve for money

Accepted Answer

A)  is difficult to accommodate unless banks are willing to hold excess reserves. 
B)  signals an impending recession unless interest rates are allowed to rise. 
C)  leads to a recession unless the quantity of money is increased. 
D)  results in increased inflationary pressures unless interest rates are allowed to rise. 
E)  results in a recession unless the quantity of money is reduced. 
A)  is difficult to accommodate unless banks are willing to hold excess reserves. 
B)  signals an impending recession unless interest rates are allowed to rise. 
C)  leads to a recession unless the quantity of money is increased. 
D)  results in increased inflationary pressures unless interest rates are allowed to rise. 
E)  results in a recession unless the quantity of money is reduced.

Question 11

The data on the circulation velocity of money since 1920 indicate that the velocity

Accepted Answer

A)  has steadily decreased over time. 
B)  is quite stable in the short run. 
C)  tends to increase during depressions and decrease during booms. 
D)  has been fairly stable over the long run but not over the business cycle. 
E)  has been directly proportional to GDP. 
A)  has steadily decreased over time. 
B)  is quite stable in the short run. 
C)  tends to increase during depressions and decrease during booms. 
D)  has been fairly stable over the long run but not over the business cycle. 
E)  has been directly proportional to GDP.

Question 12

Severe inflations often result when

Accepted Answer

A)  the economy is in a serious depression. 
B)  governments excessively increase the money supply. 
C)  price levels are falling. 
D)  the value of money rises rapidly. 
E)  the public's desire to hold money balances increases. 
A)  the economy is in a serious depression. 
B)  governments excessively increase the money supply. 
C)  price levels are falling. 
D)  the value of money rises rapidly. 
E)  the public's desire to hold money balances increases.

Question 13

The money supply exerts an influence on GDP and thus on unemployment by affecting

Accepted Answer

A)  the volume of government tax revenues. 
B)  total intended spending. 
C)  the rate of change in labor force participation. 
D)  the profitability of banking institutions. 
E)  the mix between currency and demand deposits. 
A)  the volume of government tax revenues. 
B)  total intended spending. 
C)  the rate of change in labor force participation. 
D)  the profitability of banking institutions. 
E)  the mix between currency and demand deposits.

Question 14

An increase in the price level

Accepted Answer

A)  decreases interest rates. 
B)  increases the transactions demand for money. 
C)  increases the prices of financial assets. 
D)  increases the value of existing money balances. 
E)  decreases imports. 
A)  decreases interest rates. 
B)  increases the transactions demand for money. 
C)  increases the prices of financial assets. 
D)  increases the value of existing money balances. 
E)  decreases imports.

Question 15

Before deciding on a course of action,the Fed is faced with the problem of

Accepted Answer

A)  forecasting the economy's short-term movements. 
B)  obtaining approval from Congress. 
C)  clearing its actions with the member banks. 
D)  getting the consent of Wall Street. 
E)  consulting with Milton Friedman. 
A)  forecasting the economy's short-term movements. 
B)  obtaining approval from Congress. 
C)  clearing its actions with the member banks. 
D)  getting the consent of Wall Street. 
E)  consulting with Milton Friedman.

Question 16

For the crude quantity theory of money to hold,it must be assumed that

Accepted Answer

A)  the money supply is held constant. 
B)  velocity varies directly with the money supply. 
C)  velocity varies inversely with the money supply. 
D)  the economy operates at less than full employment. 
E)  the ratio of velocity to real output is constant. 
A)  the money supply is held constant. 
B)  velocity varies directly with the money supply. 
C)  velocity varies inversely with the money supply. 
D)  the economy operates at less than full employment. 
E)  the ratio of velocity to real output is constant.

Question 17

In the United States,the quantity of money is determined

Accepted Answer

A)  entirely by commercial banks through their lending procedures. 
B)  entirely by the public through their willingness to hold currency. 
C)  primarily by the amount of gold flowing into or out of the country. 
D)  primarily by Congress, which legislates the amount of money to be printed by the Treasury. 
E)  primarily by the Federal Reserve but to some degree by the private sector. 
A)  entirely by commercial banks through their lending procedures. 
B)  entirely by the public through their willingness to hold currency. 
C)  primarily by the amount of gold flowing into or out of the country. 
D)  primarily by Congress, which legislates the amount of money to be printed by the Treasury. 
E)  primarily by the Federal Reserve but to some degree by the private sector.

Question 18

Using monetary policy to help eliminate an inflationary gap

Accepted Answer

A)  shifts the aggregate supply curve to the right. 
B)  is ineffective if the short-run aggregate supply curve is very steep. 
C)  leads to an increase in unemployment, at least temporarily. 
D)  produces a permanent increase in the price level. 
E)  is futile unless fiscal policy simultaneously creates a budget surplus. 
A)  shifts the aggregate supply curve to the right. 
B)  is ineffective if the short-run aggregate supply curve is very steep. 
C)  leads to an increase in unemployment, at least temporarily. 
D)  produces a permanent increase in the price level. 
E)  is futile unless fiscal policy simultaneously creates a budget surplus.

Question 19

The velocity of circulation is equal to

Accepted Answer

A)  the reciprocal of the marginal propensity to consume. 
B)  nominal GDP divided by the money supply. 
C)  real GDP times the price level. 
D)  the money supply divided by the price level. 
E)  nominal GDP divided by real GDP. 
A)  the reciprocal of the marginal propensity to consume. 
B)  nominal GDP divided by the money supply. 
C)  real GDP times the price level. 
D)  the money supply divided by the price level. 
E)  nominal GDP divided by real GDP.

Question 20

After the stock market crash of 1987,the financial emergency of 1998,and September 11,2001,the Federal Reserve Bank pursued a policy of

Accepted Answer

A)  tightening the money supply and raising interest rates sharply. 
B)  maintaining steady growth in the money stock to reassure business. 
C)  flooding the banking system with excess liquidity to ease the threat of personal and corporate bankruptcies. 
D)  temporary tax reductions on interest, dividends, and capital-gains income. 
E)  borrowing reserves from the International Monetary Fund. 
A)  tightening the money supply and raising interest rates sharply. 
B)  maintaining steady growth in the money stock to reassure business. 
C)  flooding the banking system with excess liquidity to ease the threat of personal and corporate bankruptcies. 
D)  temporary tax reductions on interest, dividends, and capital-gains income. 
E)  borrowing reserves from the International Monetary Fund.

Exam 25: Monetary Policy,interest Rates,and Economic Activity

If the velocity of circulation is seven and the money supply declines by 10 percent,nominal GDP declines by ________ percent.

In deciding on a policy,the Fed is faced with two difficult problems: The inability of experts to agree on the best measure of the degree of tightness of monetary policy and

Our money has value because

The monetary base is defined as

According to the more sophisticated quantity theory of money,if the money supply is increased

If the price level were to rise,people would find that to purchase the same goods and services as before,they would need

The opportunity cost of holding idle money balances

Under which of the following aggregate supply conditions does an increase in the money supply have the LEAST impact on real GDP?

The more sophisticated version of the quantity theory of money concludes

Economists who favor the use of interest rates as an indicator of monetary tightness argue that an increase in the demand curve for money

The data on the circulation velocity of money since 1920 indicate that the velocity

Severe inflations often result when

The money supply exerts an influence on GDP and thus on unemployment by affecting

An increase in the price level

Before deciding on a course of action,the Fed is faced with the problem of

For the crude quantity theory of money to hold,it must be assumed that

In the United States,the quantity of money is determined

Using monetary policy to help eliminate an inflationary gap

The velocity of circulation is equal to

After the stock market crash of 1987,the financial emergency of 1998,and September 11,2001,the Federal Reserve Bank pursued a policy of

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