Question 1

If the Fed unexpectedly shifts to a more expansionary monetary policy,which of the following will most likely occur in the short run?

Accepted Answer

A) a decrease in the real interest rate 
B) an increase in unemployment 
C) a decrease in real GDP 
D) an increase in the nominal interest rate 
A) a decrease in the real interest rate 
B) an increase in unemployment 
C) a decrease in real GDP 
D) an increase in the nominal interest rate A

Question 2

Why do individuals choose to hold part of their wealth in money rather than in other types of assets? Discuss the benefits and costs of holding money.

Accepted Answer

Money is the most liquid of all assets and can be used directly for buying goods and services.The benefit from holding wealth in the form of money is the ability to buy goods and services.The cost of holding money is the nominal interest rate,an opportunity cost.A person who holds wealth in the form of money gives up the interest that could have been earned if the money had been placed in an interest-earning asset.

Question 3

What effect does expansionary monetary policy have on short-term real interest rates?

Accepted Answer

A) Expansionary monetary policy tends to push short-term interest rates upward. 
B) Expansionary monetary policy tends to push short-term interest rates downward. 
C) The effect of expansionary monetary policy on short-term interest rates is unpredictable. 
D) Expansionary monetary policy has no effect on short-term interest rates. 
A) Expansionary monetary policy tends to push short-term interest rates upward. 
B) Expansionary monetary policy tends to push short-term interest rates downward. 
C) The effect of expansionary monetary policy on short-term interest rates is unpredictable. 
D) Expansionary monetary policy has no effect on short-term interest rates. B

Question 4

According to monetarists,which of the following would most likely eliminate inflation?

Accepted Answer

A) a steady increase in federal expenditures at an annual rate of approximately 3 percent 
B) indexing of wages,taxes,and pensions to the rate of inflation 
C) a steady expansion in the money supply at a rate no greater than the long-run growth of real output 
D) a steady 3 percent increase in the size of the budget deficit 
A) a steady increase in federal expenditures at an annual rate of approximately 3 percent 
B) indexing of wages,taxes,and pensions to the rate of inflation 
C) a steady expansion in the money supply at a rate no greater than the long-run growth of real output 
D) a steady 3 percent increase in the size of the budget deficit

Question 5

In the aggregate demand-aggregate supply model,the short-run effects of an unanticipated increase in the money supply will be

Accepted Answer

A) lower real interest rates and an increase in aggregate demand. 
B) higher real interest rates and an increase in aggregate demand. 
C) lower real interest rates and a reduction in aggregate demand. 
D) higher real interest rates and a reduction in aggregate demand. 
A) lower real interest rates and an increase in aggregate demand. 
B) higher real interest rates and an increase in aggregate demand. 
C) lower real interest rates and a reduction in aggregate demand. 
D) higher real interest rates and a reduction in aggregate demand.

Question 6

If the Federal Reserve sells bonds,the short-run effects will be

Accepted Answer

A) an increase in the money supply and lower real interest rates. 
B) a decrease in the money supply and lower real interest rates. 
C) an increase in the money supply and higher real interest rates. 
D) a decrease in the money supply and higher real interest rates. 
A) an increase in the money supply and lower real interest rates. 
B) a decrease in the money supply and lower real interest rates. 
C) an increase in the money supply and higher real interest rates. 
D) a decrease in the money supply and higher real interest rates.

Question 7

The sharp increase in the excess reserves held by the commercial banking system since the second half of 2008 increases the potential for

Accepted Answer

A) a sharp contraction in the money supply,which is likely to increase the length and severity of the recession. 
B) a rapid increase in the money supply,potentially leading to inflation. 
C) a gradual increase in the money supply,following the trend of the previous decade. 
D) a reduction in the ability of banks to extend additional loans. 
A) a sharp contraction in the money supply,which is likely to increase the length and severity of the recession. 
B) a rapid increase in the money supply,potentially leading to inflation. 
C) a gradual increase in the money supply,following the trend of the previous decade. 
D) a reduction in the ability of banks to extend additional loans.

Question 8

According to the quantity theory of money,if velocity is constant and real output grows at an average rate of 4 percent per year,a 4 percent average rate of growth in the money supply would result in

Accepted Answer

A) a constant price level. 
B) a slowly increasing price level. 
C) a rapidly increasing price level. 
D) constant real GDP. 
E) constant nominal GDP. 
A) a constant price level. 
B) a slowly increasing price level. 
C) a rapidly increasing price level. 
D) constant real GDP. 
E) constant nominal GDP.

Question 9

If the U.S.government decided to pay off the national debt by creating money,what would be the most likely effect?

Accepted Answer

A) a substantial reduction in real GDP 
B) a deflationary collapse 
C) rapid inflation 
D) an increase in the trade surplus 
A) a substantial reduction in real GDP 
B) a deflationary collapse 
C) rapid inflation 
D) an increase in the trade surplus

Question 10

When the Fed unexpectedly decreases the money supply,

Accepted Answer

A) real interest rates will tend to decline. 
B) the exchange rate value of the dollar will tend to appreciate. 
C) aggregate demand will tend to increase. 
D) there is generally no impact on the economy. 
A) real interest rates will tend to decline. 
B) the exchange rate value of the dollar will tend to appreciate. 
C) aggregate demand will tend to increase. 
D) there is generally no impact on the economy.

Question 11

During the second half of 2008 the monetary base was growing far more rapidly than the money supply because

Accepted Answer

A) banks were using most of their excess reserves to extend loans and make investments. 
B) the Fed quickly shifted from expansionary monetary policy to restrictive monetary policy. 
C) banks were using their excess reserves to make foreign investments. 
D) banks were maintaining huge excess reserves. 
A) banks were using most of their excess reserves to extend loans and make investments. 
B) the Fed quickly shifted from expansionary monetary policy to restrictive monetary policy. 
C) banks were using their excess reserves to make foreign investments. 
D) banks were maintaining huge excess reserves.

Question 12

When expansionary monetary policy pushes real interest rates to an artificial low,the Austrian view of the business cycle predicts this will lead to

Accepted Answer

A) an increase in aggregate demand and a lengthy expansion in real output. 
B) a recession,followed by a strong and lengthy expansion in real output. 
C) malinvestment during an economic boom,followed by a recession. 
D) malinvestment during a temporary recession,followed by a strong and lengthy economic boom. 
A) an increase in aggregate demand and a lengthy expansion in real output. 
B) a recession,followed by a strong and lengthy expansion in real output. 
C) malinvestment during an economic boom,followed by a recession. 
D) malinvestment during a temporary recession,followed by a strong and lengthy economic boom.

Question 13

Comparisons of the link between the growth of the money supply and inflation indicate that

Accepted Answer

A) countries with high rates of monetary growth also experience high inflation. 
B) countries with high rates of monetary growth experience low inflation. 
C) monetary growth rates and inflation are unrelated. 
D) inflation is primarily the result of restrictive monetary policy. 
A) countries with high rates of monetary growth also experience high inflation. 
B) countries with high rates of monetary growth experience low inflation. 
C) monetary growth rates and inflation are unrelated. 
D) inflation is primarily the result of restrictive monetary policy.

Question 14

Other things constant,a decrease in nominal GDP will generally

Accepted Answer

A) increase the demand for money. 
B) decrease the demand for money. 
C) increase the nominal interest rate. 
D) decrease the money supply. 
A) increase the demand for money. 
B) decrease the demand for money. 
C) increase the nominal interest rate. 
D) decrease the money supply.

Question 15

A shift to a more expansionary monetary policy will have its greatest effect on

Accepted Answer

A) the interest rate on a 30-year fixed-rate mortgage. 
B) the interest rate on 10-year government bonds. 
C) short-term interest rates. 
D) the 15-year corporate bond interest rate. 
A) the interest rate on a 30-year fixed-rate mortgage. 
B) the interest rate on 10-year government bonds. 
C) short-term interest rates. 
D) the 15-year corporate bond interest rate.

Question 16

The demand curve for money

Accepted Answer

A) would shift if the interest rate changed. 
B) shifts with an increase in the reserve requirement. 
C) shows the relationship between the quantity of money demanded and the interest rate. 
D) is a relationship between the quantity of investment demanded and the interest rate. 
A) would shift if the interest rate changed. 
B) shifts with an increase in the reserve requirement. 
C) shows the relationship between the quantity of money demanded and the interest rate. 
D) is a relationship between the quantity of investment demanded and the interest rate.

Question 17

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

Accepted Answer

A) real interest 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 interest 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 18

An unanticipated shift to a more expansionary monetary policy by the Fed will

Accepted Answer

A) increase real interest rates and,thereby,reduce investment,current consumption,and aggregate demand. 
B) reduce real interest rates,leading to an appreciation of the dollar and an expansion in net exports and aggregate demand. 
C) increase real interest rates,leading to higher asset prices that will stimulate aggregate demand. 
D) reduce real interest rates and,thereby,stimulate investment,current consumption,and aggregate demand. 
A) increase real interest rates and,thereby,reduce investment,current consumption,and aggregate demand. 
B) reduce real interest rates,leading to an appreciation of the dollar and an expansion in net exports and aggregate demand. 
C) increase real interest rates,leading to higher asset prices that will stimulate aggregate demand. 
D) reduce real interest rates and,thereby,stimulate investment,current consumption,and aggregate demand.

Question 19

Figure 14-6
  
-In the situation shown in Figure 14-6,how could the Fed return the economy to potential output?

Accepted Answer

A) decrease government spending 
B) increase taxes 
C) decrease taxes 
D) shift to a more restrictive monetary policy 
E) shift to a more expansionary monetary policy 
A) decrease government spending 
B) increase taxes 
C) decrease taxes 
D) shift to a more restrictive monetary policy 
E) shift to a more expansionary monetary policy

Question 20

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

Exam 14: Modern Macroeconomics and Monetary Policy

If the Fed unexpectedly shifts to a more expansionary monetary policy,which of the following will most likely occur in the short run?

Why do individuals choose to hold part of their wealth in money rather than in other types of assets? Discuss the benefits and costs of holding money.

What effect does expansionary monetary policy have on short-term real interest rates?

According to monetarists,which of the following would most likely eliminate inflation?

In the aggregate demand-aggregate supply model,the short-run effects of an unanticipated increase in the money supply will be

If the Federal Reserve sells bonds,the short-run effects will be

The sharp increase in the excess reserves held by the commercial banking system since the second half of 2008 increases the potential for

According to the quantity theory of money,if velocity is constant and real output grows at an average rate of 4 percent per year,a 4 percent average rate of growth in the money supply would result in

If the U.S.government decided to pay off the national debt by creating money,what would be the most likely effect?

When the Fed unexpectedly decreases the money supply,

During the second half of 2008 the monetary base was growing far more rapidly than the money supply because

When expansionary monetary policy pushes real interest rates to an artificial low,the Austrian view of the business cycle predicts this will lead to

Comparisons of the link between the growth of the money supply and inflation indicate that

Other things constant,a decrease in nominal GDP will generally

A shift to a more expansionary monetary policy will have its greatest effect on

The demand curve for money

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

An unanticipated shift to a more expansionary monetary policy by the Fed will

Figure 14-6 -In the situation shown in Figure 14-6,how could the Fed return the economy to potential output?

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

The Economic Approach

Asome Tools of the Economist

Asupply,demand,and the Market Process

Asupply and Demand: Applications and Extensions

Difficult Cases for the Market and the Role of Government

The Economics of Collective Decision-Making

Ataking the Nations Economic Pulse

Economic Fluctuations, unemployment, and Inflation

Aan Introduction to Basic Macroeconomic Markets

Dynamic Change, economic Fluctuations, and the Ad-As Model

Fiscal Policy: the Keynesian View and Historical Perspective

Fiscal Policy, incentives, and Secondary Effects

Amoney and the Banking System

Stabilization Policy, output, and Employment

Creating an Environment for Growth and Prosperity

Institutions,policies,and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Consumer Choice and Elasticity

Acosts and the Supply of Goods

Aprice Takers and the Competitive Process

Price-Searcher Markets With Low Entry Barriers

Aprice-Searcher Markets With High Entry Barriers

The Supply of and Demand for Productive Resources

Earnings, productivity, and the Job Market

Investment, the Capital Market, and the Wealth of Nations

Income Inequality and Poverty

Government Spending and Taxation

The Economics of Social Security

The Stock Market: Its Function, Performance, and Potential As an Investment Opportunity

Great Debates in Economics: Keynes Versus Hayek

The Crisis of 2008: Causes and Lessons for the Future

Lessons From the Great Depression

Lessons From Japan and Canada

The Federal Budget and the National Debt

The Economics of Healthcare

Education: Problems and Performance

Earnings Differences Between Men and Women

Do Labor Unions Increase the Wages of Workers

The Question of Resource Exhaustion

Difficult Environmental Cases and the Role of Government

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