Question 1

Which one of the following policies would be most appropriate if the economy is operating beyond its long-run potential capacity?

Accepted Answer

A) a shift to a more restrictive monetary policy 
B) an increase in government expenditures,holding taxes constant 
C) a reduction in reserve requirements 
D) a reduction in taxes,holding government expenditures constant 
A) a shift to a more restrictive monetary policy 
B) an increase in government expenditures,holding taxes constant 
C) a reduction in reserve requirements 
D) a reduction in taxes,holding government expenditures constant

Question 2

If the Federal Reserve lowered the reserve requirements imposed on the banking industry,which of the following will most likely happen in the short run?

Accepted Answer

A) an increase in the demand for loanable funds,which will exert upward pressure on the interest rate 
B) an increase in the supply of loanable funds,which will exert downward pressure on the interest rate 
C) an increase in the unemployment rate 
D) a decrease in the rate of inflation 
A) an increase in the demand for loanable funds,which will exert upward pressure on the interest rate 
B) an increase in the supply of loanable funds,which will exert downward pressure on the interest rate 
C) an increase in the unemployment rate 
D) a decrease in the rate of inflation

Question 3

Since 1980,changes in the nature of both the M1 and M2 money supply have

Accepted Answer

A) increased their reliability as indicators of monetary policy. 
B) decreased their reliability as indicators of monetary policy. 
C) had no effect on their reliability as indicators of monetary policy. 
D) decreased their reliability as indicators of fiscal policy. 
A) increased their reliability as indicators of monetary policy. 
B) decreased their reliability as indicators of monetary policy. 
C) had no effect on their reliability as indicators of monetary policy. 
D) decreased their reliability as indicators of fiscal policy.

Question 4

If the velocity of the M1 money supply is 4 and nominal GDP is $200 billion,the stock of money in circulation must be

Accepted Answer

A) $25 billion. 
B) $50 billion. 
C) $100 billion. 
D) $800 billion. 
A) $25 billion. 
B) $50 billion. 
C) $100 billion. 
D) $800 billion.

Question 5

The cost of holding money balances increases when

Accepted Answer

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

Question 6

If the long-run equilibrium of an economy is disrupted by an unexpected shift to a more expansionary monetary policy,the policy shift will

Accepted Answer

A) reduce aggregate demand and real output in the short run. 
B) lead to a higher rate of unemployment in the short run. 
C) stimulate real output in the short run,but in the long run,its primary impact will be on the general level of prices. 
D) lead to an increase in the general level of prices in the short run,but in the long run,its primary impact will be an expansion in real output. 
A) reduce aggregate demand and real output in the short run. 
B) lead to a higher rate of unemployment in the short run. 
C) stimulate real output in the short run,but in the long run,its primary impact will be on the general level of prices. 
D) lead to an increase in the general level of prices in the short run,but in the long run,its primary impact will be an expansion in real output.

Question 7

During the last two decades,the Fed has relied more extensively on ___________ in its conduct of monetary policy.(Fill in the blank)

Accepted Answer

A) the growth rate of the M2 monetary aggregate 
B) adjustments in the required reserve ratio 
C) control over short-term interest rates 
D) the growth rate of the M1 monetary aggregate 
A) the growth rate of the M2 monetary aggregate 
B) adjustments in the required reserve ratio 
C) control over short-term interest rates 
D) the growth rate of the M1 monetary aggregate

Question 8

When the Fed conducts expansionary monetary policy,lower short-term interest rates will tend to stimulate the economy.How will the change in the velocity of money affect this result?

Accepted Answer

A) Velocity will decline,enhancing the stimulus effect. 
B) Velocity will increase,somewhat dampening the stimulus effect. 
C) Velocity will increase,enhancing the stimulus effect. 
D) Velocity will decline,somewhat dampening the stimulus effect. 
A) Velocity will decline,enhancing the stimulus effect. 
B) Velocity will increase,somewhat dampening the stimulus effect. 
C) Velocity will increase,enhancing the stimulus effect. 
D) Velocity will decline,somewhat dampening the stimulus effect.

Question 9

An analysis of countries experiencing rapid inflation indicates that inflation is generally

Accepted Answer

A) caused by strong labor unions. 
B) the result of restrictive macroeconomic policy,which pushes up interest rates. 
C) caused by the impulse buying of consumers,who continue to buy the same goods even when prices rise. 
D) the result of rapid growth in the money supply. 
A) caused by strong labor unions. 
B) the result of restrictive macroeconomic policy,which pushes up interest rates. 
C) caused by the impulse buying of consumers,who continue to buy the same goods even when prices rise. 
D) the result of rapid growth in the money supply.

Question 10

When the Fed purchases more bonds and,thereby,increases the money supply,the initial effects of the more expansionary monetary policy will often be weakened as a result of

Accepted Answer

A) lower nominal interest rates and a decline in the velocity of money. 
B) higher nominal interest rates and a decline in the velocity of money. 
C) higher nominal interest rates and an increase in the velocity of money. 
D) lower real interest rates and an increase in the velocity of money. 
A) lower nominal interest rates and a decline in the velocity of money. 
B) higher nominal interest rates and a decline in the velocity of money. 
C) higher nominal interest rates and an increase in the velocity of money. 
D) lower real interest rates and an increase in the velocity of money.

Question 11

A study of countries with high inflation rates indicates that the inflation is generally

Accepted Answer

A) caused by strong labor unions. 
B) the result of restrictive macroeconomic policy,which pushes up interest rates. 
C) caused by supply shocks. 
D) the result of rapid growth in the money supply. 
A) caused by strong labor unions. 
B) the result of restrictive macroeconomic policy,which pushes up interest rates. 
C) caused by supply shocks. 
D) the result of rapid growth in the money supply.

Question 12

What happens to the aggregate demand curve when the Fed reduces the money supply?

Accepted Answer

A) It shifts leftward,lowering real GDP and the price level. 
B) It shifts leftward,raising real GDP and the price level. 
C) It shifts leftward,lowering real GDP but raising the price level. 
D) It shifts rightward,raising real GDP and the price level. 
E) It shifts rightward,lowering real GDP but raising the price level. 
A) It shifts leftward,lowering real GDP and the price level. 
B) It shifts leftward,raising real GDP and the price level. 
C) It shifts leftward,lowering real GDP but raising the price level. 
D) It shifts rightward,raising real GDP and the price level. 
E) It shifts rightward,lowering real GDP but raising the price level.

Question 13

If a country was operating well below its long-run capacity (potential GDP),the initial impact of an unanticipated increase in the money supply would most likely result in an increase in

Accepted Answer

A) prices with little change in output. 
B) output with little change in prices. 
C) output and a decline in prices. 
D) prices and a decline in output. 
A) prices with little change in output. 
B) output with little change in prices. 
C) output and a decline in prices. 
D) prices and a decline in output.

Question 14

Use the figure below to answer the following question(s).
Figure 14-9
   
AD₁ and SRAS₁ indicate the initial conditions in an economy,with the current level of output,Y₂,being the full employment level,and the current price level being P₁.
-Refer to Figure 14-9.If the Fed unexpectedly increases the money supply,in the long run,the impact of the unanticipated expansionary policy will be a movement to

Accepted Answer

A) P₁ and Y₂. 
B) P₂ and Y₁. 
C) P₂ and Y3. 
D) P₃ and Y₂. 
A) P₁ and Y₂. 
B) P₂ and Y₁. 
C) P₂ and Y3. 
D) P₃ and Y₂.

Question 15

When the Fed unexpectedly increases the money supply,it will cause an increase in aggregate demand because

Accepted Answer

A) lower interest rates will stimulate business investment and consumer purchases. 
B) real interest rates will fall,causing the dollar to depreciate and net exports to rise. 
C) lower interest rates will cause the value of assets (for example,stocks)to rise. 
D) all of the above are correct. 
A) lower interest rates will stimulate business investment and consumer purchases. 
B) real interest rates will fall,causing the dollar to depreciate and net exports to rise. 
C) lower interest rates will cause the value of assets (for example,stocks)to rise. 
D) all of the above are correct.

Question 16

Empirical studies indicate that the velocity of money tends to increase when interest rates rise.Which of the following best explains why this is true?

Accepted Answer

A) When the velocity of money is high,banks will increase their lending interest rates. 
B) An increase in the growth rate of GDP will cause the velocity of money to increase. 
C) The higher interest rates increase the cost of holding money balances and,thereby,increase the velocity of money. 
D) Both the velocity of money and interest rates will rise when the inflation rate falls. 
A) When the velocity of money is high,banks will increase their lending interest rates. 
B) An increase in the growth rate of GDP will cause the velocity of money to increase. 
C) The higher interest rates increase the cost of holding money balances and,thereby,increase the velocity of money. 
D) Both the velocity of money and interest rates will rise when the inflation rate falls.

Question 17

If the Fed unexpectedly increases the money supply,real GDP

Accepted Answer

A) increases because the resulting increase in the interest rate leads to a decrease in investment. 
B) increases because the resulting decrease in the interest rate leads to an increase in investment. 
C) decreases because the resulting increase in the interest rate leads to a decrease in investment. 
D) decreases because the resulting increase in the interest rate leads to an increase in investment. 
E) decreases because the resulting decrease in the interest rate leads to an increase in investment. 
A) increases because the resulting increase in the interest rate leads to a decrease in investment. 
B) increases because the resulting decrease in the interest rate leads to an increase in investment. 
C) decreases because the resulting increase in the interest rate leads to a decrease in investment. 
D) decreases because the resulting increase in the interest rate leads to an increase in investment. 
E) decreases because the resulting decrease in the interest rate leads to an increase in investment.

Question 18

When the Fed unexpectedly increases 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) all of the above are correct. 
E) both a and c are correct. 
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) all of the above are correct. 
E) both a and c are correct.

Question 19

When the Fed unexpectedly increases the money supply,it will cause an increase in aggregate demand because

Accepted Answer

A) real interest rates will fall,stimulating business investment and consumer purchases. 
B) the dollar will appreciate on the foreign exchange market,leading to a decrease in net exports. 
C) lower interest rates will tend to decrease asset prices (such as the prices of homes),which decreases wealth and thereby decreases current consumption. 
D) all of the above are true. 
A) real interest rates will fall,stimulating business investment and consumer purchases. 
B) the dollar will appreciate on the foreign exchange market,leading to a decrease in net exports. 
C) lower interest rates will tend to decrease asset prices (such as the prices of homes),which decreases wealth and thereby decreases current consumption. 
D) all of the above are true.

Question 20

According to the monetarists,what is the primary cause of a recession? Explain the steps by which reductions in the money supply lead to reductions in real output.

Accepted Answer

Monetarists consider unanticipated restr

Exam 14: Modern Macroeconomics and Monetary Policy

Which one of the following policies would be most appropriate if the economy is operating beyond its long-run potential capacity?

If the Federal Reserve lowered the reserve requirements imposed on the banking industry,which of the following will most likely happen in the short run?

Since 1980,changes in the nature of both the M1 and M2 money supply have

If the velocity of the M1 money supply is 4 and nominal GDP is $200 billion,the stock of money in circulation must be

The cost of holding money balances increases when

If the long-run equilibrium of an economy is disrupted by an unexpected shift to a more expansionary monetary policy,the policy shift will

During the last two decades,the Fed has relied more extensively on ___________ in its conduct of monetary policy.(Fill in the blank)

When the Fed conducts expansionary monetary policy,lower short-term interest rates will tend to stimulate the economy.How will the change in the velocity of money affect this result?

An analysis of countries experiencing rapid inflation indicates that inflation is generally

When the Fed purchases more bonds and,thereby,increases the money supply,the initial effects of the more expansionary monetary policy will often be weakened as a result of

A study of countries with high inflation rates indicates that the inflation is generally

What happens to the aggregate demand curve when the Fed reduces the money supply?

If a country was operating well below its long-run capacity (potential GDP),the initial impact of an unanticipated increase in the money supply would most likely result in an increase in

When the Fed unexpectedly increases the money supply,it will cause an increase in aggregate demand because

Empirical studies indicate that the velocity of money tends to increase when interest rates rise.Which of the following best explains why this is true?

If the Fed unexpectedly increases the money supply,real GDP

When the Fed unexpectedly increases the money supply,

When the Fed unexpectedly increases the money supply,it will cause an increase in aggregate demand because

According to the monetarists,what is the primary cause of a recession? Explain the steps by which reductions in the money supply lead to reductions in real output.

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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