Question 1

In the aggregate demand-aggregate supply model,the short-run effects of an unanticipated decrease 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 2

In an economy in which velocity is constant and real output grows at an average rate of 3 percent per year,a 5 percent average rate of growth in the money supply would result in a

Accepted Answer

A) constant price level. 
B) low (approximately 2 percent)rate of inflation. 
C) decline in the general level of prices at an annual rate of approximately 2 percent. 
D) rate of inflation of approximately 8 percent. 
A) constant price level. 
B) low (approximately 2 percent)rate of inflation. 
C) decline in the general level of prices at an annual rate of approximately 2 percent. 
D) rate of inflation of approximately 8 percent.

Question 3

The low interest rate policies of the Federal Reserve during 2002-2004,

Accepted Answer

A) indicated that monetary policy was highly restrictive. 
B) increased the demand for housing,placing upward pressure on housing prices. 
C) made home mortgages less attractive,weakening the demand for housing. 
D) was on target with the federal funds rate proscribed by the Taylor rule. 
A) indicated that monetary policy was highly restrictive. 
B) increased the demand for housing,placing upward pressure on housing prices. 
C) made home mortgages less attractive,weakening the demand for housing. 
D) was on target with the federal funds rate proscribed by the Taylor rule.

Question 4

Use the figure below to answer the following question(s).
Figure 14-5
  
-In Figure 14-5,AD₁ and SRAS₁ indicate an economy initially operating at full-employment output level,Y₁.The short-run impact of the Fed unexpectedly shifting to a more restrictive monetary policy will be

Accepted Answer

A) a decrease in aggregate demand to AD₂ and a decrease in real output to Y₂. 
B) a decrease in aggregate demand to AD₂ but real output would remain at Y₁. 
C) a decrease in aggregate demand to AD₂ and an increase in short-run aggregate supply to SRAS₂,causing the price level to fall to P₃ and real output to remain unchanged at Y₁. 
D) no change;AD and SRAS will stay at AD₁ and SRAS₁. 
A) a decrease in aggregate demand to AD₂ and a decrease in real output to Y₂. 
B) a decrease in aggregate demand to AD₂ but real output would remain at Y₁. 
C) a decrease in aggregate demand to AD₂ and an increase in short-run aggregate supply to SRAS₂,causing the price level to fall to P₃ and real output to remain unchanged at Y₁. 
D) no change;AD and SRAS will stay at AD₁ and SRAS₁.

Question 5

If there is a recession,the Fed would most likely

Accepted Answer

A) increase bank reserves by raising the discount rate. 
B) increase bank reserves by buying government securities. 
C) decrease bank reserves by raising the discount rate. 
D) decrease bank reserves by selling government securities. 
E) decrease bank reserves by lowering the legal reserve requirement. 
A) increase bank reserves by raising the discount rate. 
B) increase bank reserves by buying government securities. 
C) decrease bank reserves by raising the discount rate. 
D) decrease bank reserves by selling government securities. 
E) decrease bank reserves by lowering the legal reserve requirement.

Question 6

In the short run,an unanticipated increase in the money supply will exert its primary impact on

Accepted Answer

A) output and employment rather than on prices. 
B) prices;output and employment will be largely unaffected. 
C) interest rates;rising interest rates will stimulate additional saving. 
D) prices,if the economy operates at an output level below its long-run supply constraint. 
A) output and employment rather than on prices. 
B) prices;output and employment will be largely unaffected. 
C) interest rates;rising interest rates will stimulate additional saving. 
D) prices,if the economy operates at an output level below its long-run supply constraint.

Question 7

Which of the following is true?

Accepted Answer

A) Monetary policy influences long-term real interest rates more than short-term interest rates. 
B) Short-term interest rates are primarily determined by real factors and the expected inflation. 
C) A shift to a more expansionary monetary policy will tend to reduce short-term interest rates. 
D) A shift to a more expansionary monetary policy will tend to reduce the expected rate of inflation in the future. 
A) Monetary policy influences long-term real interest rates more than short-term interest rates. 
B) Short-term interest rates are primarily determined by real factors and the expected inflation. 
C) A shift to a more expansionary monetary policy will tend to reduce short-term interest rates. 
D) A shift to a more expansionary monetary policy will tend to reduce the expected rate of inflation in the future.

Question 8

If the Fed seeks to constrain inflation,it would be most likely to

Accepted Answer

A) sell government bonds to banks in order to reduce the amount of loanable funds. 
B) buy government bonds from banks in order to reduce the amount of loanable funds. 
C) raise taxes in order to reduce the money supply. 
D) cut the required reserve ratio in order to reduce the amount of excess reserves banks have to loan out. 
A) sell government bonds to banks in order to reduce the amount of loanable funds. 
B) buy government bonds from banks in order to reduce the amount of loanable funds. 
C) raise taxes in order to reduce the money supply. 
D) cut the required reserve ratio in order to reduce the amount of excess reserves banks have to loan out.

Question 9

Persistently expansionary monetary policy that stimulates aggregate demand and leads to inflation will

Accepted Answer

A) lead to higher rates of real output in the long run. 
B) fail to increase real output once decision makers fully anticipate the inflation. 
C) lead to lower nominal interest rates once decision makers fully anticipate the inflation. 
D) permanently reduce the rate of unemployment below its natural rate. 
A) lead to higher rates of real output in the long run. 
B) fail to increase real output once decision makers fully anticipate the inflation. 
C) lead to lower nominal interest rates once decision makers fully anticipate the inflation. 
D) permanently reduce the rate of unemployment below its natural rate.

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 real output times the price level. 
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 real output times the price level. 
C) money supply divided by velocity equals nominal GDP. 
D) money supply divided by velocity equals real GDP.

Question 11

If the economy is in an inflationary boom,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. 
E) restrict bank lending by lowering the federal funds rate. 
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. 
E) restrict bank lending by lowering the federal funds rate.

Question 12

Why will it difficult for the Fed to use monetary policy to direct the economy back to full employment and price stability from the recession of 2008-2009?

Accepted Answer

A) The Fed does not have the tools needed to alter the supply of money. 
B) Monetary policy is unable to alter short-term interest rates. 
C) The time lags between changes in monetary policy and when the changes exert an impact on output and prices are long and variable. 
D) It takes the Fed a long time to change the direction of monetary policy. 
A) The Fed does not have the tools needed to alter the supply of money. 
B) Monetary policy is unable to alter short-term interest rates. 
C) The time lags between changes in monetary policy and when the changes exert an impact on output and prices are long and variable. 
D) It takes the Fed a long time to change the direction of monetary policy.

Question 13

Since the mid-1980s,if the Fed wanted to shift to a more expansionary monetary policy,it would

Accepted Answer

A) expand the reserves available to the banking system,which would drive down short-term interest rates. 
B) reduce the reserves available to the banking system,which would drive down short-term interest rates. 
C) expand the reserves available to the banking system,which would drive up short-term interest rates. 
D) reduce the reserves available to the banking system,which would drive up short-term interest rates. 
A) expand the reserves available to the banking system,which would drive down short-term interest rates. 
B) reduce the reserves available to the banking system,which would drive down short-term interest rates. 
C) expand the reserves available to the banking system,which would drive up short-term interest rates. 
D) reduce the reserves available to the banking system,which would drive up short-term interest rates.

Question 14

Which economist made the following statement: "Every major contraction in the U.S.economy has either been created or greatly exacerbated by monetary instability.Every major inflation has been caused by monetary expansion."

Accepted Answer

A) Milton Friedman 
B) John Maynard Keynes 
C) Adam Smith 
D) Paul Samuelson 
A) Milton Friedman 
B) John Maynard Keynes 
C) Adam Smith 
D) Paul Samuelson

Question 15

"Monetary instability has been the major cause of economic instability in this country.Expansion in the money supply has been the source of every major inflation.Every major recession has been either caused or perpetuated by monetary contraction." Who among the following would most likely adhere to this view?

Accepted Answer

A) monetarists 
B) Keynesians 
C) supply-side economists 
D) early proponents of the quantity theory of money 
A) monetarists 
B) Keynesians 
C) supply-side economists 
D) early proponents of the quantity theory of money

Question 16

In an economy in which real output grows at an average rate of 3 percent per year,a 7 percent average rate of growth in the money supply would result in

Accepted Answer

A) an inflation rate of 4 percent,if velocity were constant. 
B) an inflation rate of -4 percent,if velocity were constant. 
C) a $4 increase in the price level per year. 
D) a $4 decrease in the price level per year. 
A) an inflation rate of 4 percent,if velocity were constant. 
B) an inflation rate of -4 percent,if velocity were constant. 
C) a $4 increase in the price level per year. 
D) a $4 decrease in the price level per year.

Question 17

Shifts in monetary policy will

Accepted Answer

A) stimulate output and employment almost immediately,and this will make it easier for policy-makers to change monetary policy in a manner that will promote macroeconomic stability. 
B) stimulate output and employment almost immediately,and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability. 
C) stimulate output and employment with time lags that are long and variable and this will make it easier for policy-makers to change monetary policy in a manner that will promote macroeconomic stability. 
D) stimulate output and employment with time lags that are long and variable and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability. 
A) stimulate output and employment almost immediately,and this will make it easier for policy-makers to change monetary policy in a manner that will promote macroeconomic stability. 
B) stimulate output and employment almost immediately,and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability. 
C) stimulate output and employment with time lags that are long and variable and this will make it easier for policy-makers to change monetary policy in a manner that will promote macroeconomic stability. 
D) stimulate output and employment with time lags that are long and variable and this will make it more difficult for policy-makers to change monetary policy in a manner that will promote macroeconomic stability.

Question 18

If changes in monetary policy are going to help stabilize the economy,they must

Accepted Answer

A) be expansionary. 
B) be restrictive. 
C) reduce the real rate of interest. 
D) be properly timed. 
E) stimulate aggregate demand. 
A) be expansionary. 
B) be restrictive. 
C) reduce the real rate of interest. 
D) be properly timed. 
E) stimulate aggregate demand.

Question 19

When an expansionary monetary policy leads to an acceleration in the rate of inflation,it will also result in

Accepted Answer

A) lower nominal interest rates. 
B) higher nominal interest rates. 
C) an appreciation of the dollar in the foreign exchange market. 
D) lower money wages. 
A) lower nominal interest rates. 
B) higher nominal interest rates. 
C) an appreciation of the dollar in the foreign exchange market. 
D) lower money wages.

Question 20

According to the Austrian view of the business cycle,if expansionary monetary policy pushes the interest rate to an artificially low level,the result will be

Accepted Answer

A) a long-term increase in output and employment. 
B) malinvestment and an unsustainable economic boom,followed by a recession. 
C) an increase in demand stimulus,that will expand employment and lead to a rapid increase in long-term economic growth. 
D) a temporary increase in the inflation rate,followed by a sustainable expansion in output and employment. 
A) a long-term increase in output and employment. 
B) malinvestment and an unsustainable economic boom,followed by a recession. 
C) an increase in demand stimulus,that will expand employment and lead to a rapid increase in long-term economic growth. 
D) a temporary increase in the inflation rate,followed by a sustainable expansion in output and employment.

Exam 14: Modern Macroeconomics and Monetary Policy

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

In an economy in which velocity is constant and real output grows at an average rate of 3 percent per year,a 5 percent average rate of growth in the money supply would result in a

The low interest rate policies of the Federal Reserve during 2002-2004,

Use the figure below to answer the following question(s). Figure 14-5 -In Figure 14-5,AD₁ and SRAS₁ indicate an economy initially operating at full-employment output level,Y₁.The short-run impact of the Fed unexpectedly shifting to a more restrictive monetary policy will be

If there is a recession,the Fed would most likely

In the short run,an unanticipated increase in the money supply will exert its primary impact on

Which of the following is true?

If the Fed seeks to constrain inflation,it would be most likely to

Persistently expansionary monetary policy that stimulates aggregate demand and leads to inflation will

The equation of exchange states that

If the economy is in an inflationary boom,the Fed would most likely

Why will it difficult for the Fed to use monetary policy to direct the economy back to full employment and price stability from the recession of 2008-2009?

Since the mid-1980s,if the Fed wanted to shift to a more expansionary monetary policy,it would

Which economist made the following statement: "Every major contraction in the U.S.economy has either been created or greatly exacerbated by monetary instability.Every major inflation has been caused by monetary expansion."

In an economy in which real output grows at an average rate of 3 percent per year,a 7 percent average rate of growth in the money supply would result in

Shifts in monetary policy will

If changes in monetary policy are going to help stabilize the economy,they must

When an expansionary monetary policy leads to an acceleration in the rate of inflation,it will also result in

According to the Austrian view of the business cycle,if expansionary monetary policy pushes the interest rate to an artificially low level,the result will be

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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

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Gaining From International Trade

International Finance and the Foreign Exchange Market

Consumer Choice and Elasticity

Acosts and the Supply of Goods

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Price-Searcher Markets With Low Entry Barriers

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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

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Difficult Environmental Cases and the Role of Government

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