Question 1

An increase in the supply of money will lead to ____ in equilibrium real GDP and ____ in equilibrium price level.

Accepted Answer

A)  an increase; an increase 
B)  an increase; a decrease 
C)  a decreases; an increase 
D)  a decrease; a decrease 
A)  an increase; an increase 
B)  an increase; a decrease 
C)  a decreases; an increase 
D)  a decrease; a decrease

Question 2

Which of the following is the objective of expansionary monetary policy?

Accepted Answer

A)  An increase in employment. 
B)  A decrease in employment. 
C)  An increase in the velocity of money. 
D)  An increase in prices proportional to the rise in the money supply. 
A)  An increase in employment. 
B)  A decrease in employment. 
C)  An increase in the velocity of money. 
D)  An increase in prices proportional to the rise in the money supply.

Question 3

According to the quantity theory of money,if an economy produces 100 units of output and has a money supply equal to $500,then if the money supply doubles while velocity remains constant,the new price level will:

Accepted Answer

A)  fall to half its initial level. 
B)  fall, but it will not fall all the way to half its initial level. 
C)  increase, but it will not double. 
D)  double. 
E)  more than double. 
A)  fall to half its initial level. 
B)  fall, but it will not fall all the way to half its initial level. 
C)  increase, but it will not double. 
D)  double. 
E)  more than double.

Question 4

Exhibit 20-1 Money market demand and supply curves
  
-Starting from an equilibrium at E₁ in Exhibit 20-1,a leftward shift of the money supply curve from MS₁ to MS₂ would cause an excess:

Accepted Answer

A)  demand for money, leading people to sell bonds. 
B)  demand for money, leading people to buy bonds. 
C)  supply of money, leading people to sell bonds. 
D)  supply of money, leading people to buy bonds. 
A)  demand for money, leading people to sell bonds. 
B)  demand for money, leading people to buy bonds. 
C)  supply of money, leading people to sell bonds. 
D)  supply of money, leading people to buy bonds.

Question 5

Keynesians believe that an increase in the money supply will lead to:

Accepted Answer

A) both c and d. 
B) all of the following. 
C) an increase in the price level. 
D) an decrease in nominal GDP. 
E) an increase in real GDP. 
A) both c and d. 
B) all of the following. 
C) an increase in the price level. 
D) an decrease in nominal GDP. 
E) an increase in real GDP.

Question 6

An increase in the money supply:

Accepted Answer

A)  lowers the interest rate, causing a decrease in investment and an increase in GDP. 
B)  lowers the interest rate, causing an increase in investment and a decrease in GDP. 
C)  lowers the interest rate, causing an increase in investment and an increase in GDP. 
D)  raises the interest rate, causing an increase in investment and an increase in GDP. 
E)  raises the interest rate, causing a decrease in investment and a decrease in GDP. 
A)  lowers the interest rate, causing a decrease in investment and an increase in GDP. 
B)  lowers the interest rate, causing an increase in investment and a decrease in GDP. 
C)  lowers the interest rate, causing an increase in investment and an increase in GDP. 
D)  raises the interest rate, causing an increase in investment and an increase in GDP. 
E)  raises the interest rate, causing a decrease in investment and a decrease in GDP.

Question 7

Exhibit 20-5 Money, Investment and product markets
  
-In Exhibit 20-5,if the interest rate falls from i₁ to i₂,investment spending will:

Accepted Answer

A)  increase, and aggregate demand will shift from AD₁ to AD₂. 
B)  decrease, and aggregate demand will shift from AD₂ to AD₁. 
C)  remain the same, and aggregate demand will shift from AD₂ to AD₃. 
D)  increase, and aggregate demand will shift from AD₂ to AD₁. 
E)  decrease, and aggregate demand will shift from AD₁ to AD₂. 
A)  increase, and aggregate demand will shift from AD₁ to AD₂. 
B)  decrease, and aggregate demand will shift from AD₂ to AD₁. 
C)  remain the same, and aggregate demand will shift from AD₂ to AD₃. 
D)  increase, and aggregate demand will shift from AD₂ to AD₁. 
E)  decrease, and aggregate demand will shift from AD₁ to AD₂.

Question 8

The equation of exchange states:

Accepted Answer

A)  MV = PQ. 
B)  MP = VQ. 
C)  MP = V/Q. 
D)  V = M/PQ. 
A)  MV = PQ. 
B)  MP = VQ. 
C)  MP = V/Q. 
D)  V = M/PQ.

Question 9

Exhibit 20-4 Aggregate demand and supply model
  
-In Exhibit 20-4,which one of the following actions could the Fed use to shift the AD curve from AD₃ to AD₂?

Accepted Answer

A)  Lower the discount rate. 
B)  Lower the federal funds rate 
C)  Raise the federal funds rate. 
D)  Raise the legal reserve requirement 
E)  Buy government securities. 
A)  Lower the discount rate. 
B)  Lower the federal funds rate 
C)  Raise the federal funds rate. 
D)  Raise the legal reserve requirement 
E)  Buy government securities.

Question 10

Exhibit 20-4 Aggregate demand and supply model
  
-In Exhibit 20-4,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)  Lower the discount rate. 
C)  Lower the federal funds rate. 
D)  Sell government securities. 
E)  Raise the federal funds rate. 
A)  Raise the legal reserve requirement. 
B)  Lower the discount rate. 
C)  Lower the federal funds rate. 
D)  Sell government securities. 
E)  Raise the federal funds rate.

Question 11

Exhibit 20-4 Aggregate demand and supply model
  
-In Exhibit 20-4,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. 
E)  Print currency. 
A)  Raise the legal reserve requirement. 
B)  Raise the discount rate. 
C)  Lower the federal funds rate. 
D)  Buy government securities. 
E)  Print currency.

Question 12

According to the quantity theory of money,which one of the following economic variables would change in response to an increase in the money supply?

Accepted Answer

A)  prices 
B)  real income 
C)  velocity 
D)  employment 
A)  prices 
B)  real income 
C)  velocity 
D)  employment

Question 13

According to the equation of exchange,if V = 5,P = 100,and Q = 10,the M is:

Accepted Answer

A)  20. 
B)  10. 
C)  500. 
D)  1,000. 
E)  200. 
A)  20. 
B)  10. 
C)  500. 
D)  1,000. 
E)  200.

Question 14

Why do people hold money (currency and checking account balances),and thereby forego earning interest or dividends from a financial investment?

Accepted Answer

A)  Some money is demanded for everyday transactions like parking fees, lunch, and buying groceries. 
B)  Some money is demanded as a precaution against unexpected costs such as automobile repairs, speeding tickets, or temporary loss of a job. 
C)  Some money is demanded for speculative purchases of stocks, bonds, or collectibles in case they become available at a particularly low price. 
D)  All of the above are correct. 
A)  Some money is demanded for everyday transactions like parking fees, lunch, and buying groceries. 
B)  Some money is demanded as a precaution against unexpected costs such as automobile repairs, speeding tickets, or temporary loss of a job. 
C)  Some money is demanded for speculative purchases of stocks, bonds, or collectibles in case they become available at a particularly low price. 
D)  All of the above are correct.

Question 15

Exhibit 20-1 Money market demand and supply curves
  
-Beginning from an equilibrium at E₁ in Exhibit 20-1,a decrease in the money supply from $150 billion to $100 billion causes people to:

Accepted Answer

A)  sell bonds and drive the price of bonds down. 
B)  sell bonds and drive the price of bonds up. 
C)  buy bonds and drive the price of bonds down. 
D)  buy bonds and drive the price of bonds up. 
A)  sell bonds and drive the price of bonds down. 
B)  sell bonds and drive the price of bonds up. 
C)  buy bonds and drive the price of bonds down. 
D)  buy bonds and drive the price of bonds up.

Question 16

Contrast the Keynesian and Monetarist views on how a change in the money supply impacts the economy?

Accepted Answer

According to Keynesian economists,an inc

Question 17

The opportunity cost of holding money is measured by the rate of interest.

Accepted Answer

A) True 
 B)False

Question 18

Investment is lowered by expansionary monetary policy.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is an important issue in the Keynesian-Monetarist debate?

Accepted Answer

A)  The relative importance of monetary and fiscal policy. 
B)  The nature of the transmission mechanism through which a change in the money supply affects the economy. 
C)  The shape of the investment-demand curve. 
D)  All of the above. 
A)  The relative importance of monetary and fiscal policy. 
B)  The nature of the transmission mechanism through which a change in the money supply affects the economy. 
C)  The shape of the investment-demand curve. 
D)  All of the above.

Question 20

Given the strict quantity theory of money,if the quantity of money doubled,prices would:

Accepted Answer

A)  fall by half. 
B)  double. 
C)  remain constant. 
D)  increase somewhat but less than double. 
A)  fall by half. 
B)  double. 
C)  remain constant. 
D)  increase somewhat but less than double.

Exam 20: Monetary Policy

An increase in the supply of money will lead to ____ in equilibrium real GDP and ____ in equilibrium price level.

Which of the following is the objective of expansionary monetary policy?

According to the quantity theory of money,if an economy produces 100 units of output and has a money supply equal to $500,then if the money supply doubles while velocity remains constant,the new price level will:

Exhibit 20-1 Money market demand and supply curves -Starting from an equilibrium at E₁ in Exhibit 20-1,a leftward shift of the money supply curve from MS₁ to MS₂ would cause an excess:

Keynesians believe that an increase in the money supply will lead to:

An increase in the money supply:

Exhibit 20-5 Money, Investment and product markets -In Exhibit 20-5,if the interest rate falls from i₁ to i₂,investment spending will:

The equation of exchange states:

Exhibit 20-4 Aggregate demand and supply model -In Exhibit 20-4,which one of the following actions could the Fed use to shift the AD curve from AD₃ to AD₂?

Exhibit 20-4 Aggregate demand and supply model -In Exhibit 20-4,which one of the following actions could the Fed use to shift the AD curve from AD₁ to AD₂?

Exhibit 20-4 Aggregate demand and supply model -In Exhibit 20-4,which one of the following actions could the Fed use to shift the AD curve from AD₁ to AD₂?

According to the quantity theory of money,which one of the following economic variables would change in response to an increase in the money supply?

According to the equation of exchange,if V = 5,P = 100,and Q = 10,the M is:

Why do people hold money (currency and checking account balances),and thereby forego earning interest or dividends from a financial investment?

Exhibit 20-1 Money market demand and supply curves -Beginning from an equilibrium at E₁ in Exhibit 20-1,a decrease in the money supply from $150 billion to $100 billion causes people to:

Contrast the Keynesian and Monetarist views on how a change in the money supply impacts the economy?

The opportunity cost of holding money is measured by the rate of interest.

Investment is lowered by expansionary monetary policy.

Which of the following is an important issue in the Keynesian-Monetarist debate?

Given the strict quantity theory of money,if the quantity of money doubled,prices would:

Introducing the Economic Way of Thinking

A: Appendix: Applying Graphs to Economics

Production Possibilities,Opportunity Cost,and Economic Growth

Part 1: Market Demand and Supply

Part 2: Market Demand and Supply

Markets in Action

Price Elasticity of Demand

Production Costs

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets and Income Distribution

Gross Domestic Product

Business Cycles and Unemployment

Inflation

Aggregate Demand and Supply

A: Appendix: The Self-Correcting Aggregate Demand and Supply Model

Fiscal Policy

The Public Sector

Federal Deficits,Surpluses,and the National Debt

Money and the Federal Reserve System

Money Creation

A: Appendix: Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Filters

An increase in the supply of money will lead to in equilibrium real GDP and in equilibrium price level.