Question 1

The Keynesian mechanism through which monetary policy affects the price level,real GDP,and employment depends on the impact of the:

Accepted Answer

A)  interest rate on savings. 
B)  inflation on investment. 
C)  interest rate on investment. 
D)  interest rate on bond prices. 
A)  interest rate on savings. 
B)  inflation on investment. 
C)  interest rate on investment. 
D)  interest rate on bond prices.

Question 2

Keynesian economists believe monetary policy is more effective than fiscal policy in stabilizing the business cycle.

Accepted Answer

A) True 
 B)False

Question 3

Keynes called money people hold to make routine day-to-day purchases the:

Accepted Answer

A)  transactions demand for holding money. 
B)  precautionary demand for holding money. 
C)  speculative demand for holding money. 
D)  store of value demand for holding money. 
A)  transactions demand for holding money. 
B)  precautionary demand for holding money. 
C)  speculative demand for holding money. 
D)  store of value demand for holding money.

Question 4

In Keynes's view,an excess quantity of money demanded causes people to:

Accepted Answer

A)  sell bonds and the interest rate rises. 
B)  buy bonds and the interest rate falls. 
C)  buy bonds and the interest rate rises. 
D)  increase speculative balances. 
A)  sell bonds and the interest rate rises. 
B)  buy bonds and the interest rate falls. 
C)  buy bonds and the interest rate rises. 
D)  increase speculative balances.

Question 5

Suppose that the current money market equilibrium has an interest rate of 5 percent and a quantity of $2 trillion.Suppose that at a 6 percent interest rate,the quantity of money demanded is $1.5 trillion,while at a 4 percent interest rate it is $2.5 trillion.If the Fed makes an open-market purchase of $50 billion,and the money multiplier is 10,what will be the new money market equilibrium?

Accepted Answer

A)  An interest rate of 6 percent and a quantity of $1.5 trillion. 
B)  An interest rate of 5 percent and a quantity of $2 trillion. 
C)  An interest rate of 4 percent and a quantity of $2.5 trillion. 
D)  None of the above. 
A)  An interest rate of 6 percent and a quantity of $1.5 trillion. 
B)  An interest rate of 5 percent and a quantity of $2 trillion. 
C)  An interest rate of 4 percent and a quantity of $2.5 trillion. 
D)  None of the above.

Question 6

According to monetarists,which of the following would be most important for the control of inflation?

Accepted Answer

A)  a steady increase in federal expenditures 
B)  the imposition of price controls 
C)  keeping the growth rate of the money supply low and steady 
D)  a steady increase in the size of the budget deficit 
A)  a steady increase in federal expenditures 
B)  the imposition of price controls 
C)  keeping the growth rate of the money supply low and steady 
D)  a steady increase in the size of the budget deficit

Question 7

A decrease in the money supply:

Accepted Answer

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

Question 8

While the classicists believed that both velocity and output are stable,Keynesians believe:

Accepted Answer

A)  velocity is stable and output is variable. 
B)  velocity and output are both variable. 
C)  output is stable and velocity is variable 
D)  the same as the classical economists that both output and velocity are stable 
E)  at low levels of income both velocity and output are stable, but at high levels of income velocity becomes variable. 
A)  velocity is stable and output is variable. 
B)  velocity and output are both variable. 
C)  output is stable and velocity is variable 
D)  the same as the classical economists that both output and velocity are stable 
E)  at low levels of income both velocity and output are stable, but at high levels of income velocity becomes variable.

Question 9

Bond prices and interest rates are directly related.

Accepted Answer

A) True 
 B)False

Question 10

John Maynard Keynes listed three types of motives for people holding money--transactions,precautionary,and speculative.

Accepted Answer

A) True 
 B)False

Question 11

According to Keynesians,an increase in the money supply will:

Accepted Answer

A)  decrease the interest rate, and increase investment, aggregate demand, prices, real GDP, and employment. 
B)  decrease the interest rate, and decrease investment, aggregate demand, prices, real GDP, and employment. 
C)  increase the interest rate, and decrease investment, aggregate demand, prices, real GDP, and employment. 
D)  only increases prices. 
A)  decrease the interest rate, and increase investment, aggregate demand, prices, real GDP, and employment. 
B)  decrease the interest rate, and decrease investment, aggregate demand, prices, real GDP, and employment. 
C)  increase the interest rate, and decrease investment, aggregate demand, prices, real GDP, and employment. 
D)  only increases prices.

Question 12

Starting from equilibrium in the money market,suppose the money supply increases.Other things being equal,this will cause an excess supply of money,leading people to buy bonds.

Accepted Answer

A) True 
 B)False

Question 13

If the money supply is $250 billion and nominal GDP is $1 trillion,the velocity of money is:

Accepted Answer

A)  0.25. 
B)  0.40. 
C)  2.50. 
D)  4.00. 
A)  0.25. 
B)  0.40. 
C)  2.50. 
D)  4.00.

Question 14

The precautionary demand for holding money is when people hold money:

Accepted Answer

A)  instead of near money. 
B)  to transact purchases they expect to make. 
C)  as insurance against unexpected needs. 
D)  to speculate in the stock market. 
E)  to take advantage of changes in interest rates. 
A)  instead of near money. 
B)  to transact purchases they expect to make. 
C)  as insurance against unexpected needs. 
D)  to speculate in the stock market. 
E)  to take advantage of changes in interest rates.

Question 15

Which of the following is a belief of the monetarists?

Accepted Answer

A)  They think the Great Depression was made worse by poor conduct of monetary policy. 
B)  They do not believe monetary policy is transmitted to the economy only through its effect on interest rates and planned investment. 
C)  They believe that the interest-investment curve is vertical. 
D)  All of the above. 
A)  They think the Great Depression was made worse by poor conduct of monetary policy. 
B)  They do not believe monetary policy is transmitted to the economy only through its effect on interest rates and planned investment. 
C)  They believe that the interest-investment curve is vertical. 
D)  All of the above.

Question 16

A rightward shift in the money supply curve is likely to produce a rightward shift in the aggregate demand curve.

Accepted Answer

A) True 
 B)False

Question 17

Causality is clear and mechanical with the quantity theory of money.If M increases because:

Accepted Answer

A)  V and Q are variable, the price level, P, increases. 
B)  V and Q are variable, the price level, P, decreases. 
C)  V and Q are constant, the price level, P, increases. 
D)  V and Q are constant, the price level, P, decreases. 
E)  P and Q are constant, velocity, V, increases. 
A)  V and Q are variable, the price level, P, increases. 
B)  V and Q are variable, the price level, P, decreases. 
C)  V and Q are constant, the price level, P, increases. 
D)  V and Q are constant, the price level, P, decreases. 
E)  P and Q are constant, velocity, V, increases.

Question 18

If M stands for the money supply,V for the velocity of money,P for the average selling price,and Q for the output of goods and services,the equation of exchange is:

Accepted Answer

A)  MP = VQ. 
B)  MV = PQ. 
C)  MQ = VP. 
D)  MP = PQ. 
A)  MP = VQ. 
B)  MV = PQ. 
C)  MQ = VP. 
D)  MP = PQ.

Question 19

In Keynes's view,an excess quantity of money supplied causes people to:

Accepted Answer

A)  sell bonds and the interest rate rises. 
B)  buy bonds and the interest rate falls. 
C)  buy bonds and the interest rate rises. 
D)  increase speculative balances. 
A)  sell bonds and the interest rate rises. 
B)  buy bonds and the interest rate falls. 
C)  buy bonds and the interest rate rises. 
D)  increase speculative balances.

Question 20

Monetarists and classical economists:

Accepted Answer

A)  assume that stimulative monetary policy will create high levels of GDP without inflation. 
B)  assume that stimulative monetary policy will create high levels of GDP and slightly high prices. 
C)  assume the economy operates at full employment and stimulative monetary policy will only cause the price level to rise. 
D)  assume that the economy operates at full employment and stimulative monetary policy will increase both aggregate supply and aggregate demand. 
E)  assume that the Keynesian description of monetary policy underestimates the true stimulative effect of an increase in the money supply. 
A)  assume that stimulative monetary policy will create high levels of GDP without inflation. 
B)  assume that stimulative monetary policy will create high levels of GDP and slightly high prices. 
C)  assume the economy operates at full employment and stimulative monetary policy will only cause the price level to rise. 
D)  assume that the economy operates at full employment and stimulative monetary policy will increase both aggregate supply and aggregate demand. 
E)  assume that the Keynesian description of monetary policy underestimates the true stimulative effect of an increase in the money supply.

Exam 20: Monetary Policy

The Keynesian mechanism through which monetary policy affects the price level,real GDP,and employment depends on the impact of the:

Keynesian economists believe monetary policy is more effective than fiscal policy in stabilizing the business cycle.

Keynes called money people hold to make routine day-to-day purchases the:

In Keynes's view,an excess quantity of money demanded causes people to:

According to monetarists,which of the following would be most important for the control of inflation?

A decrease in the money supply:

While the classicists believed that both velocity and output are stable,Keynesians believe:

Bond prices and interest rates are directly related.

John Maynard Keynes listed three types of motives for people holding money--transactions,precautionary,and speculative.

According to Keynesians,an increase in the money supply will:

Starting from equilibrium in the money market,suppose the money supply increases.Other things being equal,this will cause an excess supply of money,leading people to buy bonds.

If the money supply is $250 billion and nominal GDP is $1 trillion,the velocity of money is:

The precautionary demand for holding money is when people hold money:

Which of the following is a belief of the monetarists?

A rightward shift in the money supply curve is likely to produce a rightward shift in the aggregate demand curve.

Causality is clear and mechanical with the quantity theory of money.If M increases because:

If M stands for the money supply,V for the velocity of money,P for the average selling price,and Q for the output of goods and services,the equation of exchange is:

In Keynes's view,an excess quantity of money supplied causes people to:

Monetarists and classical economists:

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

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