Question 1

Exhibit 20-6 Money, investment and product markets
  
-In Exhibit 20-6,an increase in the money supply from MS₁ to MS₂ causes:

Accepted Answer

A)  interest rates to fall from i₁ to i₂ and the quantity demanded of investment to decrease from i₂ to i₁. 
B)  interest rates to fall from i₁ to i₂ and aggregate demand to shift from AD₂ to AD₁. 
C)  interest rates to fall from i₁ to i₂ and the quantity demanded of investment to increase from i₁ to i₂. 
D)  interest rates to rise from i₂ to i₁ and the quantity demanded of investment to remain the same. 
E)  interest rates to rise from i₂ to i₁ and aggregate demand to shift from AD₁ to AD₂. 
A)  interest rates to fall from i₁ to i₂ and the quantity demanded of investment to decrease from i₂ to i₁. 
B)  interest rates to fall from i₁ to i₂ and aggregate demand to shift from AD₂ to AD₁. 
C)  interest rates to fall from i₁ to i₂ and the quantity demanded of investment to increase from i₁ to i₂. 
D)  interest rates to rise from i₂ to i₁ and the quantity demanded of investment to remain the same. 
E)  interest rates to rise from i₂ to i₁ and aggregate demand to shift from AD₁ to AD₂.

Question 2

The Keynesian cause-and-effect sequence predicts that an increase in the money supply will cause interest rates to:

Accepted Answer

A)  fall, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
B)  fall, boosting investment and shifting the AD curve rightward, leading to a decrease in real GDP. 
C)  rise, cutting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
D)  rise, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
E)  fall, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP. 
A)  fall, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
B)  fall, boosting investment and shifting the AD curve rightward, leading to a decrease in real GDP. 
C)  rise, cutting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
D)  rise, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP. 
E)  fall, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP.

Question 3

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

Accepted Answer

A)  real 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 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 4

The transactions 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 expenses. 
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 expenses. 
D)  to speculate in the stock market. 
E)  to take advantage of changes in interest rates.

Question 5

The transactions demand for money is the demand for money by households for:

Accepted Answer

A)  rainy day spending. 
B)  predictable spending purposes. 
C)  liquidity purposes. 
D)  investing purposes. 
A)  rainy day spending. 
B)  predictable spending purposes. 
C)  liquidity purposes. 
D)  investing purposes.

Question 6

If people attempt to sell bonds because of excess money demand,then the interest rate will:

Accepted Answer

A)  rise. 
B)  fall. 
C)  remain unchanged 
D)  react unpredictably. 
A)  rise. 
B)  fall. 
C)  remain unchanged 
D)  react unpredictably.

Question 7

The equation specifying a direct relationship between the money supply and prices is the quantity theory of:

Accepted Answer

A)  money. 
B)  prices. 
C)  exchange. 
D)  spending. 
E)  dollars. 
A)  money. 
B)  prices. 
C)  exchange. 
D)  spending. 
E)  dollars.

Question 8

Assume a fixed demand for money curve and the Fed increases the money supply.In response,people will:

Accepted Answer

A)  sell bonds, thus driving up the interest rate. 
B)  sell bonds, thus driving down the interest rate. 
C)  buy bonds, thus driving up the interest rate. 
D)  buy bonds, thus driving down the interest rate. 
A)  sell bonds, thus driving up the interest rate. 
B)  sell bonds, thus driving down the interest rate. 
C)  buy bonds, thus driving up the interest rate. 
D)  buy bonds, thus driving down the interest rate.

Question 9

Which of the following falls when bond prices rise?

Accepted Answer

A)  Stock prices. 
B)  Interest rates. 
C)  Money demand. 
D)  Money supply. 
A)  Stock prices. 
B)  Interest rates. 
C)  Money demand. 
D)  Money supply.

Question 10

Which of the following characterizes the Monetarist viewpoint?

Accepted Answer

A)  They believe that money can never affect investment. 
B)  They believe that monetary policy is transmitted to the economy only through its effects on the interest rate and investment. 
C)  Both a and b are part of the debate. 
D)  Neither a nor b are part of the debate. 
A)  They believe that money can never affect investment. 
B)  They believe that monetary policy is transmitted to the economy only through its effects on the interest rate and investment. 
C)  Both a and b are part of the debate. 
D)  Neither a nor b are part of the debate.

Question 11

Keynes argued that the downward slope of the demand for money curve depends on the:

Accepted Answer

A)  equation of exchange. 
B)  rate of interest. 
C)  federal funds rate. 
D)  discount rate. 
A)  equation of exchange. 
B)  rate of interest. 
C)  federal funds rate. 
D)  discount rate.

Question 12

According to the quantity theory of money,if M's growth is lower than Q's,then:

Accepted Answer

A)  V falls. 
B)  V rises. 
C)  P stays the same 
D)  P falls. 
E)  P rises 
A)  V falls. 
B)  V rises. 
C)  P stays the same 
D)  P falls. 
E)  P rises

Question 13

Exhibit 20-3 Money market demand and supply curves
  
-In Exhibit 20-3,assume an equilibrium at E₂ with the money supply at $100 billion and the interest rate at 15 percent.The Fed uses its policy tools to move the economy to a new equilibrium at E₁ with a money supply of 150 billion and an interest rate of 10 percent.As part of the adjustment to the new equilibrium,we would expect the:

Accepted Answer

A)  price of bonds to rise. 
B)  price of bonds to remain unchanged. 
C)  price of bonds to fall. 
D)  none of the above. 
A)  price of bonds to rise. 
B)  price of bonds to remain unchanged. 
C)  price of bonds to fall. 
D)  none of the above.

Question 14

The velocity of money is the:

Accepted Answer

A)  rate at which the price index for consumer goods rises. 
B)  multiple by which an increase in government expenditures will cause output to expand. 
C)  average number of times a dollar is used to buy goods and services included in GDP. 
D)  number of times a dollar is taken out of the country during a year. 
A)  rate at which the price index for consumer goods rises. 
B)  multiple by which an increase in government expenditures will cause output to expand. 
C)  average number of times a dollar is used to buy goods and services included in GDP. 
D)  number of times a dollar is taken out of the country during a year.

Question 15

Exhibit 20-6 Money, investment and product markets
  
-In Exhibit 20-6,a move from MS₁ to MS₂:

Accepted Answer

A)  increases the money supply, causing the interest rate to rise from i₂ to i₁. 
B)  increases the money supply, causing the interest rate to fall from i₁ to i₂. 
C)  decreases the money supply, causing the interest rate to rise from i₂ to i₁. 
D)  decreases the money supply, causing the interest rate to fall from i₁ to i₂. 
E)  has no effect on the money supply or the interest rate. 
A)  increases the money supply, causing the interest rate to rise from i₂ to i₁. 
B)  increases the money supply, causing the interest rate to fall from i₁ to i₂. 
C)  decreases the money supply, causing the interest rate to rise from i₂ to i₁. 
D)  decreases the money supply, causing the interest rate to fall from i₁ to i₂. 
E)  has no effect on the money supply or the interest rate.

Question 16

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

Question 17

According to the classical view,

Accepted Answer

A)  velocity is constant, which means changes in price will cause changes in price or quantity. 
B)  quantity is constant, which means changes in the money supply could cause either changes in velocity or changes in prices. 
C)  velocity and price are constant so that changes in the money supply causes changes in quantity. 
D)  velocity and quantity are constant so that changes in the money supply cause changes in prices. 
E)  velocity is constant while quantity is variable so that changes in the money supply change both price and quantity. 
A)  velocity is constant, which means changes in price will cause changes in price or quantity. 
B)  quantity is constant, which means changes in the money supply could cause either changes in velocity or changes in prices. 
C)  velocity and price are constant so that changes in the money supply causes changes in quantity. 
D)  velocity and quantity are constant so that changes in the money supply cause changes in prices. 
E)  velocity is constant while quantity is variable so that changes in the money supply change both price and quantity.

Question 18

According to the quantity theory of money,if an economy produces 5,000 units of output,its money supply equals $40,000 and the velocity of money equals one,then the price level will equal:

Accepted Answer

A)  $0.13. 
B)  $1.25. 
C)  $8. 
D)  $200. 
E)  $8,000. 
A)  $0.13. 
B)  $1.25. 
C)  $8. 
D)  $200. 
E)  $8,000.

Question 19

According to the monetarists,which of the following is true?

Accepted Answer

A)  Instability in the money supply is the primary cause of economic instability. 
B)  A reduction in the money supply will cause consumers to increase spending. 
C)  A reduction in the money supply will cause a proportional reduction in wages and prices, leaving output unchanged. 
D)  A rapid growth rate of the money supply will lead to a rapid growth rate of real GDP. 
A)  Instability in the money supply is the primary cause of economic instability. 
B)  A reduction in the money supply will cause consumers to increase spending. 
C)  A reduction in the money supply will cause a proportional reduction in wages and prices, leaving output unchanged. 
D)  A rapid growth rate of the money supply will lead to a rapid growth rate of real GDP.

Question 20

According to the equation of exchange,if M = 200,P = 100,and Q = 10,the V is:

Accepted Answer

A)  20. 
B)  2. 
C)  10. 
D)  5. 
E)  2,000. 
A)  20. 
B)  2. 
C)  10. 
D)  5. 
E)  2,000.

Exam 20: Monetary Policy

Exhibit 20-6 Money, investment and product markets -In Exhibit 20-6,an increase in the money supply from MS₁ to MS₂ causes:

The Keynesian cause-and-effect sequence predicts that an increase in the money supply will cause interest rates to:

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

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

The transactions demand for money is the demand for money by households for:

If people attempt to sell bonds because of excess money demand,then the interest rate will:

The equation specifying a direct relationship between the money supply and prices is the quantity theory of:

Assume a fixed demand for money curve and the Fed increases the money supply.In response,people will:

Which of the following falls when bond prices rise?

Which of the following characterizes the Monetarist viewpoint?

Keynes argued that the downward slope of the demand for money curve depends on the:

According to the quantity theory of money,if M's growth is lower than Q's,then:

The velocity of money is the:

Exhibit 20-6 Money, investment and product markets -In Exhibit 20-6,a move from MS₁ to MS₂:

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

According to the classical view,

According to the quantity theory of money,if an economy produces 5,000 units of output,its money supply equals $40,000 and the velocity of money equals one,then the price level will equal:

According to the monetarists,which of the following is true?

According to the equation of exchange,if M = 200,P = 100,and Q = 10,the V is:

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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