Question 1

In a two-asset economy with money and T-bills,the quantity of money that people will want to hold,other things being equal,can be expected to:

Accepted Answer

A)  decrease as real GDP increases. 
B)  increase as the interest rate decreases. 
C)  increase as the interest rate increases. 
D)  all of the above. 
A)  decrease as real GDP increases. 
B)  increase as the interest rate decreases. 
C)  increase as the interest rate increases. 
D)  all of the above.

Question 2

When the interest rate falls,

Accepted Answer

A)  the opportunity cost of holding money rises. 
B)  people shift out of holding interest-yielding bonds into holding money. 
C)  the quantity of money people will hold decreases. 
D)  investment spending decreases. 
E)  real GDP will decrease. 
A)  the opportunity cost of holding money rises. 
B)  people shift out of holding interest-yielding bonds into holding money. 
C)  the quantity of money people will hold decreases. 
D)  investment spending decreases. 
E)  real GDP will decrease.

Question 3

Monetarists reject using discretionary monetary policy as an effective stabilization tool because they believe:

Accepted Answer

A)  if the money supply grows at a rate equal to the economy's long-run rate of economic growth, then the economy will be unstable. 
B)  that changes in the money stock do not affect output or prices. 
C)  the Fed will miss its money supply targets and make the economy worse. 
D)  monetary policy can stimulate aggregate demand, but it cannot affect inflation. 
A)  if the money supply grows at a rate equal to the economy's long-run rate of economic growth, then the economy will be unstable. 
B)  that changes in the money stock do not affect output or prices. 
C)  the Fed will miss its money supply targets and make the economy worse. 
D)  monetary policy can stimulate aggregate demand, but it cannot affect inflation.

Question 4

When the Fed increases the money supply,interest rates:

Accepted Answer

A)  rise. 
B)  fall. 
C)  are unaffected. 
D)  rise and then fall. 
E)  fall and then rise. 
A)  rise. 
B)  fall. 
C)  are unaffected. 
D)  rise and then fall. 
E)  fall and then rise.

Question 5

In the quantity theory of money:

Accepted Answer

A)  the price level is a function of the supply of money. 
B)  the supply of money is a function of the price level. 
C)  the money supply and the price level are inversely related. 
D)  the money supply is controlled by the government. 
A)  the price level is a function of the supply of money. 
B)  the supply of money is a function of the price level. 
C)  the money supply and the price level are inversely related. 
D)  the money supply is controlled by the government.

Question 6

When the Fed decreases the money supply,interest rates:

Accepted Answer

A)  rise. 
B)  fall. 
C)  are unaffected. 
D)  rise and then fall. 
E)  fall and then rise. 
A)  rise. 
B)  fall. 
C)  are unaffected. 
D)  rise and then fall. 
E)  fall and then rise.

Question 7

According to the Monetarists,the primary cause of inflation is:

Accepted Answer

A)  large budget deficits. 
B)  high taxes. 
C)  rapid expansion of the money supply. 
D)  government expenditures that are large relative to the size of the economy. 
A)  large budget deficits. 
B)  high taxes. 
C)  rapid expansion of the money supply. 
D)  government expenditures that are large relative to the size of the economy.

Question 8

Keynesians identify three principal motives for demanding money.They are the:

Accepted Answer

A)  transactions demand, precautionary demand, and liquidity motive. 
B)  transactions demand, precautionary demand, and convertibility motive. 
C)  transactions demand, speculative demand, and volatility motive. 
D)  transactions demand, speculative demand, and liquidity motive. 
E)  transactions demand, speculative demand, and precautionary demand. 
A)  transactions demand, precautionary demand, and liquidity motive. 
B)  transactions demand, precautionary demand, and convertibility motive. 
C)  transactions demand, speculative demand, and volatility motive. 
D)  transactions demand, speculative demand, and liquidity motive. 
E)  transactions demand, speculative demand, and precautionary demand.

Question 9

Monetarists argue that the Fed should frequently adjust the money supply in response to ever-changing economic conditions.

Accepted Answer

A) True 
 B)False

Question 10

Exhibit 20-3 Money market demand and supply curves
  
-As shown in Exhibit 20-3,assume the money supply curve shifts rightward from MS₁ to MS₂ and the economy is operating along the intermediate segment of the aggregate supply curve.The result will be a:

Accepted Answer

A)  higher investment, lower real GDP, and lower price level. 
B)  lower investment, lower real GDP, and lower price level. 
C)  higher investment, higher real GDP, and higher price level. 
D)  higher interest rate and no effect on real GDP or the price level. 
A)  higher investment, lower real GDP, and lower price level. 
B)  lower investment, lower real GDP, and lower price level. 
C)  higher investment, higher real GDP, and higher price level. 
D)  higher interest rate and no effect on real GDP or the price level.

Question 11

When interest rates rise,the quantity demanded of money held for the:

Accepted Answer

A)  speculative motive rises. 
B)  precautionary motive rises. 
C)  transactions motive falls. 
D)  precautionary motive falls. 
E)  speculative motive falls. 
A)  speculative motive rises. 
B)  precautionary motive rises. 
C)  transactions motive falls. 
D)  precautionary motive falls. 
E)  speculative motive falls.

Question 12

Exhibit 20-3 Money market demand and supply curves
  
-In Exhibit 20-3,assume an equilibrium with an interest rate of 15 percent and the money supply at $100 billion.The Fed uses its policy tools to move the economy to a new equilibrium at E₂ with money supply of $150 billion and an interest rate of 10 percent.This change could be the result of a(n):

Accepted Answer

A)  open market sale of securities by the Fed. 
B)  higher discount rate set by the Fed. 
C)  higher required-reserve ratio set by the Fed. 
D)  open market purchase of securities by the Fed. 
A)  open market sale of securities by the Fed. 
B)  higher discount rate set by the Fed. 
C)  higher required-reserve ratio set by the Fed. 
D)  open market purchase of securities by the Fed.

Question 13

The quantity of money demanded to satisfy transactions needs:

Accepted Answer

A)  is intended for unexpected expenditures. 
B)  increases with the level of real GDP. 
C)  decreases with the level of real GDP. 
D)  is unrelated to either national income or the interest rate. 
E)  varies inversely with the liquidity demand for money. 
A)  is intended for unexpected expenditures. 
B)  increases with the level of real GDP. 
C)  decreases with the level of real GDP. 
D)  is unrelated to either national income or the interest rate. 
E)  varies inversely with the liquidity demand for money.

Question 14

Monetarists argue that the Treasury's conduct of fiscal policy is the most important factor affecting real GDP and interest rates.

Accepted Answer

A) True 
 B)False

Question 15

If you hold money in anticipation of household emergency expense,this represents the::

Accepted Answer

A)  speculative demand for holding money. 
B)  transactions demand for holding money. 
C)  opportunity cost motive for holding money. 
D)  precautionary demand for holding money. 
E)  regressive cost of holding money. 
A)  speculative demand for holding money. 
B)  transactions demand for holding money. 
C)  opportunity cost motive for holding money. 
D)  precautionary demand for holding money. 
E)  regressive cost of holding money.

Question 16

People learn to hold a specific quantity of money for the groceries,theater tickets,gasoline,clothes,film,and other items they habitually purchase.This behavior is representative of the:

Accepted Answer

A)  precautionary demand. 
B)  speculative demand. 
C)  transactions demand. 
D)  volatility demand. 
E)  liquidity demand. 
A)  precautionary demand. 
B)  speculative demand. 
C)  transactions demand. 
D)  volatility demand. 
E)  liquidity demand.

Question 17

The quantity theory of money of the Classical economists says that a change in the money supply will produce a:

Accepted Answer

A)  proportional change in the price level. 
B)  greater than proportional change in the price level. 
C)  less than proportional change in the price level. 
D)  wide variation in the velocity of money. 
A)  proportional change in the price level. 
B)  greater than proportional change in the price level. 
C)  less than proportional change in the price level. 
D)  wide variation in the velocity of money.

Question 18

Which of the following policies could the Fed use to lower the interest rate?

Accepted Answer

A)  A tax cut. 
B)  Selling government securities. 
C)  Raising the discount rate. 
D)  Reducing the required reserve ratio. 
A)  A tax cut. 
B)  Selling government securities. 
C)  Raising the discount rate. 
D)  Reducing the required reserve ratio.

Question 19

The belief that the velocity of money is not constant but highly predictable is associated with the:

Accepted Answer

A)  classical school. 
B)  Keynesian school. 
C)  supply-side school. 
D)  rational expectations school 
E)  monetarist school. 
A)  classical school. 
B)  Keynesian school. 
C)  supply-side school. 
D)  rational expectations school 
E)  monetarist school.

Question 20

An increase 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 an increase 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 an increase 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.

Exam 20: Monetary Policy

In a two-asset economy with money and T-bills,the quantity of money that people will want to hold,other things being equal,can be expected to:

When the interest rate falls,

Monetarists reject using discretionary monetary policy as an effective stabilization tool because they believe:

When the Fed increases the money supply,interest rates:

In the quantity theory of money:

When the Fed decreases the money supply,interest rates:

According to the Monetarists,the primary cause of inflation is:

Keynesians identify three principal motives for demanding money.They are the:

Monetarists argue that the Fed should frequently adjust the money supply in response to ever-changing economic conditions.

Exhibit 20-3 Money market demand and supply curves -As shown in Exhibit 20-3,assume the money supply curve shifts rightward from MS₁ to MS₂ and the economy is operating along the intermediate segment of the aggregate supply curve.The result will be a:

When interest rates rise,the quantity demanded of money held for the:

The quantity of money demanded to satisfy transactions needs:

Monetarists argue that the Treasury's conduct of fiscal policy is the most important factor affecting real GDP and interest rates.

If you hold money in anticipation of household emergency expense,this represents the::

People learn to hold a specific quantity of money for the groceries,theater tickets,gasoline,clothes,film,and other items they habitually purchase.This behavior is representative of the:

The quantity theory of money of the Classical economists says that a change in the money supply will produce a:

Which of the following policies could the Fed use to lower the interest rate?

The belief that the velocity of money is not constant but highly predictable is associated with the:

An increase in the money supply:

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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