Question 1

It is the responsibility of the Trading Desk at the Federal Reserve Bank of New York to implement policies in the form of

Accepted Answer

A)  changes in the spread between the federal funds rate and the discount rate that are consistent with rules established by the twelve Federal Reserve bank presidents. 
B)  variations in reserve requirements that are consistent with the announcements by the Chair of the Fed's Board of Governors. 
C)  changes in foreign exchange rates that are consistent with policies established by the Secretary of the Treasury. 
D)  buying or selling government securities that are consistent with the FOMC Directive. 
A)  changes in the spread between the federal funds rate and the discount rate that are consistent with rules established by the twelve Federal Reserve bank presidents. 
B)  variations in reserve requirements that are consistent with the announcements by the Chair of the Fed's Board of Governors. 
C)  changes in foreign exchange rates that are consistent with policies established by the Secretary of the Treasury. 
D)  buying or selling government securities that are consistent with the FOMC Directive.

Question 2

According to the quantity theory of money, the price level decreases in equal proportion to

Accepted Answer

A)  an increase in the income velocity of money. 
B)  a decrease in the nominal interest rate. 
C)  an increase in the real interest rate. 
D)  a decrease in the money supply. 
A)  an increase in the income velocity of money. 
B)  a decrease in the nominal interest rate. 
C)  an increase in the real interest rate. 
D)  a decrease in the money supply.

Question 3

According to the quantity theory of money, increases in the money supply lead to

Accepted Answer

A)  decreases in nominal Gross Domestic Product (GDP). 
B)  increases in the price level. 
C)  decreases in the price level. 
D)  increases in taxes. 
A)  decreases in nominal Gross Domestic Product (GDP). 
B)  increases in the price level. 
C)  decreases in the price level. 
D)  increases in taxes.

Question 4

The linkages of the interest-rate-based transmission mechanism of monetary policy are summarized as follows:

Accepted Answer

A)  change in the money supply → change in speculative balances → change in transactions balances → change in planned investment → change in aggregate demand. 
B)  change in the money supply → change in planned investment → change in government spending → change in aggregate demand. 
C)  change in the money supply → change in interest rates → change in planned investment → change in aggregate demand. 
D)  change in the money supply → change in interest rates → change in transactions balances → change in government spending → change in aggregate demand. 
A)  change in the money supply → change in speculative balances → change in transactions balances → change in planned investment → change in aggregate demand. 
B)  change in the money supply → change in planned investment → change in government spending → change in aggregate demand. 
C)  change in the money supply → change in interest rates → change in planned investment → change in aggregate demand. 
D)  change in the money supply → change in interest rates → change in transactions balances → change in government spending → change in aggregate demand.

Question 5

When a person holds money, they give up

Accepted Answer

A)  the pleasure associated with spending money. 
B)  the pleasure associated with saving money. 
C)  the interest that could have been earned if the money had been changed into an interest-bearing asset. 
D)  nothing, since the person can always use the money to buy goods or services or interest-bearing assets. 
A)  the pleasure associated with spending money. 
B)  the pleasure associated with saving money. 
C)  the interest that could have been earned if the money had been changed into an interest-bearing asset. 
D)  nothing, since the person can always use the money to buy goods or services or interest-bearing assets.

Question 6

Which of the following will lead to a decrease in the price of existing bonds?

Accepted Answer

A)  a decrease in the rate of interest 
B)  an inward shift in money demand 
C)  a decrease in planned investment spending 
D)  a reduction in the money supply 
A)  a decrease in the rate of interest 
B)  an inward shift in money demand 
C)  a decrease in planned investment spending 
D)  a reduction in the money supply

Question 7

Which of the following is a TRUE statement?

Accepted Answer

A)  To demand money is to demand wealth. 
B)  To demand money is to demand a higher income. 
C)  To use money, one must hold money. 
D)  To get more money, one must earn interest on money. 
A)  To demand money is to demand wealth. 
B)  To demand money is to demand a higher income. 
C)  To use money, one must hold money. 
D)  To get more money, one must earn interest on money.

Question 8

An increase in the price level means that

Accepted Answer

A)  long-run aggregate supply has increased. 
B)  monetary policy has been contractionary. 
C)  the value of the dollar has increased. 
D)  the purchasing power of money has fallen. 
A)  long-run aggregate supply has increased. 
B)  monetary policy has been contractionary. 
C)  the value of the dollar has increased. 
D)  the purchasing power of money has fallen.

Question 9

The quantity theory of money and prices asserts that

Accepted Answer

A)  increases in the money supply lead to inflation. 
B)  increases in the money supply lead to an increase in the velocity of money. 
C)  increases in the money supply lead to a decrease in the velocity of money. 
D)  increases in the money supply will increase real GDP. 
A)  increases in the money supply lead to inflation. 
B)  increases in the money supply lead to an increase in the velocity of money. 
C)  increases in the money supply lead to a decrease in the velocity of money. 
D)  increases in the money supply will increase real GDP.

Question 10

If the total money supply is $3 trillion, real GDP is $9 trillion and the price level is 2, then the equation of exchange tells us that velocity equals

Accepted Answer

A)  0.25. 
B)  1.5. 
C)  6. 
D)  13.5. 
A)  0.25. 
B)  1.5. 
C)  6. 
D)  13.5.

Question 11

Which of the following best represents the equation of exchange?

Accepted Answer

A)  M * P = V * Y 
B)  M * V = P * Y 
C)  M * Y = P * V 
D)  M * Y * V = P 
A)  M * P = V * Y 
B)  M * V = P * Y 
C)  M * Y = P * V 
D)  M * Y * V = P

Question 12

When the interest rate increases, people will adjust their precautionary demand for money

Accepted Answer

A)  upward. 
B)  downward. 
C)  not at all. 
D)  downward or upward depending upon the actual supply of money. 
A)  upward. 
B)  downward. 
C)  not at all. 
D)  downward or upward depending upon the actual supply of money.

Question 13

A sale of bonds by the Fed generates

Accepted Answer

A)  an increase in the demand for money balances. 
B)  a decrease in the demand for money balances. 
C)  an increase in the demand for bonds and a rise in bond prices. 
D)  an increase in the supply of bonds and a fall in bond prices. 
A)  an increase in the demand for money balances. 
B)  a decrease in the demand for money balances. 
C)  an increase in the demand for bonds and a rise in bond prices. 
D)  an increase in the supply of bonds and a fall in bond prices.

Question 14

If the economy is underutilizing its economic resources, the Fed should

Accepted Answer

A)  discourage investment spending. 
B)  expand the money supply to increase aggregate demand. 
C)  decrease aggregate supply. 
D)  contract the money supply to decrease aggregate demand. 
A)  discourage investment spending. 
B)  expand the money supply to increase aggregate demand. 
C)  decrease aggregate supply. 
D)  contract the money supply to decrease aggregate demand.

Question 15

When households hold money for unplanned expenditures and emergencies, it is called

Accepted Answer

A)  the speculative demand for money. 
B)  the transactions demand for money. 
C)  the irrational demand for money. 
D)  the precautionary demand for money. 
A)  the speculative demand for money. 
B)  the transactions demand for money. 
C)  the irrational demand for money. 
D)  the precautionary demand for money.

Question 16

The velocity of money

Accepted Answer

A)  is, according to the equation of exchange, equal to P/M. 
B)  indicates the number of times per year a dollar is spent on final goods and services. 
C)  is, according to the equation of exchange, equal to M/Y. 
D)  indicates the speed with which the U.S. Treasury can mint new coins. 
A)  is, according to the equation of exchange, equal to P/M. 
B)  indicates the number of times per year a dollar is spent on final goods and services. 
C)  is, according to the equation of exchange, equal to M/Y. 
D)  indicates the speed with which the U.S. Treasury can mint new coins.

Question 17

Suppose the Fed conducts an open market purchase of bonds. This monetary policy action will tend to cause

Accepted Answer

A)  the price of bonds to increase, and the interest rate to increase. 
B)  the price of bonds to increase, and the interest rate to decrease. 
C)  the price of bonds to decrease, and the interest rate to increase. 
D)  the price of bonds to decrease, and the interest rate to decrease. 
A)  the price of bonds to increase, and the interest rate to increase. 
B)  the price of bonds to increase, and the interest rate to decrease. 
C)  the price of bonds to decrease, and the interest rate to increase. 
D)  the price of bonds to decrease, and the interest rate to decrease.

Question 18

People hold money as an asset rather than other assets because

Accepted Answer

A)  it is highly liquid. 
B)  it holds its value. 
C)  it grows in value. 
D)  there is no cost to holding money as an asset. 
A)  it is highly liquid. 
B)  it holds its value. 
C)  it grows in value. 
D)  there is no cost to holding money as an asset.

Question 19

The market price of existing bonds is ________ to the rate of interest prevailing in the economy.

Accepted Answer

A)  inversely related 
B)  directly related 
C)  totally unrelated 
D)  synonymous 
A)  inversely related 
B)  directly related 
C)  totally unrelated 
D)  synonymous

Question 20

The demand for money is downward sloping, because at higher interest rates

Accepted Answer

A)  the opportunity cost of holding cash is lower. 
B)  the opportunity cost of holding money is higher. 
C)  the opportunity cost of holding money is decreasing. 
D)  the opportunity cost of holding money is constant. 
A)  the opportunity cost of holding cash is lower. 
B)  the opportunity cost of holding money is higher. 
C)  the opportunity cost of holding money is decreasing. 
D)  the opportunity cost of holding money is constant.

Exam 16: Domestic and International Dimensions of Monetary Policy

It is the responsibility of the Trading Desk at the Federal Reserve Bank of New York to implement policies in the form of

According to the quantity theory of money, the price level decreases in equal proportion to

According to the quantity theory of money, increases in the money supply lead to

The linkages of the interest-rate-based transmission mechanism of monetary policy are summarized as follows:

When a person holds money, they give up

Which of the following will lead to a decrease in the price of existing bonds?

Which of the following is a TRUE statement?

An increase in the price level means that

The quantity theory of money and prices asserts that

If the total money supply is $3 trillion, real GDP is $9 trillion and the price level is 2, then the equation of exchange tells us that velocity equals

Which of the following best represents the equation of exchange?

When the interest rate increases, people will adjust their precautionary demand for money

A sale of bonds by the Fed generates

If the economy is underutilizing its economic resources, the Fed should

When households hold money for unplanned expenditures and emergencies, it is called

The velocity of money

Suppose the Fed conducts an open market purchase of bonds. This monetary policy action will tend to cause

People hold money as an asset rather than other assets because

The market price of existing bonds is ________ to the rate of interest prevailing in the economy.

The demand for money is downward sloping, because at higher interest rates

The Nature of Economics

Scarcity and the World of Trade-Offs

Demand and Supply

Extensions of Demand and Supply Analysis

Public Spending and Public Choice

Funding the Public Sector

The Macroeconomy: Unemployment, Inflation, and Deflation

Measuring the Economys Performance

Global Economic Growth and Development

Real GDP and the Price Level in the Long Run

Classical and Keynesian Macro Analyses

Consumption, Real GDP, and the Multiplier

Fiscal Policy

Deficit Spending and the Public Debt

Money, Banking, and Central Banking

Stabilization in an Integrated World Economy

Policies and Prospects for Global Economic Growth

Demand and Supply Elasticity

Consumer Choice

Rents, Profits, and the Financial Environment of Business

The Firm: Cost and Output Determination

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Regulation and Antitrust Policy in a Globalized Economy

The Labor Market: Demand, Supply and Outsourcing

Unions and Labor Market Monopoly Power

Income, Poverty, and Health Care

Environmental Economics

Comparative Advantage and the Open Economy

Exchange Rates and the Balance of Payments

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