Question 1

The direct effect of an increase in the money supply is to

Accepted Answer

A)  raise interest rates as people increase their saving. 
B)  increase interest rates as people anticipate higher inflation in the future. 
C)  increase aggregate demand as people try to spend their excess money balances. 
D)  decrease aggregate demand as people anticipate future economic problems. 
A)  raise interest rates as people increase their saving. 
B)  increase interest rates as people anticipate higher inflation in the future. 
C)  increase aggregate demand as people try to spend their excess money balances. 
D)  decrease aggregate demand as people anticipate future economic problems.

Question 2

As a result of an increase in the money supply, some banks may end up with excess reserves. What is the likely result?

Accepted Answer

A)  Banks will make more loans, thereby contributing to an increase in aggregate demand. 
B)  Banks will make more loans, thereby contributing to a decrease in aggregate demand. 
C)  Banks will raise interest rates. 
D)  Banks will spend the excess reserves by paying their employees more. 
A)  Banks will make more loans, thereby contributing to an increase in aggregate demand. 
B)  Banks will make more loans, thereby contributing to a decrease in aggregate demand. 
C)  Banks will raise interest rates. 
D)  Banks will spend the excess reserves by paying their employees more.

Question 3

Suppose a family is holding $1000 in its checking account for normal transactions, $500 in cash for emergencies, and $1500 as a store of value when the interest rate is 4 percent. If the interest rate rises to 10 percent, which of the following patterns of holding money would be most likely and why?

Accepted Answer

A)  Transactions demand-$1000; Precautionary demand-$350; Asset demand-$500, because the opportunity cost of holding money has increased. The reduction money balances held as an asset is greatest because interest-bearing assets are much more attractive when interest rates are higher. 
B)  Transactions demand-$500; Precautionary demand-$500; Asset demand-$1400, because the opportunity cost of holding money balances has risen. The reduction in money balances held for transaction purposes falls the most because people start using credit cards more when the opportunity cost of holding money increases. 
C)  Transactions demand-$1000; Precautionary demand-$500; Asset demand-$500, because only the asset demand is responsive to changes in the interest rate. 
D)  Transactions demand-$800; Precautionary demand-$600; Asset demand-$1500, because people can economize on their money balances for making transactions, but the possibility of an emergency increases with the interest rate. People will also expect rates to go higher, so they will hold money as an asset until the rates increase further. 
A)  Transactions demand-$1000; Precautionary demand-$350; Asset demand-$500, because the opportunity cost of holding money has increased. The reduction money balances held as an asset is greatest because interest-bearing assets are much more attractive when interest rates are higher. 
B)  Transactions demand-$500; Precautionary demand-$500; Asset demand-$1400, because the opportunity cost of holding money balances has risen. The reduction in money balances held for transaction purposes falls the most because people start using credit cards more when the opportunity cost of holding money increases. 
C)  Transactions demand-$1000; Precautionary demand-$500; Asset demand-$500, because only the asset demand is responsive to changes in the interest rate. 
D)  Transactions demand-$800; Precautionary demand-$600; Asset demand-$1500, because people can economize on their money balances for making transactions, but the possibility of an emergency increases with the interest rate. People will also expect rates to go higher, so they will hold money as an asset until the rates increase further.

Question 4

One result of a contractionary monetary policy would be

Accepted Answer

A)  a decline in the price level. 
B)  an increase in the money supply. 
C)  an increase in business investment. 
D)  lower interest rates. 
A)  a decline in the price level. 
B)  an increase in the money supply. 
C)  an increase in business investment. 
D)  lower interest rates.

Question 5

-Refer to the above figure. Which panel is consistent with the Fed selling bonds?

Accepted Answer

A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D 
A)  Panel A 
B)  Panel B 
C)  Panel C 
D)  Panel D

Question 6

Which of the following statements is FALSE?

Accepted Answer

A)  Both monetary and interest rate targets cannot be pursued simultaneously. 
B)  A reduction in the required reserve ratio increases the money supply and pushes down the equilibrium interest rate. 
C)  An open market purchase reduces the money supply and pushes down the equilibrium interest rate. 
D)  An open market sale decreases the money supply and pushes up the equilibrium interest rate. 
A)  Both monetary and interest rate targets cannot be pursued simultaneously. 
B)  A reduction in the required reserve ratio increases the money supply and pushes down the equilibrium interest rate. 
C)  An open market purchase reduces the money supply and pushes down the equilibrium interest rate. 
D)  An open market sale decreases the money supply and pushes up the equilibrium interest rate.

Question 7

What happens when the Fed aims to change interest rates?

Accepted Answer

A)  It asks Congress to legislate new interest rates. 
B)  It buys or sells government bonds on the open market to achieve the desired rate. 
C)  It buys or sells dollars on the foreign exchange market to achieve the desired rate. 
D)  It announces a new discount interest rate. 
A)  It asks Congress to legislate new interest rates. 
B)  It buys or sells government bonds on the open market to achieve the desired rate. 
C)  It buys or sells dollars on the foreign exchange market to achieve the desired rate. 
D)  It announces a new discount interest rate.

Question 8

In economics, the demand for money is basically a demand for

Accepted Answer

A)  high returns. 
B)  status. 
C)  liquidity. 
D)  investment. 
A)  high returns. 
B)  status. 
C)  liquidity. 
D)  investment.

Question 9

-Refer to the above figure. Suppose point A is the original equilibrium. If there is an increase in the money supply, the new long-run equilibrium is given by point

Accepted Answer

A)  A. 
B)  B. 
C)  C. 
D)  D. 
A)  A. 
B)  B. 
C)  C. 
D)  D.

Question 10

The demand for money curve depicts

Accepted Answer

A)  an inverse relationship between the quantity of money demanded and the quantity of bonds demanded. 
B)  a direct relationship between the quantity of money demanded and the quantity of bonds demanded. 
C)  an inverse relationship between the quantity of money demanded and the interest rate. 
D)  a direct relationship between the quantity of money demanded and the interest rate. 
A)  an inverse relationship between the quantity of money demanded and the quantity of bonds demanded. 
B)  a direct relationship between the quantity of money demanded and the quantity of bonds demanded. 
C)  an inverse relationship between the quantity of money demanded and the interest rate. 
D)  a direct relationship between the quantity of money demanded and the interest rate.

Question 11

The short-run effect of an increase in the supply of money is

Accepted Answer

A)  an increase in both real Gross Domestic Product (GDP) and the price level. 
B)  an increase in the price level but not in real Gross Domestic Product (GDP). 
C)  an increase in real Gross Domestic Product (GDP) but not in the price level. 
D)  an increase in the price level, a decrease in real Gross Domestic Product (GDP), but an increase in nominal national income. 
A)  an increase in both real Gross Domestic Product (GDP) and the price level. 
B)  an increase in the price level but not in real Gross Domestic Product (GDP). 
C)  an increase in real Gross Domestic Product (GDP) but not in the price level. 
D)  an increase in the price level, a decrease in real Gross Domestic Product (GDP), but an increase in nominal national income.

Question 12

-Using a graph above, show the short-run and long-run effects of an expansionary monetary policy.

Accepted Answer

In the above figure, E1 is the original

Question 13

The hypothesis that changes in the money supply lead to proportional changes in the price level is called

Accepted Answer

A)  the equation of exchange. 
B)  the Keynesian multiplier. 
C)  the theory of empirical relativity. 
D)  the quantity theory of money and prices. 
A)  the equation of exchange. 
B)  the Keynesian multiplier. 
C)  the theory of empirical relativity. 
D)  the quantity theory of money and prices.

Question 14

An increase in the money supply will affect aggregate demand

Accepted Answer

A)  only if the increase in the money supply causes interest rates to rise. 
B)  only if the increase in the money supply causes people to buy less goods and services. 
C)  only if the increase in the money supply causes people to increase their saving. 
D)  if the increase in the money supply causes interest rates to fall and/or causes people to buy more goods and services. 
A)  only if the increase in the money supply causes interest rates to rise. 
B)  only if the increase in the money supply causes people to buy less goods and services. 
C)  only if the increase in the money supply causes people to increase their saving. 
D)  if the increase in the money supply causes interest rates to fall and/or causes people to buy more goods and services.

Question 15

Which of the following is a TRUE statement about the relationship between the price of bonds and the interest rate?

Accepted Answer

A)  The prices of bonds are directly related to the interest rate. 
B)  The prices of bonds increase when the interest rates rise. 
C)  The prices of bonds are unrelated to the interest rate. 
D)  The prices of bonds are inversely related to the interest rate. 
A)  The prices of bonds are directly related to the interest rate. 
B)  The prices of bonds increase when the interest rates rise. 
C)  The prices of bonds are unrelated to the interest rate. 
D)  The prices of bonds are inversely related to the interest rate.

Question 16

According to traditional Keynesians, monetary policy is ineffective in affecting the economy during a recession because

Accepted Answer

A)  an increase in the money supply will have little impact on interest rates. 
B)  an increase in the money supply will only lead to higher interest rates. 
C)  an increase in the money supply will only lead to lower investment spending. 
D)  an increase in the money supply will raise the amount of government debt. 
A)  an increase in the money supply will have little impact on interest rates. 
B)  an increase in the money supply will only lead to higher interest rates. 
C)  an increase in the money supply will only lead to lower investment spending. 
D)  an increase in the money supply will raise the amount of government debt.

Question 17

Operations of the Trading Desk of the Federal Reserve Bank of New York are typically conducted

Accepted Answer

A)  no more often than once per month. 
B)  once a year. 
C)  no more often than once per week. 
D)  within a one-hour period during each day. 
A)  no more often than once per month. 
B)  once a year. 
C)  no more often than once per week. 
D)  within a one-hour period during each day.

Question 18

-In the above figure, suppose the economy is at a short-run equilibrium at point B and the interest rate is r2. Which of the following policy options for the Fed will help solve the short-run situation?

Accepted Answer

A)  lowering the differential between the discount rate and the federal funds rate 
B)  open market purchase of government securities 
C)  lowering the required reserve ratio 
D)  open market sale of government securities 
A)  lowering the differential between the discount rate and the federal funds rate 
B)  open market purchase of government securities 
C)  lowering the required reserve ratio 
D)  open market sale of government securities

Question 19

An increase in the money supply will

Accepted Answer

A)  increase aggregate supply. 
B)  decrease aggregate supply. 
C)  increase aggregate demand. 
D)  decrease aggregate demand. 
A)  increase aggregate supply. 
B)  decrease aggregate supply. 
C)  increase aggregate demand. 
D)  decrease aggregate demand.

Question 20

The price of bonds and the interest rate are

Accepted Answer

A)  inversely related. 
B)  positively related. 
C)  unrelated. 
D)  related, but we are not sure how. 
A)  inversely related. 
B)  positively related. 
C)  unrelated. 
D)  related, but we are not sure how.

Exam 16: Domestic and International Dimensions of Monetary Policy

The direct effect of an increase in the money supply is to

As a result of an increase in the money supply, some banks may end up with excess reserves. What is the likely result?

One result of a contractionary monetary policy would be

-Refer to the above figure. Which panel is consistent with the Fed selling bonds?

Which of the following statements is FALSE?

What happens when the Fed aims to change interest rates?

In economics, the demand for money is basically a demand for

-Refer to the above figure. Suppose point A is the original equilibrium. If there is an increase in the money supply, the new long-run equilibrium is given by point

The demand for money curve depicts

The short-run effect of an increase in the supply of money is

-Using a graph above, show the short-run and long-run effects of an expansionary monetary policy.

The hypothesis that changes in the money supply lead to proportional changes in the price level is called

An increase in the money supply will affect aggregate demand

Which of the following is a TRUE statement about the relationship between the price of bonds and the interest rate?

According to traditional Keynesians, monetary policy is ineffective in affecting the economy during a recession because

Operations of the Trading Desk of the Federal Reserve Bank of New York are typically conducted

-In the above figure, suppose the economy is at a short-run equilibrium at point B and the interest rate is r2. Which of the following policy options for the Fed will help solve the short-run situation?

An increase in the money supply will

The price of bonds and the interest rate are

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

Filters