Question 1

When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money individuals want to hold _____.

Accepted Answer

A)  falls; falls; falls 
B)  falls; falls; rises 
C)  rises; falls; falls 
D)  rises; falls; rises

Question 2

A 30% increase in the aggregate price level will:

Accepted Answer

A)  increase money demand by 30%. 
B)  increase money demand by the money multiplier. 
C)  decrease money demand by 30%. 
D)  not affect the demand for money.

Question 3

Given an inflationary gap, the Federal Reserve will use monetary policy to _____ interest rates and _____ aggregate demand.

Accepted Answer

A)  increase; increase 
B)  increase; decrease 
C)  decrease; increase 
D)  decrease; decrease

Question 4

Long-term interest rates affect the demand for money more than short-term interest rates.

Accepted Answer

A) True 
 B)False

Question 5

In the long-run, changes in the money supply will change prices but not real GDP or interest rates.

Accepted Answer

A) True 
 B)False

Question 6

Contractionary monetary policy entails _____ the money supply, _____ interest rates, and _____ aggregate demand.

Accepted Answer

A)  increasing; increasing; increasing 
B)  increasing; decreasing; decreasing 
C)  decreasing; decreasing; decreasing 
D)  decreasing; increasing; decreasing

Question 7

To close an inflationary gap using monetary policy, the Federal Reserve should _____ the money supply to _____ investment and consumer spending and shift the aggregate demand curve to the _____.

Accepted Answer

A)  increase; increase; left 
B)  decrease; decrease; left 
C)  increase; increase; right 
D)  decrease; decrease; right

Question 8

If the economy is at potential output and the Fed increases the money supply, in the short run the aggregate demand will likely:

Accepted Answer

A)  shift to the left. 
B)  remain the same. 
C)  increase. 
D)  decrease.

Question 9

An increase in the money supply will decrease interest rates in the short run but will not affect interest rates in the long run because an increase in the money supply will eventually _____ prices and _____ money demand.

Accepted Answer

A)  decrease; decrease 
B)  decrease; increase 
C)  increase; decrease 
D)  increase; increase

Question 10

U.S. banks did not offer interest on checking accounts until the beginning of the 1980s. As a result, before the early 1980s:

Accepted Answer

A)  the opportunity costs of keeping funds in checking accounts was zero. 
B)  the opportunity costs of keeping funds in checking accounts was lower. 
C)  the opportunity costs of keeping funds in checking accounts was higher. 
D)  people kept money under their mattress.

Question 11

As the opportunity cost of holding money changes from 5% to 3%, the quantity of money demanded increases.

Accepted Answer

A) True 
 B)False

Question 12

Assume the money market is in equilibrium. The Federal Reserve Bank has decided to purchase Treasury bills in an open market operation. The result of this action will be a _____ in the interest rate as the money _____ shifts _____.

Accepted Answer

A)  fall; supply curve; outward 
B)  fall; supply curve; inward 
C)  fall; demand curve; inward 
D)  rise; demand curve; outward

Question 13

In the long run, if the money supply rises by 10%, then the price level may rise by more than 10%.

Accepted Answer

A) True 
 B)False

Question 14

If the interest rate is below equilibrium, then the quantity demanded of interest-bearing financial assets is less than the quantity supplied, so people selling interest-bearing financial assets have to offer higher interest rates to get people to buy them, thus raising interest rates back to the equilibrium level.

Accepted Answer

A) True 
 B)False

Question 15

When the economy is developing an inflationary gap, the Fed should increase the money supply to decrease interest rates.

Accepted Answer

A) True 
 B)False

Question 16

Over time, contractionary monetary policy _____ nominal wages and causes the short-run aggregate supply curve to shift _____.

Accepted Answer

A)  lowers; leftward 
B)  raises; rightward 
C)  lowers; rightward 
D)  raises; leftward

Exam 15: Monetary Policy

When the short-term interest rate ___, the opportunity cost of holding money _, and the quantity of money individuals want to hold ___.

A 30% increase in the aggregate price level will:

Given an inflationary gap, the Federal Reserve will use monetary policy to _ interest rates and _ aggregate demand.

Long-term interest rates affect the demand for money more than short-term interest rates.

In the long-run, changes in the money supply will change prices but not real GDP or interest rates.

Contractionary monetary policy entails ___ the money supply, _ interest rates, and ___ aggregate demand.

To close an inflationary gap using monetary policy, the Federal Reserve should ___ the money supply to _ investment and consumer spending and shift the aggregate demand curve to the ___.

If the economy is at potential output and the Fed increases the money supply, in the short run the aggregate demand will likely:

An increase in the money supply will decrease interest rates in the short run but will not affect interest rates in the long run because an increase in the money supply will eventually _ prices and _ money demand.

U.S. banks did not offer interest on checking accounts until the beginning of the 1980s. As a result, before the early 1980s:

As the opportunity cost of holding money changes from 5% to 3%, the quantity of money demanded increases.

Assume the money market is in equilibrium. The Federal Reserve Bank has decided to purchase Treasury bills in an open market operation. The result of this action will be a ___ in the interest rate as the money _ shifts ___.

In the long run, if the money supply rises by 10%, then the price level may rise by more than 10%.

When the economy is developing an inflationary gap, the Fed should increase the money supply to decrease interest rates.

Over time, contractionary monetary policy _ nominal wages and causes the short-run aggregate supply curve to shift _.