Question 1

Once the federal funds rate is reduced to zero, conventional expansionary monetary policy is no longer an option.

Accepted Answer

A) True 
 B)False

Question 2

The most common estimate of the value of transactions used to estimate velocity is

Accepted Answer

A)  real GDP. 
B)  total sales. 
C)  nominal GDP. 
D)  cash balances.

Question 3

According to Baumol and Blinder, the lag between the time a policy is implemented and the time it affects aggregate demand is

Accepted Answer

A)  longer for fiscal than monetary policy. 
B)  longer for monetary than fiscal policy. 
C)  approximately equal for both. 
D)  influenced mainly by the size of the multiplier.

Question 4

According to the quantity theory of money currently used by monetarists, assuming velocity is constant (at a value of 5), a 10 percent increase in the money supply will raise

Accepted Answer

A)  nominal GDP by 50 percent. 
B)  real GDP by 10 percent. 
C)  nominal GDP by 10 percent. 
D)  real GDP by 50 percent.

Question 5

____ is a school of economic thought which uses equation of exchange to analyze the macro economic data.

Accepted Answer

A)  Mercantilism 
B)  Monetarism 
C)  Supply side economics 
D)  Keynesianism

Question 6

Over long periods of time, M2 velocity has been relatively constant.

Accepted Answer

A) True 
 B)False

Question 7

In what year did the housing bubble burst?

Accepted Answer

A)  2000 
B)  2006 
C)  2008 
D)  There was no such event.

Question 8

If you believe that velocity is constant and that the aggregate supply curve is horizontal, then the quantity theory of money would predict that a doubling of the money supply would cause a doubling of the

Accepted Answer

A)  price level and real output. 
B)  price level. 
C)  price level and no change in real output. 
D)  real output.

Question 9

The major difference between the Keynesian approach and the monetarist approach is that

Accepted Answer

A)  Keynesian analysis explains an equilibrium condition and monetarism does not. 
B)  in Keynesian analysis, money affects the economy by first affecting interest rates; monetarist analysis is not limited to working through interest rates. 
C)  monetarism explains an equilibrium condition and Keynesian analysis does not. 
D)  there are no differences.

Question 10

In the equation of exchange, velocity of money increases when

Accepted Answer

A)  Y increases without any changes in P and M. 
B)  Y falls without any changes in P. 
C)  M increases without any changes in P and Y. 
D)  P falls without any changes in Y and M.

Question 11

If you divide the amount of nominal GDP by the stock of money, you have computed the

Accepted Answer

A)  multiplier. 
B)  price level. 
C)  velocity of circulation. 
D)  inflation rate.

Question 12

Which of the following policies would a Keynesian expect to produce the largest increase in income?

Accepted Answer

A)  a reduction in government spending of $100 billion 
B)  an increase in transfer payments of $100 billion 
C)  an increase in government spending of $100 billion 
D)  a tax cut of $100 billion

Question 13

For both Keynesians and monetarists to predict accurately the effects of a change in the money supply on the price level, they need to add ____ to their analysis.

Accepted Answer

A)  aggregate demand 
B)  nominal GDP 
C)  real GDP 
D)  aggregate supply 
E)  government spending

Question 14

How will an increase in the efficiency of the payments mechanism effect velocity?

Accepted Answer

A)  It will decrease. 
B)  It will increase. 
C)  It will remain constant. 
D)  Velocity is unrelated to payments.

Question 15

The reason that velocity increases when interest rates rise is

Accepted Answer

A)  the Fed encourages banks to turn money in faster for recycling, which causes money to move faster. 
B)  the opportunity cost of saving increases, so people hold smaller cash balances. 
C)  home mortgage payments increase, so people write larger checks that reduces their checking account balances. 
D)  the opportunity cost of holding money increases, so average money balances decrease.

Question 16

In terms of the price-real GDP diagram, a given expansion of the money supply will have a greater effect on prices the

Accepted Answer

A)  steeper the aggregate supply curve. 
B)  flatter the aggregate supply curve. 
C)  higher the initial price level. 
D)  lower the initial price level.

Question 17

The current debate about fiscal and monetary policy tends to focus on

Accepted Answer

A)  which policy is less destabilizing. 
B)  which policy is more effective. 
C)  whether the Fed can control the money supply. 
D)  which policy works more quickly.

Question 18

The objective of the Fed and the government is to

Accepted Answer

A)  prevent asset bubbles by recognizing them in real time. 
B)  mitigate the consequences of asset bubbles by recognizing them in real time. 
C)  prevent asset bubbles by recognizing bad lending practices. 
D)  mitigate the consequences of asset bubbles by recognizing bad lending practices.

Question 19

Which of the following was the result of the Federal Reserve's purchase of mortgage-backed securities in 2009?

Accepted Answer

A)  MBS interest rates declined, home mortgage rates declined, and the Fed turned a profit on these operations. 
B)  MBS interest rates declined, home mortgage rates declined, but the Fed had a loss on these operations. 
C)  MBS interest rates increased, home mortgage rates declined, and the Fed turned a profit on these operations 
D)  MBS interest rates increased, home mortgage rates increased, but the Fed had a loss on these operations

Question 20

Both approaches-Keynesian and monetarist-are ways of analyzing

Accepted Answer

A)  aggregate supply. 
B)  aggregate demand. 
C)  the average price level. 
D)  government spending and expenditures.

Exam 32: The Debate over Monetary and Fiscal Policy