Question 1

An increase in the money supply will:

Accepted Answer

A)  decrease both investment spending and aggregate demand. 
B)  decrease investment spending and increase aggregate demand. 
C)  decrease both consumption spending and aggregate demand. 
D)  increase both investment spending and aggregate demand. 
E)  increase investment spending and decrease aggregate demand

Question 2

Assume that there is an unexpected increase in the demand for U.S. dollars in Switzerland. If the foreign currency price of the U.S. dollar is fixed, the U.S. Federal Reserve must intervene in the foreign exchange market such that:

Accepted Answer

A)  the supply of U.S. dollars increases. 
B)  the U.S. demand for the Swiss franc falls. 
C)  the supply of U.S. dollars decreases. 
D)  Swiss imports from the United States are reduced. 
E)  the Swiss currency is devalued.

Question 3

Suppose that a sharp downturn in the price of a country's prime manufacturing product results in a terrible recession and a massive decline in the general income level of the citizens. Other things constant, what would be the recession's most probable effect on money demand in the country?

Accepted Answer

A)  People will hold more money for any purpose, resulting in a decline in money demand. 
B)  Local M1 money demand will rise. 
C)  The transactions demand for money will fall such that the quantity of money demanded will be lower at any given interest rate level. 
D)  The speculative demand for money will fall, causing a downward movement along the money demand curve. 
E)  The precautionary demand for money will increase, causing an upward shift in the money demand curve.

Question 4

Which of the following statements about inflation targeting is true?

Accepted Answer

A)  Inflation targeting allows the central bank to achieve multiple goals like low unemployment and economic growth. 
B)  Inflation targeting has not been adopted by the Fed. 
C)  A central bank that adopts inflation targeting is intrinsically dependent on fiscal policy. 
D)  Inflation targeting decreases the perceived uncertainty derived from the central bank's course of action. 
E)  Inflation targeting increases the uncertainty associated with the central bank's course of action.

Question 5

If a bond pays 11.5 percent interest a year and a bank deposit pays 3.5 percent, the opportunity cost of holding the deposit is:

Accepted Answer

A)  11.5 percent. 
B)  15 percent. 
C)  8 percent. 
D)  3.5 percent. 
E)  13.5 percent.

Question 6

The figure given below depicts the equilibrium in the foreign exchange market.
Figure 13.1
 
-Refer to Figure 13.1. If the exchange rate is fixed at E2 but the free market equilibrium rate is E1 then:

Accepted Answer

A)  there is a shortage of British pounds at E1. 
B)  no intervention is necessary to achieve the exchange rate E1. 
C)  there is a permanent surplus of U.S. dollars at E1. 
D)  there is a permanent surplus of U.S. dollars at E2. 
E)  there is a permanent shortage of U.S. dollars at E3.

Question 7

Which of the following people is most likely to demand U.S. dollars in the foreign exchange market?

Accepted Answer

A)  A United States resident who is traveling to the Greek Islands 
B)  An American investor who intends to buy Japanese government bonds 
C)  A resident of Australia who is traveling to Belgium 
D)  A British importer of U.S. beef 
E)  A U.S. company that is importing avocados from Mexico

Question 8

Suppose the interest rate on a bond is 12.5 percent and that bond pays $90 a year in interest and sells for $720. If the supply of bonds increases and the price of the bond falls to $600, the interest rate will ____ to ____.

Accepted Answer

A)  increase; 15 percent 
B)  increase; 17.5 percent 
C)  decrease; 7.5 percent 
D)  decrease; 10 percent 
E)  increase; 13 percent

Question 9

Inflation targeting usually increases the uncertainty about the course of action of central banks, as perceived by the general public.

Accepted Answer

A) True 
 B)False

Question 10

The table given below shows the assets and liabilities of the National Bank. Assume that this is the only bank in the economy.
Table 13.2
 $\begin{array}{c}
\text {  Balance Sheet of National Bank }\
\quad\quad\quad\text { Assets } \quad\quad\quad\quad\quad\quad\quad\quad \text { Liabilities }\
\begin{array}{|c|c|c|c|}
\hline\text { Vault Cash } & \$ 1,725 & \text { Deposits } & \$ 5,450 \
\text { Deposit in Fed } & \$ 425 & & \
\text { Loans } & \$ 3,300 & & \
\hline \text { Total Assets } & \$ 5,450 & \text { Total Liabilities } & \$ 5,450\
\hline
\end{array}\end{array}$

-Refer to Table 13.2. Calculate the change in the bank's excess reserves if the reserve requirement is decreased from 10% to 5%.

Accepted Answer

A)  +$272.5 
B)  +$236 
C)  -$2,360 
D)  -$1877.5 
E)  -$3,210

Question 11

In the figure given below panel A represents money market equilibrium, panel B represents investment demand, and panel C represents equilibrium real GDP.
Figure 13.3
 
-Refer to Figure 13.3. Other things equal, if the interest rate is greater than 6 percent, then:

Accepted Answer

A)  investment spending will be greater than $500 billion. 
B)  the equilibrium level of real GDP will increase. 
C)  the equilibrium level of real GDP will decrease. 
D)  the money demand curve will shift downward to the left. 
E)  the equilibrium price level will increase.

Question 12

Which of the following is the ultimate goal of monetary policy?

Accepted Answer

A)  Complete removal of income inequality 
B)  Economic growth with price stability 
C)  Free trade 
D)  Balanced budget 
E)  Economic welfare

Question 13

An increase in the money supply will lead to an increase in equilibrium real GDP only if:

Accepted Answer

A)  the aggregate demand curve is horizontal. 
B)  the aggregate supply curve is vertical. 
C)  the investment function is horizontal. 
D)  the aggregate supply curve is not vertical. 
E)  the investment function is upward-sloping.

Question 14

The transactions demand for money increases when more people want to hold some of their wealth in the form of money to reduce the risks associated with unexpected emergencies.

Accepted Answer

A) True 
 B)False

Question 15

In foreign exchange markets, a U.S. resident who imports New Zealand apples is:

Accepted Answer

A)  a demander and supplier of New Zealand dollars. 
B)  a demander and supplier of U.S. dollars. 
C)  a demander of New Zealand dollars and a supplier of U.S. dollars. 
D)  a supplier of both New Zealand dollars and U.S. dollars. 
E)  a supplier of New Zealand dollars and a demander of U.S. dollars.

Question 16

Which of the following is most likely to lead to an increase in the demand for U.S. dollars in the foreign exchange market?

Accepted Answer

A)  U.S. firms purchasing raw materials from Japan 
B)  U.S. speculators expecting the value of the German mark to rise 
C)  The Fed intervening in the foreign exchange market and devaluing the dollar 
D)  Speculative outflows of money from the United States to Britain because of higher interest rates in Britain 
E)  Japanese cars becoming more popular in the United States

Question 17

If you believe that the price of U.S. government bonds will soon fall, you will want to increase your speculative money demand.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following actions of the Fed will increase money supply in the U.S. directly?

Accepted Answer

A)  Purchase U.S. government bonds 
B)  Increase the federal funds rate 
C)  Increase the reserve requirement 
D)  Increase the discount rate 
E)  Ban sales of private mutual funds

Question 19

The Board of Governors of the Federal Reserve is:

Accepted Answer

A)  appointed by the president, and each governor serves a 7-year term. 
B)  appointed by the president, and each governor serves a 14-year term. 
C)  elected by Congress, and each governor serves a 10-year term. 
D)  elected by Congress, and each governor serves a 4-year term. 
E)  elected by Congress, and each governor serves a 7-year term

Question 20

The transactions demand for money exists because:

Accepted Answer

A)  people want to maintain a speculative cash reserve. 
B)  people are insensitive to interest rate fluctuations and prefer to hoard money. 
C)  people want to be prepared for unplanned emergency expenditures. 
D)  people prefer cash over bank deposits. 
E)  people do not receive their income at the same time they spend it.

Exam 13: Monetary Policy

An increase in the money supply will:

Assume that there is an unexpected increase in the demand for U.S. dollars in Switzerland. If the foreign currency price of the U.S. dollar is fixed, the U.S. Federal Reserve must intervene in the foreign exchange market such that:

Suppose that a sharp downturn in the price of a country's prime manufacturing product results in a terrible recession and a massive decline in the general income level of the citizens. Other things constant, what would be the recession's most probable effect on money demand in the country?

Which of the following statements about inflation targeting is true?

If a bond pays 11.5 percent interest a year and a bank deposit pays 3.5 percent, the opportunity cost of holding the deposit is:

The figure given below depicts the equilibrium in the foreign exchange market. Figure 13.1 -Refer to Figure 13.1. If the exchange rate is fixed at E₂ but the free market equilibrium rate is E₁ then:

Which of the following people is most likely to demand U.S. dollars in the foreign exchange market?

Suppose the interest rate on a bond is 12.5 percent and that bond pays $90 a year in interest and sells for $720. If the supply of bonds increases and the price of the bond falls to $600, the interest rate will to .

Inflation targeting usually increases the uncertainty about the course of action of central banks, as perceived by the general public.

In the figure given below panel A represents money market equilibrium, panel B represents investment demand, and panel C represents equilibrium real GDP. Figure 13.3 -Refer to Figure 13.3. Other things equal, if the interest rate is greater than 6 percent, then:

Which of the following is the ultimate goal of monetary policy?

An increase in the money supply will lead to an increase in equilibrium real GDP only if:

The transactions demand for money increases when more people want to hold some of their wealth in the form of money to reduce the risks associated with unexpected emergencies.

In foreign exchange markets, a U.S. resident who imports New Zealand apples is:

Which of the following is most likely to lead to an increase in the demand for U.S. dollars in the foreign exchange market?

If you believe that the price of U.S. government bonds will soon fall, you will want to increase your speculative money demand.

Which of the following actions of the Fed will increase money supply in the U.S. directly?

The Board of Governors of the Federal Reserve is:

The transactions demand for money exists because:

Exam 13: Monetary Policy

An increase in the money supply will:

Assume that there is an unexpected increase in the demand for U.S. dollars in Switzerland. If the foreign currency price of the U.S. dollar is fixed, the U.S. Federal Reserve must intervene in the foreign exchange market such that:

Suppose that a sharp downturn in the price of a country's prime manufacturing product results in a terrible recession and a massive decline in the general income level of the citizens. Other things constant, what would be the recession's most probable effect on money demand in the country?

Which of the following statements about inflation targeting is true?

If a bond pays 11.5 percent interest a year and a bank deposit pays 3.5 percent, the opportunity cost of holding the deposit is:

The figure given below depicts the equilibrium in the foreign exchange market. Figure 13.1 -Refer to Figure 13.1. If the exchange rate is fixed at E2 but the free market equilibrium rate is E1 then:

Which of the following people is most likely to demand U.S. dollars in the foreign exchange market?

Suppose the interest rate on a bond is 12.5 percent and that bond pays $90 a year in interest and sells for $720. If the supply of bonds increases and the price of the bond falls to $600, the interest rate will ____ to ____.

Inflation targeting usually increases the uncertainty about the course of action of central banks, as perceived by the general public.

In the figure given below panel A represents money market equilibrium, panel B represents investment demand, and panel C represents equilibrium real GDP. Figure 13.3 -Refer to Figure 13.3. Other things equal, if the interest rate is greater than 6 percent, then:

Which of the following is the ultimate goal of monetary policy?

An increase in the money supply will lead to an increase in equilibrium real GDP only if:

The transactions demand for money increases when more people want to hold some of their wealth in the form of money to reduce the risks associated with unexpected emergencies.

In foreign exchange markets, a U.S. resident who imports New Zealand apples is:

Which of the following is most likely to lead to an increase in the demand for U.S. dollars in the foreign exchange market?

If you believe that the price of U.S. government bonds will soon fall, you will want to increase your speculative money demand.

Which of the following actions of the Fed will increase money supply in the U.S. directly?

The Board of Governors of the Federal Reserve is:

The transactions demand for money exists because:

The figure given below depicts the equilibrium in the foreign exchange market. Figure 13.1 -Refer to Figure 13.1. If the exchange rate is fixed at E₂ but the free market equilibrium rate is E₁ then:

Suppose the interest rate on a bond is 12.5 percent and that bond pays $90 a year in interest and sells for $720. If the supply of bonds increases and the price of the bond falls to $600, the interest rate will to .