Question 1

If the demand for money is insensitive to the interest rate,then the most effective expansionary policy would be

Accepted Answer

A)  fiscal policy. 
B)  monetary policy. 
C)  neither fiscal nor monetary policy. 
D)  both fiscal and monetary policy.

Question 2

In a typical year,how accurate are forecasts of inflation and real GDP?

Accepted Answer

A)  within 8-10 percentage points 
B)  within 2-3 percentage points 
C)  within 3/4 of 1 percentage point 
D)  within 1/4 of 1 percentage point

Question 3

Monetarists have received this label because they emphasize the role of

Accepted Answer

A)  money supply in determining aggregate supply. 
B)  the money supply in determining nominal GDP. 
C)  the Fed in making monetary policy. 
D)  the money supply in determining interest rates and investment.

Question 4

As the price level rises,the demand for money

Accepted Answer

A)  decreases because interest rates also increase. 
B)  decreases because consumers buy fewer goods and services. 
C)  increases because more money is needed for each transaction. 
D)  increases because investment spending will also increase.

Question 5

During the financial crisis of 2007-2009 the interest rate spread on mortgage-backed securities over Treasury bills

Accepted Answer

A)  increased tremendously. 
B)  increased moderately. 
C)  decreased moderately. 
D)  decreased tremendously.

Question 6

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 7

In the second quarter of 1995,the following values were observed: real GDP = 4,359.3 billion; GDP Deflator = 325.1; and M₁ = 989.5.What is the value of velocity?

Accepted Answer

A) 32.51 
B) 24.31 
C) 14.32 
D) 2.31

Question 8

The fiscal stimulus bills of 2001,2008,and 2009 were unusual examples of rapid implementation of fiscal policy.

Accepted Answer

A) True 
 B)False

Question 9

If velocity remains relatively constant,changes in the money supply can have a predictable effect on nominal GDP.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is an example of the Fed's use of unconventional monetary policy?

Accepted Answer

A)  buying assets other than Treasury bills 
B)  participating in rescue operations for troubled financial institutions 
C)  lending massive amounts to banks and other financial institutions 
D)  all of the above

Question 11

Economists observed the following growth rates in the fourth quarter of 1995: real GDP = 2.8 percent; M1 = 7.8 percent; GDP Deflator = 2.2 percent.Given this data,the growth of nominal GDP was approximately

Accepted Answer

A) 12.8 percent. 
B) 10.0 percent. 
C) 5.6 percent. 
D) 5.0 percent. 
E) 0.6 percent

Question 12

Believers in a fixed-rule approach to stabilization policy propose that

Accepted Answer

A)  Congress should balance the high employment budget. 
B)  the Fed should keep the money supply growth constant. 
C)  the economy be stabilized by automatic mechanisms. 
D)  All of the above are correct.

Question 13

The inability of Congress to pass a stimulus package after September 11,2001,could be used as an argument for

Accepted Answer

A)  activist fiscal policy. 
B)  activist monetary policy. 
C)  expansionary fiscal policy. 
D)  contractionary monetary policy.

Question 14

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 15

When the Fed increases the money supply,interest rates

Accepted Answer

A)  rise, causing velocity to fall. 
B)  fall, causing velocity to fall. 
C)  rise, causing velocity to rise. 
D)  fall, causing velocity to rise.

Question 16

Many economists believe that stabilization policy should be limited in scope until

Accepted Answer

A)  Keynesians and monetarists agree on policy. 
B)  inflation is brought under control. 
C)  the economy is operating near capacity. 
D)  forecasting becomes more reliable.

Question 17

By purchasing large amounts of mortgage-backed securities (MBS)in 2009,the Federal Reserve's goal was to

Accepted Answer

A)  raise the price of MBS and raise their yields. 
B)  raise the price of MBS and lower their yields. 
C)  lower the price of MBS and raise their yields. 
D)  lower the price of MBS and lower their yields.

Question 18

Velocity is commonly calculated by which of the following formulas?

Accepted Answer

A)  (Value of money stock)/(Value of nominal GDP) 
B)  (Value of transactions)/(money stock) 
C)  (Value of financial transactions)/(GDP) 
D)  (Value of output)/(Value of input)

Question 19

A factor increasing the popularity of monetarism in the late 1970s was the

Accepted Answer

A)  ease with which the Fed controlled the money supply. 
B)  excellent performance of the economy in the 1970s. 
C)  the fear of budget deficits and growing federal debt. 
D)  the predictable behavior of velocity until about 1980.

Question 20

The major limitation of both the Keynesian approach and the monetarist approach is that both

Accepted Answer

A)  focus on the determination of interest rates to the exclusion of price levels. 
B)  study the determination of real GDP equilibrium without including the price level. 
C)  are ways of studying the aggregate demand curve, but to learn anything about the price level and output, the aggregate supply curve must be included in the analysis. 
D)  concentrate on interest rates without considering changes in consumption or net exports.

Exam 15: The Debate over Monetary and Fiscal Policy